Key Takeaways
Despite huge subsidies, government hand-outs and mandates, “green energy” is taking a beating on equity value as costs have skyrocketed under Bidenomics.
Investment in renewable funds have dropped as much as 60 percent since Biden’s first year in office, even as his administration has directed more than $1 trillion in spending commitments.
Stock prices for individual companies have fallen globally, as higher costs and interest rates, equipment failures and uncooperative weather have combined to reduce revenues.
Investors expect this trend to continue, despite all the positive talk at COP28.
Despite well over $1 trillion so far spent by governments on “green energy,” the iShares Global Clean Energy E.T.F., an exchange-traded fund that tracks the entire industry, is down more than 30 percent this year. Further, since the start of 2021, the fund has lost more than 50 percent. The portfolio of the iShares Global Clean Energy ETF is heavily invested in solar, wind, and hydrogen stocks, including SolarEdge, First Solar, Sunrun, Orsted, and Plug Power. Therefore, it is not surprising that solar and wind stock funds have also dropped. The Invesco Solar E.T.F. is down more than 40 percent this year and almost 60 percent since January 1, 2021. The First Trust Global Wind Energy E.T.F. lost about 20 percent this year and about 40 percent since January 1, 2021. Renewable energy companies have been hard hit as rising interest rates from torrid government spending increased costs and moderated consumer enthusiasm in many countries, reducing stock valuations for renewable companies that are not producing large profits.
A Brutal Correction
The largest clean energy ETF, QCLN, has suffered an almost 50 percent decline since its peak in 2021.
Individual renewable companies are also seeing the same stock trend. SolarEdge, which provides equipment that converts energy from solar panels into power that can be transmitted through electric grids, warned on October 17 that demand for its products was lagging. The market responded by dropping it share value by almost 30 percent in a single day. Other solar companies are seeing the same fate. Enphase Energy, a rival firm, lost almost 40 percent since October 17.
Wind energy companies also saw the same fate. Shares of Orsted, the Danish wind turbine company, fell nearly 26 percent after it announced that it might have to write down as much as $5.6 billion on the value of its offshore wind projects in the United States. The company canceled two projects, known as Ocean Wind 1 and 2, that were to supply New Jersey with electricity, and some of its projects for New York and Connecticut have also run into trouble. In October, New York State’s Public Service Commission rejected requests from Orsted and several other companies — including BP and Equinor — for billions in electric rate increases to help defray their escalating costs that are caused by inflation and higher interest rates. Orsted, however, is completing a N.Y. offshore wind project. South Fork Wind, a set of wind turbines 30 miles east of Montauk Point, Long Island, is scheduled to generate electricity before the end of the year.
Shares in Siemens Energy fell to record lows after the energy-technology company said it was asking the German government and banks for guarantees to back long-term projects. Its stock fell by 39 percent in Frankfurt, hitting the lowest levels since it was spun off as a public company in 2020. Shares in former owner Siemens, a large shareholder, fell nearly 5 percent. Siemens Energy expects its wind business, Siemens Gamesa, to record lower revenues and higher losses than market expectations through the next fiscal year. The industry is challenged by higher borrowing costs that builds on years of supply-chain disruptions from Covid-19 lockdowns and higher costs.
The selling in renewables intensified after NextEra Energy Partners, a subsidiary of NextEra Energy focused on renewables, cut its growth target by half to 6 percent through at least 2026 as tighter monetary policy and higher interest rates affected the financing needed to grow distributions at 12 percent. NextEra Energy Partners is down 69.27 percent year to date, on pace for its worst year on record, while its parent company NextEra Energy hit a 52-week low recently, down 42 percent year to date. NextEra is the world’s largest renewable developer.
Background
Some of the biggest solar companies initially rallied after Russia invaded Ukraine in late February 2022 and oil prices spiked. The invasion hastened investments towards green technologies in Europe and the United States as oil and natural gas became more expensive and governments justified a need to rely on other sources of energy. Biden’s climate legislation, the Democrat-passed Inflation Reduction Act (IRA) of 2022 was also a boon for renewable energy companies, with “clean” energy stocks the clear winners. The IRA provides tax credits for companies to manufacture items like solar panels and wind turbine parts in the United States. The law also offers credits of up to $7,500 for electric vehicles assembled domestically. The Biden administration has directed more than $1 trillion in spending commitments in the U.S. alone.
But some of the federal and local government’s green initiatives are scaling back. Earlier this year, policy changes went into effect in California, the largest U.S. solar market. The new measures reduced the money credited to rooftop solar panel owners for sending excess power into the grid. California’s net metering reform created headwinds for companies like Enphase Energy. In April, the solar inverter maker’s stock fell 25 percent in one day following disappointing second quarter revenue guidance amid concerns of slowing demand. In July, the stock took another hit of 11 percent in one day after Enphase Energy’s third quarter guidance came in weaker than expected.
The delay of offshore wind farms in the Northeast is another setback for the renewable industry. Six Democratic governors recently sent a letter to the Biden Administration asking for even more federal help with planned projects after wind developers asked to renegotiate contracts due to rising costs, dwindling supply chain issues, and tighter credit.
Without federal action, offshore wind deployment in the United States is at serious risk of stalling because ratepayers are unable to absorb the significant new costs, particularly given that offshore wind is a very expensive technology to begin with. This is in addition to its already enormous subsidies, reduced royalties, and other inducements. It is more than triple the cost of onshore wind. The Democratic 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, and they also want the government to expedite clean energy permitting.
Will It Continue?
The latest Bloomberg MLIV Pulse survey of over 600 professional and retail investors revealed that more than half expect the downturn in ‘green’ energy stocks to persist into next year. The survey was conducted from November 13 to the 24th globally. Most respondents, 57 percent (353), expect the selloff to continue next year. And, 43 percent (267) expect “green stocks” to find a near-term bottom.
Conclusion
Renewable stocks are taking a beating in the utility sector. It may be a sign that Investors are betting that going green will take longer and require more capital in a higher-for-longer interest rate environment. Utilities struggle with converting to more green energy as their operating margins are squeezed until they can get their utility rates increased by their Public Service Commissions. Higher interest rates are impacting the renewable sector because “clean” energy projects are capital intensive. And, falling valuations are making it harder for companies to tap into public markets to fund their projects. Despite the common interpretation that renewable (wind and solar) energy are “free” because the resource is free, the reality is that they are capital intensive, weather-driven, and intermittent—not affordable nor reliable. It clearly is expensive to go “green”.
