Energy Security Concerns Are Fueling A Renewable Boom

Back in 2013, an announcement by the Federal Reserve about pulling back on the central bank's easy-money policies sent markets into a tizzy. Treasury bond yields skyrocketed, junk bond prices fell, emerging-markets stocks tumbled, and stock volatility was off the charts leading to the coining of a new phrase on Wall Street, "taper tantrum." We are currently going through another phase of quantitative tightening, with the Fed aggressively hiking interest rates in its fight against a 40-year high in inflation.

This time around, the market is taking things in stride–comparatively–avoiding an all-out meltdown.

Nevertheless, an expensive stock market that was trading near record highs, higher interest rates, supply chain disruptions, and high inflation have all contributed to investors increasingly shunning growth stocks in favor of more defensive value companies.

Among the first casualties has been the renewable energy sector.

After enduring a torrid season in 2021, renewable energy stocks have continued to underperform in 2022, with the sector's popular benchmark iShares Global Clean Energy ETF (NASDAQ:ICLN) down 21.2% in the year-to-date compared to a 36.5% gain by its fossil fuel equivalent, the Energy Select Sector SPDR Fund (NYSE:ARCAXLE).

But don't let the anemic returns by clean energy stocks fool you: the green energy sector is in the pink of health and enjoying robust growth.

In fact, Russia's invasion of Ukraine has lit a fire under the sector, with the International Energy Agency (IEA) predicting that renewable energy is on pace to set new records in 2022.

According to the IEA, new capacity for generating electricity from solar, wind, and other renewables is set to hit new records this year as governments seek to take advantage of renewables' energy security and climate benefits.

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Source: Statista

Energy Security

According to the IEA's latest Renewable Energy Market Update, last year, a record 295 gigawatts of new renewable power capacity was added to the global power grid, a remarkable achievement considering the crippling supply chain challenges, construction delays, and high raw material prices that the industry has been grappling with.

Renewable growth is expected to be even more impressive this year, with global capacity additions expected to clock in at 320 gigawatts - or nearly enough to match the European Union's total electricity generation from natural gas. Solar PV is expected to be in the lead again, with the sector on course to account for 60% of global renewable power growth in 2022, followed by wind and hydropower. Global additions of solar PV capacity are on course to break new records both this year and next, with the annual market expected to reach 200 GW in 2023.

Related: China’s COVID Lockdowns Force Aramco To Slash Oil Export Prices

Indeed, the IEA says the additional renewables capacity commissioned for 2022 and 2023 has the potential to significantly reduce the European Union's dependence on Russian gas. About 16 percent of the EU's total power demand is currently met via electricity generation with natural gas, a significant share of which is sourced from Russia. The EU's natural gas-fueled electricity generation annually ranges from 340 TWh to 600 TWh, with Russian gas accounting for 100 TWh to 200 TWh of that.

"Energy market developments in recent months--especially in Europe--have proven once again the essential role of renewables in improving energy security, in addition to their well-established effectiveness at reducing emissions. Cutting red tape, accelerating permitting and providing the right incentives for faster deployment of renewables are some of the most important actions governments can take to address today's energy security and market challenges, while keeping alive the possibility of reaching our international climate goals," IEA Executive Director Fatih Birol has said.

To meet its goal of accelerated adoption of clean energy, the bloc will start allowing some renewable energy projects to receive permits within a year. The European Commission will propose rules requiring countries to designate "go-to areas" of land or sea suitable for renewable energy at next week's meeting in Brussels.

Overall, the IEA says that renewables' growth so far this year in China, the European Union, and Latin America, has been more than compensating for slower-than-anticipated growth in the United States.

By Alex Kimani for Oilprice.com

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