Renewable stocks are taking an outsized beating among other stocks in the utility sector, which was down more than 10% last quarter.
Investors may be betting that going green will take longer and require more capital in a higher-for-longer interest rate environment.
“As utilities struggle with converting to more green energy, their operating margins are getting squeezed until they can get their utility rates increased,” Louis Navellier, founder of Navellier, a money management firm, told Yahoo Finance.
Higher interest rates are impacting the renewable sector because clean energy projects are capital intensive.
To make matters worse, falling valuations are making it harder for companies to tap into public markets to fund their projects. Also, bonds offering higher yields are competing against dividend yields on utility stocks.
“There is an exodus from ESG products that are suffering from outflows,” said Navellier.
The Global Clean Energy ETF (ICLN) is down about 30% year to date. The solar and wind energy benchmarks Invesco Solar ETF (TAN) and First Trust Global Wind Energy ETF (FAN) are down 35% and 32% during the same period, respectively.
The selling in renewables intensified after NextEra Energy Partners (NEP), a subsidiary of NextEra Energy (NEE) focused on renewables, cut its growth target by half to 6% through at least 2026.
“Tighter monetary policy and higher interest rates obviously affect the financing needed to grow distributions at 12%,” read the company statement on Sept. 27.
NextEra Energy Partners is down 69.27% year to date, on pace for its worst year on record, while its parent company NextEra Energy hit a 52-week low on Friday, down 42% year to date.
Bank of America analysts called the recent sell-off “overblown with collateral damage unfounded.”
“Rates have indeed moved higher through the same period and utilities and renewables are rates sensitive,” wrote Julien Dumoulin-Smith and Paul Zimbardo in a note to clients.
They continued that “the collapse in confidence in NextEra – the world’s largest renewable developer – has precipitated a draconian view for the outlook of renewables as an asset class, and the associated returns.”
‘It is expensive to go green’
Some of the biggest solar companies initially rallied after Russia invaded Ukraine in late February 2022 and oil prices spiked. The invasion hastened investments in a push towards green technologies in both Europe and the US as crude and natural gas became more expensive and governments saw a need to rely on other sources of energy.
The Inflation Reduction Act, or IRA, of 2022 was also seen as a boon for renewable energy companies, making clean energy stocks the clear winners of the legislation passed in August 2022. The IRA focuses on tax credits for companies to manufacture items like solar panels and wind turbine parts in the United States. The measure also offers credits of up to $7,500 for electric vehicles assembled domestically.
But some of the federal and local government’s recent green initiatives are facing challenges, or scaling back.
Earlier this year policy changes went into effect in California, the largest US solar market. The new measures reduced the money credited to rooftop solar panel owners for sending excess power they generate into the grid.
Analysts note California’s so-called net metering reform has created headwinds for companies like Enphase Energy (ENPH). In April, the solar inverter maker’s stock fell 25% in one day following disappointing second quarter revenue guidance amid concerns of slowing demand.
In July the stock took another hit of 11% in one day after Enphase Energy’s third quarter guidance came in weaker than expected.
“Our microinverter sell-through in the US peaked in the fourth quarter of 2022,” Badri Kothandaraman, CEO of Enphase, said during the company’s earnings call. “The sell-through in the first half of 2023, in both Q1 and Q2, was approximately 20% below the fourth quarter due to the high interest rate environment in the US.”
The delay of offshore wind farms in the Northeast is seen as another setback for the renewable industry. Six Democratic governors recently sent a letter to the Biden Administration asking for more federal help with the planned projects after wind developers asked to renegotiate contracts amid rising costs, dwindling supply chain issues, and tighter credit.
“Absent intervention, these near-term projects are increasingly at risk of failing,” the governors wrote. “Without federal action, offshore wind deployment in the US is at serious risk of stalling because states’ ratepayers may be unable to absorb these significant new costs alone.”
The governors are asking for the Biden Administration to ensure offshore wind projects are fully eligible for federal clean energy tax credits under the Inflation Reduction Act. They also want the government to expedite clean energy permitting.
“The bottom line is it is expensive to go green,” said the strategist Navellier.
Having said that, as a sector “utility stocks grossly oversold,” he said. “We will sort this out during the Q3 earnings announcement season.”
Renewable energy stocks may have gotten so cheap, analysts at BofA say, it may be time to buy.
“We continue to see significant utility scale growth in renewables in the coming years, and do not agree with the collateral damage we saw in the space in the last week; we see particularly attractive buying opportunities,” wrote the analysts.
