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TriOrient Research

Renewable Energy and the Rising Competition for Investment

A leading portfolio manager in charge of a nearly US$5 billion climate change fund recently pointed out that as financial markets in 2020 began to realize the scale of the coming transition presented by climate change and ESG investing, firms’ valuations began to reflect this. This was seen more noticeably at firms spanning renewable energy, electric vehicles, hydrogen, and the circular economy, among others.

The re-ratings of such firms’ valuations were based on the brighter growth prospects for those industries and the firms with expertise in them.


Such attention, however, will lead to greater competition for ESG-related investment.


Success causing headaches from rising competition once the broader market goes after the opportunities has been seen before. In Taiwan, early entrants into the solar industry a decade ago at first enjoyed the green fields that were being created by the few firms that were willing to take the risk to enter. Investors did not need to be too selective as there were fewer firms in which to invest. Those that were in the industry enjoyed greater power over pricing. Later, however, as solar power began to take off as an alternative source of power and with the industry eager to reach pricing parity with fossil fuels, prices of solar products plunged as more firms entered the industry, particularly from China. What was a seller’s market turned into a buyers’ market, with gross margins narrowing at the widening number of solar providers.


Fortunately, the number of green-related industries has multiplied as the environmental movement takes root, with wind power and other forms of renewable energy being added to the investment industry palette. In Taiwan, the government’s commitment to end reliance on nuclear power by 2025 has spurred greater investment in the renewable energy industry, particularly offshore wind power. As of February 2020, there were 361 installed onshore turbines and 22 offshore turbines in operation with the total installed capacity of 845.2 MW. Meanwhile, for the solar industry, the government aims to install 20 GW of power by then.


Rather than simply supplying the cheapest products or materials, however, success is related to the ability by wind power firms to create sustainable business models that ensure projects are built, launched and maintained for years. Given this, the size of those firms able to compete in this industry has increased given the need for more capital to be successful in going after and fulfilling such projects.


More recently, the electric vehicle (EV) industry is just beginning to provide the kind of long-term opportunities that investors who earlier were involved in the solar industry are looking for.


One thing has definitely changed in the renewable energy and ESG segment: the ability by firms to succeed and attract investment has become more challenging. To succeed, being a first mover is no longer the key advantage. That was expected. Instead, having a sustainable competitive edge is key. And that means attracting investment has to be a serious focus by such firms.



Related references:

Taiwan News, February 27, 2020 Thousand Wind Turbines Promotion Project


 

Disclaimer: Blog posts and other information on TriOrient Investments' web site (3-orient.com) do not constitute investment advice. TriOrient Investments is a private company and does not accept outside funds for investment, nor does it divulge trading activity, nor provide recommendations of any kind to buy or sell any kind of investment product. This material is provided for informational purposes only. The views expressed regarding market, economic, industry or corporate trends are those of the authors and are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets, sectors or firms will perform as expected.


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