Green Utilities Are Starting to Outperform

(Bloomberg) — Concern about an economic slowdown has struck equities hard in the past three days. Amid the bloodbath, utilities — perceived as safer — have fared better than others. While the sector is up 17% for the year, it masks strong winners and losers within it. Renewables in particular have outperformed, given that many European governments are looking to boost spending on tackling climate change.

Government policies globally are increasingly supporting net-zero carbon targets, underpinning the growth ambitions of utilities including Orsted, RWE, Enel , SSE and EDPR, which are poised to benefit from structurally growing capex pipelines, Bank of America Merrill Lynch (NYSE:) says. The analysts estimate renewable players will enter a “golden age” with investments doubling from current levels to 60 billion euros per year.

Goldman Sachs (NYSE:) analysts are on the same page and said back in August that “climate champions” will benefit from an unprecedented growth to 2030, a call they reiterated last week after the announcement of the German climate package. They forecast a 9% to 12% compounded annual growth rate (CAGR) for those stocks. In a highly fragmented renewable market Goldman has a clear preference for six utility plays: RWE (MI:), Oersted (CSE:), EDP (SIX:), EDP Renovaveis (LS:), Enel (MI:), SSE (LON:) and Iberdrola (MC:). They see the “pioneering” German plan to act as a “blueprint” for the rest of the world.

Valuation could put off investors, though. Orsted and EDPR are the two largest pure-play stocks of the sector but they’re also the most expensive. Overall, analysts on average are struggling to find some upside for renewables after the recent rally. UBS analysts turned cautious on Orsted and Iberdrola last month, saying fundamentals are no longer supportive. They prefer other players including Enel and RWE.

Some caution might also be needed on German utilities as the government allocated less money in its budget for closing coal-fired power plants than the companies that own them expected.

Climate change remains the number one ESG issue for investors, according to BofA. They estimate $70 billion of assets are tied to ESG strategies in the U.S. alone, while $3 trillion of assets currently use climate change and carbon footprint as one of the ESG criteria in their investment process.

Among European countries gearing up spending on tackling climate change, Germany already announced it will spend more than 100 billion euros to reduce carbon emissions between 2020 and 2030, with half of the amount in the first three years.

With 77 countries now committed to net-zero emissions by 2050, and 87 large companies with a similar pledge, BofA analysts estimate there may be a need to triple the current capacity of renewable projects, as over 75GW of green power purchase agreements (PPA) should be generated.

Renewables might be one of the few beneficiaries from the German package, because the country may not commit to much more fiscal spending beyond this new “green” deal, according to Deutsche Bank (DE:) economists.

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