AI-fuelled optimism meets policy risks for European clean energy stocks

Core Viewpoint - European clean-energy producers are facing potential volatility as a rally driven by AI-related power demand expectations encounters policy risks, particularly regarding carbon pricing and energy affordability [1]. Group 1: Market Dynamics - The clean energy sector had previously surged due to expectations of increased electricity demand from data center expansions, mirroring trends in the U.S. where demand is now driven by firm market conditions rather than subsidies [1]. - Recent discussions among European governments about reforming the EU carbon-trading system have led to a decline in carbon prices by over 20%, impacting generator earnings [1]. - The International Energy Agency (IEA) forecasts that European electricity demand will not return to 2021 levels until 2028, following significant declines in 2022-2023 and a projected modest recovery thereafter [1]. Group 2: Policy Risks - Analysts suggest that renewed debates over carbon policy could lead investors to reassess their assumptions regarding valuations and earnings in the clean energy sector [1]. - Germany and other countries are prioritizing energy affordability and security over green initiatives, indicating a shift in policy focus that could affect the clean energy market [1]. - The upcoming review of the Emissions Trading System (ETS) is expected to create uncertainty in carbon prices and utility stocks until clearer policy signals are provided [1]. Group 3: Valuation Trends - The utilities index in Europe has seen a significant increase of over 40% in the past year, despite earnings forecasts for 2025-2027 remaining largely unchanged [1]. - Some utility stocks in Spain, Italy, Germany, and Britain are perceived to have stretched valuations, reflecting investor optimism that may not align with actual demand growth [1]. - Bank of America warns that if the EU were to eliminate carbon cost pass-through to power prices, long-term earnings for renewable developers could decline by more than 30% [1].