analysis-energy-sector

Sector analysis: Energy sector

Energy sector outlook: increased likelihood of bankruptcies
The energy sector is at a crossroads. While there is a clear shift underway toward renewable energy with all the innovation opportunities that come with it, this transformation also brings significant financial and operational challenges. For many companies in the energy sector, both established players and new entrants, pressure on margins, rising investment costs and intensifying competition are worrisome. Our research department predicts that the probability of bankruptcies in the energy sector will increase in the coming years.

This article contains:

    • Financial pressures and volatile energy prices are increasing the likelihood of bankruptcies with a peak expected in 2025.
    • Global renewable energy capacity grew by 10% in 2024, driven by solar and wind, though fierce competition and supply chain challenges are straining industry margins.
    • Europe's push for climate neutrality and geopolitical tensions are reshaping energy strategies.
  • The energy sector is undergoing major changes, driven by rising energy demand and the need to meet climate goals. Anno 2024, the global energy mix still relies heavily on fossil fuels, with oil, gas and coal collectively accounting for more than 75% of total energy consumption. Nevertheless, accelerating investment in renewable energy is having a significant impact. Global renewable energy capacity is up 10% in 2024 compared to 2023, mainly due to solar and wind, which collectively account for more than 70% of new installations.

    Europe is aiming for climate neutrality by 2050, which will require major reductions in the use of fossil fuels. Large companies such as Shell and BP are increasingly investing in renewable energy and hydrogen technology to meet stricter environmental regulations and public pressure.

    Transverse to this is the impact of geopolitical events, such as the conflict between Russia and Ukraine and unrest in the Middle East. This creates price volatility and uncertainty in supply. Europe has reduced dependence on Russian gas through LNG imports from the U.S. and the Middle East, but remains vulnerable to disruptions.

    According to our research department, Trump's return means bad news for the energy transition. Never before has the US pumped as much oil as it did last year, and under Trump this will only increase further. So will LNG exports. More LNG exports will feel European citizens and companies directly in their pockets. According to our research department, gas prices in Europe could fall by more than 15% over the next five years, due to additional LNG exports including from the US.

    Trump's return puts a brake on the energy transition. In his first term, he already scrapped numerous environmental regulations, such as the Clean Power Plan and stricter emission standards for vehicles. He is expected to continue this line again. Thus, he will address the billions of dollars in subsidies and loans for accelerating the energy transition.

    This change in direction not only undermines U.S. efforts to reduce greenhouse gas emissions but also frustrates climate policy globally. Thus, less funding for renewable energy projects and less international cooperation will put great pressure on the Paris climate goals.

    Trump promises to lower fuel prices, but it won't be that easy. The cost of oil production is already close to break even. And additional production capacity will only have an effect in the medium term.

    Furthermore, geopolitical factors also play a role. A good example is Iran. There is a good chance that Trump will reimpose heavy sanctions to reduce Iranian oil exports. New sanctions could fuel tensions in the oil market. We believe that this could potentially raise oil prices by 5-10%. This would not only increase global inflation but also raise tensions in the Middle East. Especially around the Strait of Hormuz, through which 20% of global oil trade passes.

    Within the energy transition, gas serves as a transition fuel with lower emissions than oil and coal. The demand for LNG continues to rise. Countries such as the Netherlands and Belgium have invested heavily in LNG infrastructure. Although there will be a gradual decline in LNG demand as renewable energy is further integrated.

    Decarbonization requires investment in technologies such as carbon capture and hydrogen production. This entails high costs, affecting smaller companies in particular. At the same time, the EU is introducing stricter regulations and higher emission allowances, putting pressure on corporate strategies.

    Europe is playing a prominent role in the shift to renewable energy. The continent continues to lead the way in reducing CO2 emissions and developing green technologies. By 2024, about 40% of Europe's energy mix will come from renewable sources. Countries like Germany and Spain have made impressive strides with 55% and 48% of their electricity needs met by renewable energy sources, respectively. The Netherlands and Belgium get about 30% of their electricity from renewable sources.
    High energy prices and geopolitical tensions has strengthened research toward energy independence. The European Union rolled out plans in 2024 to reduce fossil fuel imports from non-European countries by 20% by 2030, and is investing heavily in hydrogen technology. Subsidies and incentives of €250 billion have been introduced to support renewable energy projects.

    Although "green energy" applications are booming, many energy companies in the sustainability space are struggling to thrive. This apparent contradiction can be explained by a combination of factors affecting the market. We zoom in on some of the factors:

    Fierce competition

    One of the main challenges is intensifying competition. As more companies enter the market to respond to the growing demand for sustainable solutions, competitive pressure increases. This leads to lower profit margins and an intensified battle for market share. Innovation is crucial to remain competitive, but the cost of research and development is high and is often a barrier for companies.

    The renewable energy industry, especially solar and wind, is facing intense price pressure. In the solar sector, price competition is unprecedentedly fierce, mainly due to overproduction and the dominance of low-cost products from Asia. For many European companies, with higher production costs and fewer economies of scale to exploit, it is becoming increasingly difficult to remain competitive. In addition, wind turbine manufacturers are dealing with material costs that have stabilized at high levels and supply chain issues, which are further reducing their margins. The margin pressure can be fatal for companies with limited financial buffers, increasing the likelihood of bankruptcy.

    Price fluctuations

    The geopolitical uncertainties surrounding energy supply cause strong price fluctuations. The "energy crisis" a few years ago gave a strong boost to demand for renewable energy, but as energy prices plummeted in 2023, so did the urgency for many companies and citizens to take up renewable energy. This continued volatility can leave energy companies facing unsustainable debt burdens, making them vulnerable to bankruptcy. Volatility has also made securing financing more difficult.

    Changing regulations

    The European Union has set ambitious climate goals, such as the obligation to reduce carbon emissions by 55% by 2030. The stricter regulations impose additional compliance costs and oblige companies. Traditional energy companies whose revenue model relies heavily on fossil fuels will have to drastically change their business models, leading to high transformation costs.

    Supply chain

    Furthermore, the complexity of the supply chain plays a role. Dependence on raw materials such as lithium and rare metals for technologies such as batteries and solar cells creates vulnerability in the chain. Shortages and price increases in materials can drive up costs for energy companies and weaken their competitive position.

    Consolidation

    Although demand for wind and solar power remains strong, the wind industry is facing problems such as supply chain disruptions and financial instability among key suppliers. Some major wind turbine manufacturers have already reported significant losses, hampering the financeability of new projects. The solar market, which is facing overcapacity and a sharp price war, is experiencing a similar crisis. For companies operating in these sectors, project delays and narrow margins can increase financial risks.

    Whereas developments in the energy sector are worrying some players, others are actually benefiting. Financially stronger companies can take over weaker players to increase market share and efficiency. Consolidation in the sector can help relieve margin pressure and achieve economies of scale. At the same time, investment in innovation and new technologies, such as hydrogen production and energy storage, can help strengthen competitiveness and reduce bankruptcy risks.

    1. The energy transition requires substantial investments in renewables, smart grids and energy storage technologies. The capital expenditure required for these projects is high, especially at a time when interest rates worldwide first rose and now appear to be falling. It can be challenging for smaller companies to secure financing on acceptable terms, putting pressure on their financial stability. Large players, who previously invested primarily in fossil fuels, are also feeling the pressure to rapidly convert to green technology, which entails significant capital commitments.
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    3. The increased risk of bankruptcies among energy companies is a serious challenge for the sector may have implications for Europe's energy transition. Companies that can withstand the financial and operational pressures of this period are likely to emerge stronger from the crisis.
    1. For many energy companies, the future is uncertain. Our own research shows that the wave of bankruptcies worldwide (in full) is not yet at its peak. The peak will come in 2025. Thereby, the energy sector is explicitly mentioned as a vulnerable sector. Our research department also warns against possible bankruptcies of larger companies (to big to fail no longer exists).
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    3. We see that invoices are getting paid later and later. This is extremely difficult for many companies. Working capital comes under pressure as a result. Companies put each other in trouble. With the logical consequence that the chance of non-payment and bankruptcy increases. Even healthy companies can be affected. A large unpaid invoice is a nightmare for many business owners.
    The ever-increasing bankruptcies should be an alarm signal for energy companies. The chances are increasing that they will be left with unpaid invoices. That blow can hit hard. The consequences can be absorbed with a trade credit insurance. We have a solution for every type of business. Whether an invoice is paid or not is no longer a concern, companies are sure of their money with our trade credit insurance. This provides security and removes anxiety. We take over the debtor risk from the company. Don't customers pay? Then we compensate the affected company. In addition, we offer companies that take out a trade credit insurance with us information about the creditworthiness of their (potential) customers. On a daily basis, we analyze the financial situation of customers and prospects.