Fjord Defence Group ASA

Investor Presentation • Jun 22, 2022

Market view - renewables

Comment on short-term EU ETS outlook

Was the "green bubble" the tech bubble of our time?

As tech stocks are once again feeling the pain, we find it fitting to address the frequent comparisons drawn between the tech bubble of the early 2000's and the rise and fall of renewable shares in 2020-2021

Was this a "green bubble", akin to that of the tech bubble?

Frequent readers of our weekly reports will recognize the chart below, showing the performance of renewable shares vs. the general market, in Norway and globally. Indeed, the past year and a half has been grim.

Renewables in Norway and globally vs. general market*

Renewables have been on a path that certainly looks like the early 2000's tech bubble

SB1M Virtue index includes the "oldest" Nordic renewable shares

…and the resemblence is just as striking when looking at valuation

EV/Sales of renewables in 2021 peaked around the same level as that of tech stocks in 2000

Renewables: S&P 500 Clean Energy Index Tech: S&P 500 Information Technology Index General Market: S&P 500

General Market: S&P 500

However, note that valuation is now back on par with the general market…

This is obviously somewhat simplified, as we are only looking at aggregate EV/Sales across indices

… but admittedly the general market is valued somewhat higher this time…

Hence, on the relative, renewables no longer seem overpriced

Renewables: S&P 500 Clean Energy Index Tech: S&P 500 Information Technology Index General Market: S&P 500

… and Fed('s model) indicate a continued soft sentiment for growth shares

The probability for a recession is 90% - and GDP will most likely decline through both '22 and '23!

	2022		2023		2024		2025
	Jun	Mar	Jun	Mar	Jun	Mar	Jun	Mar
GDP growth (Q4/Q4)	-0.6 (-3.6, 2.3)	0.9 (-0.8, 2.6)	-0.5 (-5.0, 4.0)	1.2 (-0.6, 3.1)	0.4 (-4.4, 5.3)	1.5 (-0.3, 3.4)	1.4 (-3.9, 6.5)	1.8 (-0.1, 3.6)
Core PCE inflation (Q4/Q4)	3.8 (3.3, 4.4)	2.8 (2.1, 3.6)	2.5 (1.7, 3.4)	2.2 (1.3, 3.1)	2.1 (1.2, 3.1)	2.0 (1.1, 3.0)	2.0 (1.0, 3.0)	2.0 (1.0, 3.0)
Real natural rate of interest (Q4)	0.9 (-0.4, 2.1)	0.0 (-1.3, 1.4)	0.9	0.4	0.9	0.6 (-0.5, 2.4)	0.8 (-0.9, 2.5)	0.6 (-1.1, 2.3)

• To June from March, the centre forecast for Q4-2022 y/y GDP growth was revised down by 1.5 pp to -0.6%
• .. And the Q4-2023 y/y estimate was cut by 1.7 pp to -0.5%
• Thus, the Q4-2023 GDP level was revised down by 3.2%, and the level will be 1.1% below Q4-2021!
  • » In addition, 2024 and 2025 was revised down by 1.1 pp and 0.4 pp, resp., in sum 1.5 pp. Grand total down 4.7% vs the March f'cast –
• If so, a not very deep, but a rather long-lasting recession and a slow recovery thereafter
• The model forecast are way below the FOMC members' forecast: by end of 2023, the difference (in GDP level) is 4.5%!!

However, investing in the future proved wise the last time around

Tech has outperformed the general market by a landslide, despite being overvalued in 2000

Then again, it took 17 years before tech stocks were back at the peak of 2000

Will it take that long for renewables to recover as well?

Reason 1: We are running out of time to lower emissions. This urgency was not there after the tech bubble.

Reason 2: Renewables are enjoying strong regulatory tailwind, as represented by rising emission costs

Reason 3: Irrespective of share prices, underlying momentum in various renewable sectors is rock-solid

Growth in announced renewable projects from 2020 to 2021 (by capacity)

Sources: Rystad Energy; Ørsted, TrønderEnergi, Scatec, NEL 13

Reason 4: We are still heavily underinvested in renewables

Annual investments required per technology in IEA's Net Zero Emissions scenario, USDbn

Market view - renewables

Comment on short-term EU ETS outlook

The degree of speculation in the EU ETS market is still not particularly high

This implies that actual supply/demand should be reflected in the spot price

Comments

• A proxy for the extent of speculation in any given market can be created by dividing the traded volume by the volume of open positions.
• The reasoning behind this is that high levels of speculation leads to increased volume traded, but without a corresponding increase in the volume of open positions, since speculative positions are generally closed quickly.
• The ECB has created such a proxy for the EUA market. The conclusion is that, although speculation increased slightly as the EUA price rallied in 2018-2019, the current level of speculation is still relatively moderate, and lower than during earlier phases of the ETS.

Lowered economic activity may be offset by increased emissions in the power sector

A recession will lower industrial activity and correspondingly most likely also emissions related to this

Both coal and gas prices are at extreme levels

Gas prices rallied this week, as Russia lowered supply to Europe

…but burning coal is still highly cost competitive relative to gas…

This remains supportive for the EUA price, as burning coal entails higher emissions and more demand for allowances

Note: Spark/Dark spread = the difference between the price received by a generator for electricity produced and the cost of gas/coal needed to produce that electricity Source: SpareBank 1 Markets, Macrobond, Bloomberg 19

1 tonne coal ~= 3 tonnes CO2 = 3 EU ETS allowances

…and the market believes coal power will be cheaper for the next two years…

Hence, emissions from the power sector are expected to remain high

Forward-looking power generation costs and power price (Germany)

… supportive of short-term EU ETS price as power accounts for >50% of system emissions

Combustion of fuels is mainly related to power stations

EU ETS emissions by source (GtCO2eq)

Short-term EU ETS

So, in our view, the >EUR80/t may remain over the next couple of years

… which should incentivize the industry to move forward with carbon capture projects!