Real Assets
Reiterating Our Views on Renewables
Article
Mar 11, 2021
Renewables securities experienced a broad-based selloff in February. Some of this underperformance reflects a natural pullback after a strong rally in late 2020 and early 2021 and other technical factors. Much of the weakness, however, can be attributed to negative headlines calling the reliability of renewables into question amid recent power outages in Texas. We view these assertions as unfair and we reiterate our positive outlook for renewables, which remains unchanged despite the recent volatility.
The polar vortex across the U.S. southern states in mid-February led to record-cold temperatures in Texas—and a massive spike in energy demand and corresponding drop in supply that was too much for the existing electrical grid system to handle. In response, the state’s electrical grid operator, Electric Reliability Council of Texas (ERCOT), implemented rolling blackouts. While some market watchers blamed the intermittency of renewables and frozen wind turbines for these blackouts and noted how little renewable energies helped during the extreme weather, we believe the reality is quite different.
Traditional energy sources (i.e., nuclear, gas and coal) are responsible for the majority of power supply in Texas, as the chart below shows. This is particularly true in winter, a typically lower-wind season. These traditional energy sources were also offline due to frozen gas wells and pipelines, frozen coal piles, a nuclear unit outage, and power-plant operational problems sparked by the atypical and unexpected extremely cold weather.
To be sure, the blackouts in Texas raise questions about the reliability of the state’s electrical grid, but their root cause was not renewables alone, in our opinion, and they do not change our outlook for the asset class. We believe that the transition to renewables as the world’s favored energy supply is a multi-decade opportunity. Today, renewables are the world’s most cost-competitive sources of energy, and we anticipate adoption to further accelerate. We believe growth prospects have been strengthened by recent events, including the U.S. rejoining the Paris agreement, and increasing awareness around climate change.
Within the asset class, we find attractive relative valuations among regulated utilities focusing on transmission & distribution assets. Massive investment will be needed to accommodate the transition to renewables, and we believe these companies have a critical role to play in the renewables buildout as owners and operators of the world’s electrical grids. Read more on our views in the full commentary.
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This material is not, and is not intended as investment advice, an indication of trading intent or holdings or the prediction of investment performance. All information is current as of the date of this material. Views and information expressed herein are subject to change at any time. Brookfield Public Securities Group LLC disclaims any responsibility to update such views and/or information. This information is deemed to be from reliable sources however, Brookfield Public Securities Group LLC does not warrant its completeness or accuracy. This presentation is not intended to, and does not constitute an offer or solicitation to sell or a solicitation of an offer to buy any security, product, investment advice or service (nor shall any security, product, investment advice or service be offered or sold) in any jurisdiction in which Brookfield Public Securities Group LLC is not licensed to conduct business, and/or an offer, solicitation, purchase or sale would be unavailable or unlawful. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.