As oil prices surged in the wake of Russia’s invasion on Ukraine, shares of renewable energy stocks took off, with the war strengthening the argument for European nations to reduce their reliance on Russian energy exports. Now in its sixth week, experts say the conflict will fast-track the energy transition and boost the prospects of clean energy producers.

“We believe the war will only accelerate the build out of renewables and hopefully simplify and accelerate the permitting process,” says Jan de Vos, a global listed infrastructure portfolio manager a Resolution Capital.

“Prices for long-term renewable power purchase agreements (PPA) have increased as corporations want to purchase ‘green’ electricity at prices which are significantly below current spot prices,” he says.

“Renewable generation owners and developers also have produced strong returns recently as renewables combine decarbonisation with energy independence.”

Solar specialist Sunrun (RUN) gained 33% in the days following the invasion, while Sunnova Energy International (NOVA) was up 32%, and Sunlight Financial (SUNL) rose 26%. NextEra Energy (NEE), the world's largest producer of wind and solar energy, gained 7%. Returns have since faltered, but the iShares Global Clean Energy ETF continues to outpace the broader S&P 500 index so far this year.

Frank Jotzo, a professor and director of the Centre for Climate Economics and Policy at Australian National University, agrees, saying that Russia’s war will hasten the drive for clean energy .

“The big and lasting effect will be to greatly accelerate investment in renewable energy, with much more solar power and wind power both on land and offshore,” he says.

“Seaborne imports of fuels based on clean hydrogen are also likely to play a role, with Australia a potential supplier.

“Previous crises that affected oil supply (other than the 1970s oil crisis) did not have a huge effect, but this one is about gas, and the clean energy alternatives are now affordable. Europe’s heating systems are slated to be converted to electric heat pumps, and this will make efficient electric heating cheaper everywhere, driving uptake globally in future.”

LNG’s role in transition to clean energy

The demand for cleaner energy sources is also driving up demand for natural gas – a relatively clean burning fossil fuel. Natural gas is also likely to be a key source of ‘blue’ hydrogen, which is carbon free if emissions are sequestered in geological reservoirs, according to Mark Taylor, senior energy analyst with Morningstar.

“Gas has around half the carbon intensity of coal and around two thirds that for oil,” he says.

“It is also better from a geopolitical risk perspective as it is more broadly distributed in contrast to the concentrated supply of oil, which in large part comes from the Middle East.”

Australia is the world’s largest exporter of liquefied natural gas (LNG) in 2020, and Woodside Petroleum is Australia’s largest LNG exporter. The company has been one of the ASX 200’s strongest performers in 2022, up around 50% over the year to April 8, while Santos has gained around 25% amidst a global gas shortage and boosted by a rise in gas prices since Russia's war against Ukraine.

Still, Taylor thinks Santos and Woodside are undervalued.

“I think the market isn't giving them full credit for their LNG expansion plans, nor for their potential to produce carbon neutral energy products such as hydrogen.”

Taylor’s fair value on Woodside is $40, compared to its market price around $32.90. His fair value on Santos is $10.20, compared to its price around $7.95.

LNG’s role in the movement to cleaner energy was recently highlighted by Larry Fink, Blackrock chairman and chief executive officer, who wrote in his 2022 Letter to CEOs that gas will underpin part of the transition to net zero.

“The transition to net zero is already uneven with different parts of the global economy moving at different speeds. It will not happen overnight. We need to pass through shades of brown to shades of green,” Fink said.

“For example, to ensure continuity of affordable energy supplies during the transition, traditional fossil fuels like natural gas will play an important role both for power generation and heating in certain regions, as well as for the production of hydrogen,” Fink said.

Huge investment in clean energy

According to research from JP Morgan, for renewable energy to replace fossil fuels in the energy mix, global investment in clean energy and energy efficiency would need to triple by 2030 to US$2.3 trillion per annum.

The Paris climate agreement has created huge long-term demand for renewable energy. By 2050, the share of power from renewables globally is expected to rise to 60% from current levels of around 10%, boosted largely by solar, wind, and hydropower. Fossil fuels are expected to shrink from almost 80% of energy supply to about 20%, according to the International Energy Agency’s Net-Zero by 2050 Roadmap.

American Century Investment portfolio manager Federico Laffan says we are seeing a surge in clean energy investment, predominantly in Europe. Globally, clean energy stocks have outperformed this year. The benchmark S&P Global Clean Energy Index, which measures has outperformed the S&P 500 (in US dollar terms) has delivered a total return of 0.4% over the year to 12 April, which compares well to the S&P 500, which is down 7% and compared to the global benchmark the S&P Global 100, which is down 4.84%.

“There have been concerns over higher interest rates and the shift towards value names as higher rate fears materialised and hurt these names over the last two months of 2021,” Laffan says.

“The recent rally in clean energy is driven by higher oil prices and energy supply insecurity fears. There are a lot of very volatile concept stocks in this space that will be profitless for many years.

“In Europe, we would highlight hydrogen/ fuel cell related names which have very high valuations and are not expected to be profitable for many years to come. Also, there have been recent moves in wind turbine manufacturers, which have suddenly started to perform on expectations that orders will accelerate.

“Our preference is for names like GTT and Acciona which will not be experiencing these near-term cost pressures but will also benefit from an expected acceleration in their backlogs.”