2023: the year the European renewables bubble burst

In 2023, clean energy in Europe witnessed one of the toughest years in its short history. Supply chain issues, the energy crisis post Russia’s invasion of Ukraine and the ensuing ramp of interest rates and inflation hit all entities across the natural resources value chain. Clean energy in Europe bore the brunt of these global tensions more than other sectors in this space. By the end of last year, clean energy stocks were down and underperforming against the overall market and their energy market peers.

Our recent report, '2023: the year the European renewables bubble burst and reasons for optimism in 2024', explores what happened last year - and the outlook for this year - in great detail. You can download your complimentary copy of the report by filling out the form at the top of the page, or read on for a summary of some of the takeaways.

So, why did European clean energy take the biggest hit?

Firstly, clean energy entities (wind and solar markets here) are typically more exposed to cost of capital and interest rate hikes, unlike their cash-rich energy major and mining peers with proportionally lower capital expenditure as a function of overall cost base.

Secondly, as the world has re-prioritised energy security over sustainability, large energy companies have rolled back on renewables ambitions to focus more on hydrocarbons once again. Market sentiment followed, leaving European clean energy firms undervalued in comparison.

The role of technology cost increases

Renewables are characterized by high up front capital expenditure, with very low operating costs. Solar PV costs jumped up 23% from 2022 to 2023, a trend seen across the renewables space. The industry, which typically underestimates cost reductions, was not designed or prepared for these radical cost increases.

A key market driver in Europe is renewables auctions, alongside PPAs. The market response was significant under-subscription to auctions as ceiling prices were evidently too low, resulting in unprofitable economics and a lack of successful bidders.

There was also a notable slow-down of the secondary market. Between Q4 2023 and Q3 2023 we saw a 71% drop in secondary market transactions (transactions between existing investors and developers of solar projects).

On the horizon in 2024

Central bank interest rates are likely to get cut after two years of aggressive hikes. Investment delays has resulted in pent-up capital, with investor appetite for the power and renewables opportunities afoot across Europe. Although rates may drop slower than most onlookers wish, we expect the soft-landing outlook with resettling of interest rates to spur on investment activity once again.

Although investment sentiment has changed and fossil fuels in the meantime have become somewhat fashionable again as energy security has been reprioritised, the energy transition and investment into clean energy has not slowed down. $US 1.7 trillion was invested into clean energy in 2023 (IEA), 65% more than into fossil fuels and as the energy transition accelerates this gap will continue to widen. Wood Mackenzie expects 710 gigawatts (GW) of new wind, solar and energy storage capacity to be built across Europe by 2030 alone.

In addition, routes to market for renewables are also reopening. Government administrations are revising auction ceiling prices upwards to ensure they bring much needed wind and solar capacity to market once again. For instance, after no successful bids in 2023 the UK Government is increasing its offshore wind auction ceiling price by 66% from £44/MWh to £73/MWh to spur on the market once again.

PPA markets are also set to strengthen. Solar PPA volumes came back in 2023 after a slump in 2022, due to an uncertain market with major policy shifts such as windfall taxes and high-price pressures. On the other hand, wind PPA volumes continue to slump, with a cost premium to solar and longer development lead times. However, as these issues subside, this market should also pick up in 2024.

What opportunities are afoot across the supply chain?

Europe’s Net Zero Industry Act offers no direct incentives but targets to meet 45% to 90% demand from local content. There are plans to loosen state aid rules to allow government investment, speed up permitting and encourage domestic content. The European Commission estimates that EUR € 89 billion of investment is required out to 2030 across the key wind, PV, battery, electrolyser and heat pump value chains.

Offshore wind has seen huge uptick in Europe and further afield. As the market ramps up and technology gets bigger and better, Wood Mackenzie sees an investment gap open up. Globally, offshore wind needs $22 billion in supply chain investments by 2030 across installation vessels and key component manufacturing alone. This figure increases when taking investment needs for port infrastructure, R&D and facility upgrades into consideration.

More generally, entities right across the wind value chain have struggled. Large entities across component and turbine supply have been hit hard, with negative EBIT margins and record low valuations. This culminated at the end of 2023 in Siemens Energy requiring a €15 billion loan (backed by a €7.5 billion German state guarantee) to shore up its balance sheet after being dragged down by its wind business.

Putting this alongside strong longer term market fundamentals, we see opportunities for investing in distressed assets across the wind space. With depressed valuations but continuation of typical lucrative return margins, this could be an attractive space in 2024, particularly deals involving entities in O&M, services and asset ownership.

Hydrogen and energy storage

Hydrogen projects are maturing very slowly, faced with high-costs and project complexity. Actual project costs are higher than expected limiting volumes that governments can subsidize. The UK’s first funding round auction at the end of 2023 supported just 125 MW of a 250 MW pot but a business case did finally emerge with 15-year strike prices for operation targets in 2025.

Meanwhile recycling electrons to enable renewables is now a strong growth market across Europe. Battery energy storage, a technology often underestimated and misunderstood, finally takes off. Solar hybridization ramps up and as the market matures primary applications move to trading and arbitrage, the largest value pools in power markets. Wood Mackenzie forecasts the 34 gigawatt hour (GWh) installed base in 2023 to grow ten-fold by 2032.

What are the risks to this optimistic view?

All eyes are hoping for an acceleration of interest rate reductions. If reductions do not materialize this will push the market back. Renewable power markets in Europe continue to be agonizingly coupled with gas prices; setting the underlying power price. Another unsettling event on wider global geopolitics could have detrimental consequences on energy prices for this sector and slow down this much needed upturn. 

Learn more

You can download your complimentary copy of our recent report - '2023: the year the European renewables bubble burst and reasons for optimism in 2024' - by filling out the form at the top of the page.