1. UK Clean Energy Industry Landscape

Clean energy is the energy generated from renewable sources and does not pollute the atmosphere. Moreover, it can be conserved by energy efficiency measures. Several clean energy sources include wind power, solar, hydro power, tidal and geothermal. There is a thin line of difference between clean energy and green energy as clean energy is the energy gained from sources that do release air pollutants, while green energy is the energy derived from natural sources.

According to the IPCC scientists, the carbon output must be reduced by almost 50% every decade between 2020 and 2050. Hence, there would be a large market for clean energy companies to capitalize on the opportunities. The UK cleantech exports around the world are projected to reach USD 44.61 billion by 2026 and are set to achieve explosive growth as countries seek to meet their net-zero targets. The offshore and onshore wind remained as the biggest source of renewable energy in the UK. Moreover, it produces around 13.8% more total electricity generation than the other renewable sources in the UK. Also, it produces more electricity than the combined generation of coal, oil, and others.

Key Trends in the Clean Energy Sector

Risk Exposures to the Clean Energy Sector

• Lack of Long-Term Financing: It gets challenging to obtain long-term financing in many developing countries due to regulatory or other restrictions on long-term bank lending. Moreover, it may hamper the quality of drilling and exploration activities.
• High costs of Resource Assessments: For geothermal projects, the greatest risk comes at the time of resource appraisal when expensive drilling of exploratory wells is needed.
• Cyber Crimes: The increasing number of cyber-attacks across several industries has posed serious threats, and the Clean Energy industry has tried to combat these attacks.
• Uncertainties over Carbon Financing: The process for registration of projects is long and the outcome uncertain, particularly if a new methodology is involved. Meanwhile, there are significant uncertainties over the timing and amounts of revenues from the sale of Certified Emissions Reductions (“CERs”)

SWOT Analysis

Benchmark Index Performance

Based on the last one-year performance, the FTSE All-Share Energy index has outperformed the FTSE 100 and FTSE 250 index. The FTSE All-Share Energy index generated a return of about 79.79%; however, the FTSE 100 generated a return of approximately 28.65%, and FTSE 250 generated a return of around 34.69%

Figure 1: One Year Benchmark Index Performance

(Data Source: Refinitiv, Chart created by Kalkine Group)        

Clean Energy Sector Outlook

The clean energy demand across the world remained resilient as renewables and storage recorded declining costs and rising capacity and usage factors. Moreover, Utility companies, businesses, cities, states, and countries adopted decarbonization plans, despite the onset of a global pandemic and an economic recession. Meanwhile, the UK has invested significantly in offshore wind and has installed as much capacity as the rest of the world combined. The UK government had undertaken several steps to reduce emissions by 78% by 2035 compared to 1990 levels. The government would distribute £620 million in grants for electric vehicles and street charging points. Furthermore, the government had also promised an extra £350 million to support the automotive supply chain move to electric. In a nutshell, the UK aimed to reach a target of net-zero by 2050 driven by government support.

2. Investment analysis and stocks under discussion (GRP, AFC, GOOD)

After gaining insights into the Clean Energy sector, we would look at the business model of three clean energy players listed on the London Stock Exchange.

 A. Greencoat Renewables PLC (LON: GRP)

(Recommendation: Speculative Buy, Potential Upside: 17.54%, Market Capitalization: GBP 719.27 million)

Greencoat Renewables PLC is an FTSE AIM 100 index listed Ireland-based company that invests in renewable energy infrastructure assets. 

The company had paid the quarterly dividend of 1.51 Euro cents per share on 27 August 2021, while the ex-dividend date was 29 July 2021.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)   

From a technical standpoint, the MACD line remained above the signal line, indicating an upside potential in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 17.54% over the closing price of EURO 1.14 (as of 02 November 2021).

 

B. AFC Energy Plc (LON: AFC)

(Recommendation: Speculative Buy, Potential Upside: 16.23%, Market Capitalization: GBP 474.48 million)

AFC Energy PLC is an FTSE AIM UK 50 index listed leading provider of hydrogen power generation technologies.

 

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, a 20-days exponential moving average of GBX 56.25 indicates an upside potential in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 16.23% over the closing price of GBX 59.90 (as on 02 November 2021). 

C. Good Energy Group PLC (LON: GOOD)

(Recommendation: Watch, Potential Downside: 13.56%, Market Capitalization: GBP 57.68 million)

Good Energy Group PLC (LON: GOOD) is an FTSE AIM All Share listed British renewable electricity company, with a mature wind & solar generation portfolio focused on businesses and electric mobility.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the stock price is hovering between the upper Bollinger band and the middle Bollinger band, indicating a correction in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has a downside potential of 13.56% over the closing price of GBX 337.50 (as on 02 November 2021).

*All forecasted data and peer information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

*The "Speculative Buy” recommendation is also valid for the current price as covered in the report as on 03 November 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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