Going green in the Nordics

What happened

Atonra's research team recently attended the 25th Power & Renewable Energy Conference organized by Pareto in Oslo. The conference aimed to connect companies and investors in the power and renewable energy industry, and it featured presentations from 77 companies accounting for 290TWh of annual production in wind, hydro, and solar energy (or more than  20% of Europe's total production).

The conference's discussions covered various topics, including battery technology, renewables, green hydrogen, carbon capture, utilization and storage (CCUS), waste treatment, recycling, power grids, and various new and upcoming climate regulations.

Scandinavian countries have abundant natural resources and have long been known for their energy production, primarily in the form of oil and gas. However, these countries are now at the forefront of a global movement towards cleaner and more sustainable energy technologies. Norway has set a goal to achieve carbon neutrality by 2050 and is aiming for a 55% cut in CO2 emissions by 2030 compared to 1990 levels. The country is investing heavily in renewable energy sources such as wind and hydropower to achieve these goals.

Sweden and Denmark have also made significant strides in transitioning to clean energy. Denmark aims to phase out all fossil fuels by 2050, and Sweden has set a goal to be entirely fossil-free by 2040. These countries are setting an example by demonstrating that economic prosperity and environmental responsibility can coexist. This has also attracted a growing number of investors eager to support such efforts to build a greener future.

Despite these efforts, Norway still exports more than 1'100 TWh of natural gas per year compared to only about 20TWh in electricity exports. The country's focus on transitioning to clean energy sources implies that this balance will have to shift significantly in the coming years.

Moreover, many new players are emerging in the Nordic region, and existing big energy players are also eager to transition to clean technologies and renewables. Their goal is to make the Nordics Europe's factory for clean technologies, which will increase the region's competitiveness in the global market while contributing to a sustainable future.

The conference provided a platform for participants to share insights on technological advancements and regulatory developments in the renewable energy industry.

Impact on our Investment Case

A major powerhouse for Europe

The Nordic region's potential as a major player in Europe's clean technologies is vast, but it requires strong government support and fast action. The region is well-positioned with industrial countries that possess strong technological and operational know-how, but the differentiating factor won't be technology or costs. Rather, it will come from building local supply chains and a higher level of transparency on environmental impacts. With a focus on creating more sustainable supply chains, the Nordic region can leverage its existing advantages in the areas of renewable energy production, recycling, and in the longer term, green energy and carbon capture utilization and storage (CCUS).

The region's high level of interconnection and a strong focus on renewable energy, including abundant hydropower resources and leadership in wind energy, make it an increasingly important region in Europe's energy transition. The Nordic countries are characterized by a well-functioning power market that facilitates cross-border trade and a strong regulatory framework that supports the development of renewable energy. Moreover, the region is investing heavily in research and development of new clean energy technologies, including green hydrogen and CCUS, which will be critical in the transition to a low-carbon energy system.

We believe that the best investment opportunities lie in areas where the region has long-standing technological expertise and significant market potential. These include specifically: wind, heat pumps, and green hydrogen.

Scandinavia has a rich history in wind power, with Denmark being one of the world's first adopters of this technology. With vast wind resources in both the North Sea and the Baltic Sea, offshore wind presents a particularly promising opportunity for investment. The region's proximity to large markets in Europe, such as Germany and the UK, also enhances the commercial appeal of this sector. Some key actors (e.g., Orsted) have acquired over time world-leading expertise in developing wind energy projects; such local players are well positioned to benefit from the upcoming growth in Europe’s wind sector (especially in the offshore segment, expected to grow >25x by 2030).

Heat pumps are another area where the Nordic region has a competitive edge, owing to the harsh winter conditions that necessitate efficient heating systems. With a growing demand for renewable heating solutions in Europe (see REPowerEU plan, with its targets of 20mn new heat pumps by 2026 and 60mn by 2030), we see significant potential for Scandinavian companies to expand their market share in this sector. Companies such as Nibe Industrier (Swedish leading heat pump provider) are well positioned to capture Europe’s growing demand for energy-efficient heating & cooling solutions.

Finally, green hydrogen is an area where Scandinavian countries could have an edge in the future. With abundant renewable energy resources, such as wind and hydropower, the region has the potential to become a major producer and exporter of green hydrogen. While the hydrogen industry is still in its early stages and considered risky, companies with established expertise, like Nel ASA, will be key to the development of a green hydrogen industry.

Reshoring on everyone’s lips

Europe's clean technology sector is undergoing a significant transformation, with a growing emphasis on reshoring production and promoting sustainable investment. Reshoring and green protectionism have undoubtedly become hot topics, with governments and businesses seeking to build more resilient and sustainable supply chains. In the U.S., the Inflation Reduction Act (IRA) is a prime example of how reshoring policies can influence investment decisions, with the act incentivizing companies to invest in domestic production and reduce reliance on imports.

In Europe, a Green Deal framework is under discussion, and should include a Net-Zero Industry Act and a Critical Raw Materials Act, which aim to promote the development of sustainable industries and ensure the availability of critical materials for clean technologies. However, Europe is currently behind the U.S. in terms of implementation, and many Scandinavian actors are looking into building capacity in the U.S. to take advantage of the different domestic production tax credits. This is especially true in the battery industry, where U.S.-made battery cells can qualify for a credit of $35/kWh (standard battery size is roughly 50 kWh). A manufacturer producing 50 kWh batteries for one million cars annually would get $1.75bn per year from this credit. This incentive is driving battery manufacturers to move to the U.S. either alone or through partnerships with local players (see recent CATL-Ford partnership). FREYR Battery, an emerging Norwegian battery maker, is a good example. In addition to its two giga factories in Norway (under construction, aiming for 29 GWh of annual battery cell production once completed), the company is planning to expand in the U.S. with a new factory that would have an initial annual production capacity of 34GWh by itself.

To efficiently relocalize some of the clean technology value chain, Europe needs to accelerate incentives and boost investments. According to a leaked draft of the EU's plan, to be officially published on 14 March, the EU would target at least 40% of global cleantech manufacturing to be based in Europe by 2030 (40% of solar PV, 50% of electrolyzers and 60% of heat pumps). This plan looks to incentivize manufacturing relocation, increase investment in R&D, promote the growth of clean tech start-ups, and prioritize the development of critical raw materials. If Europe effectively increases its incentives, more clean technology companies will likely relocate their manufacturing to Europe, including in the Nordics.

Permitting, permitting, and permitting

“Permitting” was a prominent topic of discussion during the conference. One of the biggest obstacles to renewable energy deployment in Europe is the permitting process. The lengthy and often complicated process of obtaining permits for renewable energy projects can result in significant delays and costs, making it challenging for companies to develop projects efficiently. This is particularly true in the case of wind energy, where the permitting process in some countries can take up to 10 years.

However, there is hope that the process will become more streamlined in the future. In December 2021, the EU adopted a new regulation aimed at simplifying the permitting process and reducing the time required to obtain permits for renewable energy projects. The regulation is a step in the right direction, as it will enable member states to grant permits for renewable energy projects more quickly and efficiently while ensuring that the projects comply with environmental standards.

Despite this positive development, more needs to be done to ensure that the permitting process is efficient and streamlined. The EU should consider a range of measures to support the development of clean tech projects, including the establishment of a dedicated agency to oversee the permitting process, the provision of financial incentives to support renewable energy projects, and the development of standard guidelines for the permitting process.

In addition to these regulatory measures, it is also essential to engage with local communities to gain support for renewable energy projects. Public opposition to renewable energy projects can result in significant delays and added costs, making it essential to work with communities to address concerns and ensure that projects are developed in a way that benefits everyone.

China stands out as a different case in terms of renewable energy deployment. Its top-down government-driven approach to renewable energy development has limited public opposition and provided greater visibility to growth. Its government's strong support for renewable energy projects has enabled the country to quickly become the world's largest manufacturer and developer of clean technologies.

Our Takeaway

The Nordic region has the potential to become a major player in Europe's clean technology industry. However, stronger government support and faster action are needed. We believe that the Nordic should capitalize on its extensive experience in the energy sector, while also prioritizing the development of local supply chains and increasing transparency regarding environmental impacts.

It is important to note that China, the world's largest supplier as well as end-market for clean technologies (China 2022's investment in energy transition were of $549bn or almost 50% of the world's total), was missing from the discussion. We believe that investors who are seeking to gain exposure to the cleantech sectors should not overlook Chinese players (to which we have ~35% exposure in our Sustainable Future strategy), who are often leaders in terms of market share and technological advances.

Today, most of our exposure to Europe's cleantech sector is in Scandinavian companies, comprising approximately 15% of the portfolio. These companies are primarily focused on offshore wind, hydrogen, and heat pumps. We will continue to closely monitor the development of the EU's Green Deal framework as it determines the future of the region.