The renewed interest in green energy ETFs in 2023 stemmed from growing political support and awareness of the challenges in the renewable energy sector. ETFs tied to uranium mining and renewable grid technologies posted strong gains, reflecting investor optimism in these sectors. For example, the Global X Uranium ETF (URA-A) has outperformed the Nasdaq Smart Grid Infrastructures ETF (GRID-Q) and the S&P oil & gas exploration and production ETF (XOP) since the beginning of the year, with gains of 17 percent versus 12 percent and 10 percent, respectively, for oil ETFs, according to The Globe and Mail. *

Price performance of the Global X Uranium ETF (URA), Nasdaq Smart Grid Infrastructures ETF (GRID) and S&P oil & gas exploration and production ETF (XOP) over the past 5 years (source: Yahoo Finance)*

Volatile years

While some green funds have outperformed, the fact remains that many are still in the red. Over the past few years, green energy ETFs have experienced a volatile journey that reflects changing investor sentiment and market dynamics. The year 2020 marked a surge in demand for renewables, not just because of government support but also the coronavirus pandemic. These events had an impact on the funds of both sectors. While green energy funds have grown, such as the iShares Global Clean Energy ETF (ICLN), which gained around 180 per cent in one year, fossil fuel-linked funds have slumped. The aforementioned S&P oil & gas exploration and production ETF (XOP) fell more than 40 percent during the same period. By 2022, the situation had reversed and green energy, whose pandemic-impacted supply chain delays and significant interest rate hikes have caused them to be in a downtrend that continues to persist. While support for green investments has been tremendous, ETFs focused on the sector have faced declines of up to 70 percent over the past two years, with fossil ETFs notching gains of more than 50 percent. *

Price performance of the iShares Global Clean Energy ETF (ICLN) over the past 5 years (source: Yahoo Finance)*

The reason is rates

The renewables and energy sector typically relies on subsidies and loans due to high upfront costs. Therefore, the impact of interest rate changes is most significant. The current high interest rates make borrowing more expensive, increasing costs for companies and reducing profitability. In addition, companies have also been put under pressure by the reduction in consumer energy prices at a time when costs have been rising rapidly. Rising oil prices caused by supply constraints due to geopolitical tensions, such as the attacks on Israel, have caused a decline in interest in the green energy sector and their ETFs. As the ETF stream noted, the expected OPEC oil supply cut is also unpleasant news, which is expected to push up oil prices. [1]

Positive outlook for the future

Green energy ETFs are showing signs of recovery, which could turn their performance positive this year. Experts see strong growth prospects over the long term, which Morningstar says will not be without obstacles such as red tape or supply issues. In addition to support such as rate cuts and addressing geopolitical issues, incorporating other trends in storage, supply chains and advances in technology, for example, could boost investor confidence in clean energy investments.

Artificial intelligence can help

Artificial intelligence can provide key assistance in the transition to and cost of green energy through its multifaceted use. One of these is harnessing the ability to analyse vast amounts of data from satellites and monitoring stations, which will make it easier for operators to predict weather changes, ensure more stable and reliable generation, increase the efficiency of systems in real time and reduce costs. AI analytics also has a role to play in improving the management of the energy grid and infrastructure, where companies can more easily make strategic decisions regarding the deployment and design of energy networks. Among other things, it can ensure the reliability and longevity of infrastructure through predictions.

Adapting to the trend

Oil companies are also seeing a change in global investment and are trying to adapt to the trend. One such company is international oil company BP (BP), which is increasing investment and focusing on bioenergy production, electric vehicle charging infrastructure, renewable energy, and carbon capture and storage. Notable moves include the acquisition of Archaea Energy and an investment in TravelCenters of America. BP aims to achieve significant renewable energy capacity by 2030 through onshore and offshore wind and solar projects.

* Past performance is no guarantee of future results.

[1] Forward-looking statements are based on assumptions and current expectations, which may be inaccurate, or on the current economic environment, which may change. Such statements are not guarantees of future performance. They involve risks and other uncertainties that are difficult to predict. Results may differ materially from those expressed or implied by any forward-looking statements.