Renewable energy loses investor appeal as governments impose price caps and deal collapses occur
The attraction of investing in companies exposed to renewable energy has been dealt a double blow as governments impose price caps to help customers, and renewable energy deals fall over.
The most obvious example of these unexpected changes in an industry hailed as a key to energy transition is the collapse of a takeover bid for Genex Power (ASX: GNX), the company behind the Kidston hydro power project in Queensland.
Skip Capital and Stonepeak Partners have made two attempts to buy Genex, a business in which they already have a 20% interest with the first offer at $0.23 a share rejected by Genex and the latest offer at $0.25 withdrawn by the bidders after four months of due diligence.
Another potential example of renewable energy losing its shine is the weak share price of Origin Energy (ASX: ORG) which is the target of a $9 per share takeover bid but continues to trade around $7.70, partly the result of the nature of the bid, a slow-moving scheme of arrangement with Origin dividends to be deducted from the final price.
But it is also possible that investors have looked at the changing nature of the renewable energy market and are wondering how profitable it might be if governments peg the price of electricity produced by wind turbines and solar farms, as is happening in Australia with the pegging of prices for gas and coal.
The myth about renewable energy being ‘free’
Politics, and the desire of politicians to win votes by subsidising the power bills of voters, has taken centrestage in Europe with the European Union’s energy minister, Kadri Simson, dropping a bombshell last week when she declared the energy source for a wind farm or solar array was “essentially free”.
It’s not, as any sensible person knows, because there are big upfront capital costs and perpetual maintenance, especially for offshore wind turbines.
But if the claim about renewable energy being free becomes widely accepted it is easy to see governments imposing price caps to limit profits.
The European energy market is different to that in Australia, particularly a business model known as merit order power generation which prioritises renewable power (including nuclear), followed by coal and gas.
But the system also has a pricing mechanism set by the last generator to enter the system, which means European power prices are often set by fossil fuels with the process designed to encourage investment in renewables which benefit from the higher cost of gas.
Ms Simson, an Estonian politician, wants to redesign the electricity market to better reflect “the true cost of production”.
The problem with that view is that once the capital equipment is installed in a wind or solar power project, the cost of ‘fuel’ is essentially free, providing government with a lever to force down the prices a power producer can charge.
European investors are alarmed by the proposal and the claim that renewable power sources are free, claiming that a government policy based on that concept will remove the profit incentive and kill new investment.
Government-imposed price caps make investors wary
Former Liberal National Party Senator for Queensland, Amanda Stoker, used the recent Australian Government price caps on coal and gas to argue they were bad for anyone planning to invest in hydrogen as a liquid fuel to replace gas.
The core of her argument, carried is that “the market works out a fair price better than any politician.”
“By imposing a price ceiling on coal and gas, the Australian Government has done the very opposite. It has sent a clear message that the government is willing to take away the fruit of private investment at a whim, and as a shortcut solution to any political problem,” Ms Stoker stated.
“Why would an investor make the long-term, high-cost investment needed to take hydrogen from a green dream to reality under a government that is prepared to take away their right to reap the benefit of doing so?”
Ms Stoker’s point is similar to that being made by European investors who are growing wary of investing in renewable energy if the rules are changing, price caps are imposed, and politicians tell the electorate that the power extracted from the wind and the sun is free.
The Genex experience is a sobering example for investors who might have believed that renewable energy was a surefire way to make money and deliver a benefit to the environment at the same time.
One of the issues which caused Skip and Stonepeak to walk away from their proposed takeover is said to be a leak in the pumped hydro storage system with repairs adding up to $15 million to the budget.
But it is interesting that the withdrawal of the Genex bid occurred two weeks after the government announced its price caps of coal and gas.
The worry for investors is that once price caps are accepted on one form of energy it would be easy to extend the mechanism across all forms of energy, including low-cost renewables based on a “free” energy source.