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Clean energy stocks plummet

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2023-11-29

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Clean energy stocks are mired in their most severe downturn in years, triggering a multi-billion-dollar erosion of the sector's value and casting a shadow over America's environmental objectives. This downward spiral is impacting major auto manufacturers, offshore wind projects, solar panel adoption, and green-power producers. While rising interest rates pose the most immediate challenge, supply chain disruptions, inadequate electric transmission infrastructure, and heightened competition from China are compounding the industry's woes.

The Invesco WilderHill Clean Energy exchange-traded fund (PBW), a yardstick for green energy, has recorded a staggering decline, with 76 out of its 77 component stocks plummeting over the past three months. The ETF itself has tumbled by 32% since the beginning of the year, in stark contrast to the S&P 500 index, which has posted a 14% gain over the same period.

Most analysts anticipate a prolonged slump in the sector. Solar and wind companies are grappling with a glut of mispriced inventory and the headwinds of persistently high interest rates, with a potential financial recovery likely several quarters away. Emerging technologies such as clean hydrogen are even further from profitability. Even stocks showing signs of a rebound are viewed with caution.

Beyond the financial ramifications, the challenges in the green energy sector carry profound environmental and political implications. A consortium of scientists known as the Climate Action Tracker warns that the United States is veering off course in its pursuit of reducing emissions by half from 2005 levels by 2030, highlighting the need for significant and immediate emission reduction measures, which depend heavily on the clean-energy industry.

There are also political repercussions at play. President Joe Biden's ambitious energy transition agenda, which envisions carbon-free electricity production by 2035, is now at risk. Last year's Inflation Reduction Act earmarked at least $369 billion for clean energy, but to make this government investment payoff, companies will need to funnel trillions more into the sector. Any delays could be detrimental to Biden's plans.

However, despite the daunting challenges, experts remain confident that the clean-energy transition is not derailed but merely experiencing a detour. Unlike past eras, renewable energy is now propelled by powerful momentum, with almost every electricity producer in the United States committed to going green at varying paces. Technological advancements have rendered renewables cost-competitive with fossil fuel plants in numerous states, even without government assistance. Industrial-scale batteries have solved the long-standing problem of renewable intermittency.

Private investments are another crucial force buttressing the industry during this turbulent period. Private-equity firms have poured a staggering $108 billion into new renewable energy and energy storage projects in the United States from August 2022 to August 2023, surpassing all publicly traded North American utilities and independent power producers combined.

Peter Gardett, the executive director of climate and clean-tech research at S&P Global Commodity Insights, emphasises that the clean-energy transition represents the first major industrial and technology investment cycle primarily occurring in opaque private markets. The long-term commitments of private-equity investors help stabilise the industry against short-term market volatility.

For individual investors without access to private funds, opportunities still exist in publicly traded clean-energy stocks, particularly among large utility companies deeply committed to renewables. Companies like AES and NextEra, with strong portfolios of long-term contracts, are better positioned to withstand the current challenges and offer stability in uncertain times.

The current clean-energy stock woes are chiefly attributed to surging interest rates, which have disrupted project financing and dampened customer demand. For example, the rooftop solar industry has witnessed a decline in installations as homeowners grow wary of financing projects amid rising interest costs. Changes in rules and subsidies in various states have further complicated the situation for residential solar companies.

The supply chain for solar equipment has ground to a halt, adversely affecting stocks of companies like Enphase Energy and SolarEdge Technologies. These firms confront near-term challenges, with Enphase CEO Badri Kothandaraman acknowledging the impending stress.

While utility-scale solar projects have fared slightly better, onshore wind power faces even more significant hurdles, including erratic tax subsidies, sluggish transmission approvals, inflation, and other setbacks that have kept installations below 2020 levels for two consecutive years. The outlook remains uncertain, even with the more dependable subsidies provided by the clean-energy law.

Offshore wind energy, a pivotal technology in decarbonising coastal states, faces perhaps the most formidable challenges. While the industry is just taking root in the United States, several projects have already been delayed or canceled due to rising costs. The recent decision by offshore wind market leader Orsted to abandon two projects in New Jersey underscores the difficulties. S&P Global Commodity Insights has scaled back its 2030 offshore wind projection, reflecting the macroeconomic headwinds the industry confronts.

Despite these headwinds, a select few clean-energy stocks appear to be weathering the storm. Companies such as NextEra and AES, with a strong focus on renewables and the financial strength to navigate turbulent markets, offer hope to investors. They benefit from long-term contracts that provide stability even in uncertain times.

In conclusion, the current challenges faced by clean-energy stocks are substantial but are unlikely to derail the overall transition to renewable energy. A combination of falling interest rates and supply chain improvements could pave the way for a resurgence in the clean energy sector in 2024, reaffirming its trajectory toward a more sustainable future.

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