ASX renewable shares have been struggling so far in 2022. Particularly if you compare their performance to some of the leading ASX fossil fuel energy shares.
Now, before we continue, there's no single clear definition of what constitutes an ASX renewable share.
Traditionally, you'd expect them to belong to companies providing sustainable energy sources outside of fossil fuels. Say solar, wind, hydro, tidal, or geothermal.
But, these days, you could argue that lithium miners producing a material vital to battery power storage count among that group too. But then electric vehicles need nickel and copper too.
So, while there's merit in that argument, for the purposes of this article, we'll stick to the traditional definition of ASX renewables shares.
How have these ASX renewable shares performed in 2022?
Contact Energy Ltd (ASX: CEN) has a market cap just north of $6 billion. The New Zealand-based electricity provider operates 11 power stations and produces 80-85% of its electricity from renewable hydro and geothermal stations.
The Contact Energy share price is down around 4.3% so far in 2022.
Fellow ASX renewable share, Mercury NZ Ltd (ASX: MCY) has a market cap of just under $7.2 billion. The company generates more than 15% of New Zealand's electricity and all that electricity is now generated from renewable sources.
The Mercury NZ share price is down almost 8% year-to-date.
Then there's small-cap ASX renewable share Genex Power Ltd (ASX: GNX), with a market cap of $197 million. The Aussie-based company is focused on the generating and storing renewable energy, with various solar, hydro, and wind assets.
The Genex Power share price is down 27.5% in the New Year.
How does this compare to ASX fossil fuel shares?
While not all ASX fossil fuel focused shares have shot the lights out this year, many have rocketed higher on the back of soaring prices for everything from coal to oil to gas.
The Woodside Petroleum Ltd (ASX: WPL) share price, as one example, has soared 42% in 2022, with crude oil hitting its highest levels in 14-years following Russia's invasion of Ukraine and pre-existing supply constraints.
Yancoal Australia Ltd (ASX: YAL) has performed even better, with thermal coal prices breaking all-time highs last month. The Yancoal share price is up 61% this calendar year.
What the experts are saying
Addressing the lagging performance of many ASX renewables shares, RC Global's chief investment officer Roy Chen said (quoted by The Australian Financial Review):
It's a combination of some clean energy stocks being driven up the year before, then becoming relatively expensive, while others do have some real issues. But I see the biggest problem being too many of these ETFs, or even active managers in the space, chasing very similar companies. Then when the tide turned, investors deserted the ETFs, causing outflows.
Chen added that while many fossil fuel companies have been waiting to expand their operations, a lot of ASX renewable shares have been spending big to upscale at a time when commodity prices are soaring.
"There are some of these clean energy companies that have issued profit warning after profit warning, and warned profit margins could even turn negative because costs are becoming so much," he said.
And the outperformance advantage could lie with ASX fossil fuel shares over ASX renewables shares for some time yet.
According to an analyst at Wentworth Williamson, Martin Marais:
With geopolitical issues and an industry that is incapable of rapidly ramping up production after years of underinvestment, it is likely that the supply/demand imbalance may take many months, if not years, to fix. In our opinion, demand is unlikely to fall much while there are big supply issues in terms of new discoveries and bringing extra projects online.
At US$80 per barrel for oil and with higher gas prices, we believe that Australian oil and gas producers present good value at their current prices, and accordingly we have invested a meaningful portion of our fund into our best picks among them.
What's next for ASX renewables shares?
But don't count ASX renewables shares out just yet.
According to VanEck Australia senior associate for investments and capital markets Alice Shen (quoted by the AFR):
This trend towards clean energy stocks too will likely gain momentum as energy consumers seek substitutes for fossil fuels and the demand for renewable energy rises to meet climate change carbon emissions targets.
Clean energy assets are typically pro-cyclical and tend to overperform when the economic cycle expands and capital spending on renewable energy increases. We could therefore see clean energy companies are likely to rally in the months ahead as the world seeks cleaner and more reliable supplies of energy.
