Startups in the United States and Europe have seen a surge in funding for promising energy storage, hydrogen, and renewable energy technologies. This is due to increased public financial support for energy innovation. To understand the risks associated with investing in energy, it is important to consider both the financing and funding perspectives. Financing involves assessing whether the revenues and profits of a project can support new expenses in corporate balance sheets.
Funding, on the other hand, looks at how well debt and capital can be raised to supplement corporate and government funding. Recent events have led to a reassessment of risk in the global economy, particularly in the energy sector. The market capitalization of major publicly traded oil and gas companies has dropped by almost 50%, with most of the decline occurring last year. This has caused volatility to increase compared to the market in general, as evidenced by a higher beta.
US shale producers, which rely on debt markets to finance their operations, have been particularly affected by this, with higher borrowing costs and short-term liquidity restrictions for several companies. The fall in energy demand, uncertainties about future wholesale market prices, and exposure to gas distribution as part of utility business models have all posed new financing challenges. Loan costs have increased and utility companies face credit risks due to non-payment by customers in financial distress. In Europe, electricity companies have seen their profits drop over the past decade due to falling demand.
Meanwhile, US companies entered the crisis on a firmer footing. Actors in the electrical equipment supply chain are also facing more challenging financial conditions than project developers. Economic uncertainties have caused some governments and utility companies to delay the acquisition of energy projects, resulting in reduced order portfolios and cash flow for suppliers. Consolidation pressure on smaller renewable energy manufacturers with weaker balance sheets could accelerate, while larger players could reduce costs to weather the storm.
Car manufacturers have also seen a sharp drop in sales and market capitalization this year. This raises questions about billing for vehicle fleets, as well as the deployment of more efficient vehicles and electric vehicles in light of lower fuel prices. Financial markets can play an amplifying role in both downward and upward energy investment trends. While short-term uncertainties abound, there may be conditions for refinancing and acquisitions that could help reduce financing costs and improve investor confidence.
These opportunities have increased in recent years and could now be more attractive to institutional investors seeking returns with a risk appetite for assets such as renewable energy, energy infrastructure, and other capital-intensive technologies with reliable income profiles. To make informed investment decisions, it is important to understand the dynamics of sustainable finance and investment in energy. Private investment decisions will also depend on the evolution of the current crisis and on government measures to support markets. In markets and sectors where investment risks remain high, public financial institutions can play an increasingly important role.
Despite increasing cost competitiveness that has supported solar photovoltaic and wind energy deployment over the past decade, investments in renewable energy are not expanding at the pace necessary to align with sustainability objectives.