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Ask AI · How can the U.S.-Iran conflict accelerate the global transition to green electricity?

This is the 1,297th original article from New Energy Right in Front

Teaching people, you can’t teach them; teaching people by example, once is enough.

Previously, New Energy Right in Front had been waving flags for and championing the green electricity industry, firmly believing this was a good business model. Under the overarching logic of the global transition to green energy, long-term certainty was very high—but the market just wouldn’t buy it. This time, because of the U.S.-Iran conflict, with the Strait of Hormuz shut down, the global energy crisis once again became the focus of market attention. China Three Gorges New Energy, which had been grinding its way through a bottom for two or three years, was “an old man going wild like a young hero”—it surged violently and at one point rose by more than ten percentage points.

Although the gains aren’t really anything compared with many themes that “soar like the little guys,” its recent rally is very likely only just the beginning. Whether it’s China Three Gorges New Energy, or Green Electricity ETF Huaxia (562550) and similar index products, they are worth watching for the long term. Because the energy-security crisis triggered by the U.S.-Iran conflict will bring long-lasting and profound changes to the new energy sector.

** 01**

Domestic growth is expected to rebound

New Energy Right in Front has covered and tracked China Three Gorges New Energy before, believing that in terms of its business model, although it’s not as excellent as its elder “brother” China Yangtze Power, it’s not bad either. It’s basically this: buy upstream photovoltaic and wind power equipment, build power plants, then sell the electricity it generates to power retailers, earn profit from the spread in the middle—the business model is extremely simple.

China Yangtze Power, after a one-time investment, is essentially like profiting effortlessly. China Three Gorges New Energy needs ongoing investment and depreciation—especially in recent years, when investment and depreciation are both relatively large, its profitability is weaker. But the “just-in-demand” attribute of energy means the electricity it generates can’t be sold off. Even if we take into account the market-based transition of renewable power generation, as a large central state-owned enterprise, it has advantages and basically doesn’t need to worry about issues in selling power.

In addition, as a large central state-owned enterprise, it has advantages in financing and in securing high-quality locations—these are the two most important capabilities for new energy operators. The former determines that its installed capacity can keep running ahead of competitors. The latter determines that its power generation efficiency is higher, its input-output ratio is better, and it can recoup its investment faster.

This is also why, as a later starter, it was able to surge along for more than ten years, with installed capacity for wind and solar soaring to nearly 50 GW, ranking as the second-largest in China.

Previously, because the short-term growth in China’s wind and solar installed capacity was too fast and energy-storage supporting capacity didn’t keep up, plus wind and solar power generation has intermittency, making grid absorption a problem, and also issues with pushing the market-based reform of feed-in electricity for new energy generation, new energy operators were under pressure in stages. But this time, the energy crisis caused by the U.S.-Iran war confirms the foresight of China’s green power transition strategy. Next, fully pushing forward the market-based reform of renewable power generation is expected to accelerate the process, and policies to further increase wind and solar development will continue.

The market believes this is a negative for the market-based reform of new energy power feed-in. Actually, from a long-term perspective, it is definitely good news for industry leaders. Previously, the profitability of new energy operators relied only on subsidies, which clearly isn’t sustainable over the long run. Only when they can keep generating profits under market conditions will the profitability be sustainable.

As a central state-owned enterprise, China Three Gorges New Energy has advantages in financing and in securing abundant wind and solar resources and high-quality locations. This means it has advantages in both scale and generation cost, and naturally it has even greater advantages in the market-based reform of renewable power feed-in. Going forward, it is expected to enter a new round of fresh development.

If the broader domestic market can also benefit from this U.S.-Iran conflict, then the upside imagination brought by overseas expansion will be even greater.

** 02**

Going overseas opens up an entirely new realm of imagination

Actually, domestic power generation companies are not fully the product of a market-based system. For them, making money is definitely not the first purpose; implementing the country’s energy security strategy is the fundamental basis for their existence. Especially for those large central state-owned power generation companies, as a new energy operator, China Three Gorges New Energy is also not immune to this constraint.

And many wind and solar projects—especially offshore wind projects—have very long cycles: approval → construction → grid connection typically takes 3–5 years. On top of that, the benefits are highly uncertain. This slow-return and high-uncertainty nature means many private enterprises simply can’t do it. China Three Gorges New Energy, as a central state-owned enterprise, has advantages. But fundamentally, it means it can never be the kind of company whose profits suddenly soar. It’s more like a steady-and-sustained type of company.

But if it can go overseas, the situation is very likely to be quite different. Many countries’ electricity markets are highly market-based, and many participating entities are private companies and foreign investors. Their pricing is also highly market-based, and power generation companies generally have pricing power.

This time, the Hormuz Strait blockade crisis made the whole world realize the importance of energy security, and the urgency of increasing installed capacity for new energy. Therefore, opening up and cooperating with overseas new energy operators is expected to be greatly accelerated. Operators like China Three Gorges New Energy may from here begin to have opportunities to go global.

If it really develops as expected—when the world accelerates opening up electricity markets, especially by loosening restrictions on new energy operators—China Three Gorges New Energy is expected to replicate the domestic operating model and start a new narrative of going overseas. Not only would it have more long-term performance potential, but the valuation level provided by capital markets also has a chance to rise. Over the long run, it will constitute a major long-term positive catalyst.

Stepping back a huge step: even if we don’t consider the U.S.-Iran conflict and the new growth opportunities it brings to the wind-and-solar sector, and assume that the company’s total installed capacity remains at around the current level of 50 GW, unchanged, then as depreciation gradually decreases, the company’s profits can also gradually increase. Its long-term profitability would be protected. It’s an excellent type of asset that can both attack when there’s opportunity and retreat when necessary.

** 03**

Green electricity is worth paying attention to long term

Not only China Three Gorges New Energy, but other green electricity companies are also worth watching. The fundamental logic behind this is that human development cannot do without energy. Humanity’s continued development drives sustained growth in energy demand. In the AI era, electricity has again come into a brand-new window of development. Humans are already in the process of transitioning to green energy. This time, the energy-security crisis triggered by the U.S.-Iran conflict will further accelerate the global green electricity transition speed. It can be said that over the next ten years, the green electricity sector will be one of the directions most worth paying attention to.

However, the uncertainty of any single company is still relatively high. If you look favorably on green electricity opportunities, the best way to capture opportunities is still through index products such as Green Electricity ETF Huaxia (562550). Not only can you avoid the risk of “blowing up” from a single company, you can also overcome people’s weak tendency not to dare to buy after a drop. Not only is the long-term win rate higher, but the return rate is also higher.

In the past few years, especially in the wind-and-solar sector, after excess capacity, the bubbles in the sector have already been squeezed out. This wave of rally may have been triggered by the war, but in truth it is also the realization of long-term opportunities for the industry. It’s just that this realization has only just begun. With the global shift of the power sector toward green energy still far from complete, the potential remains enormous.

Green Electricity ETF Huaxia (562550) allocates to various power companies—especially various green electricity leaders. For example, China Three Gorges New Energy, which this article is tracking today, is the third-largest overweight holding in the product. This means it will benefit long term from the broad trend of both domestic and global transitions to green energy.

Whether it’s because you’re bullish on the long term, or because you want to mitigate uncertainty in the mid- to short-term, it’s worth paying attention to.

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Investing involves risks; financial management requires caution. The content in this article is for reference only and does not constitute any investment advice or any promise of returns. Past performance of the product does not represent future performance. The market has volatility, and investors should make rational judgments based on their own risk tolerance. Financial management is not a deposit; the product may involve the risk of principal loss. Please make a prudent decision.

Author statement: personal views, for reference only