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Renewable energy stocks have sold off sharply in recent months, lagging far behind fossil fuel companies as the industry grapples with the impact of rising interest rates and contracts signed at unfavorable prices.
The S&P Global Clean Energy Index, which consists of the 100 largest companies in solar, wind and other renewable energy-related businesses, has fallen 20.2% over the past two months and is on track for its worst annual performance since 2013. By comparison, oil and The natural gas-heavy S&P 500 energy index rose 6%.
The decline comes despite tens of billions of dollars in government tax credits, subsidies and loans to U.S. and European green energy companies, underscoring how their finances are being squeezed.
Many companies enter into long-term contracts that set the price at which energy will be sold before developing a project. They were then hit by sharp rises in costs as global inflation soared, while rising interest rates made their high borrowing costs more expensive.
“There is a dark cloud hanging over green stocks,” said Martin Frandsen, portfolio manager at Premier Asset Management.
“Two years ago, our commitment to net-zero emissions grew significantly, which translated into massive investment opportunities. Then we had a wave of inflation and companies that locked in (power) prices faced very serious risks,” Frandsen said. “The hysteretic effects are now showing up.”
Solar and wind turbine groups were among the hardest-hit stocks. Swedish wind turbine developer Vattenfall said in July that its costs had risen 40%. South Korean manufacturer CS Wind’s shares have fallen 28% since early August, while U.S. wind and solar generator NextEra Energy said on Wednesday it had cut its three-year growth forecast.
NextEra Chief Executive John Ketchum said, “Tighter monetary policy and higher interest rates will obviously affect the financing required to increase shareholder distributions to 12%.” Turbine maker Vestas lost 130 million euros in the second quarter.
The threat of less generous tax credits and delays affecting U.S. turbine base manufacturers have made life harder for Danish developer Ørsted, whose shares have fallen about 30% since the end of August. Analysts at UBS estimate that sensitivity to rising interest rates could cost Ørsted between DKK 5 billion ($709 million) and DKK 10 billion ($1.42 billion).
Some traders believe Renewable Energy Group’s business model is not well suited to a world of high inflation and high interest rates.
“The bottom line is that many companies are disappointed with their profitability,” said David Souccar, portfolio manager at Vontobel Asset Management. “To support rapid growth, you need Keep leveraging your balance sheet or issuing equity. In a zero-rate environment, this formula worked. In a higher-rate environment, it breaks down.”
“The entire value chain is in trouble,” said Renaud Saleur, a former trader at Soros Fund Management and now head of Anaconda Invest, who shorted wind stocks Ørsted and Vestas. Shorting means betting on a lower stock price.
“Offshore (wind) contracts are going to be heavily unprofitable for a long time until governments realize they need to provide $80 to $100 per megawatt hour, not $30 to $40.”
European solar module makers warned last month that a flood of cheap Chinese alternatives was squeezing local companies out of the market. Fiona Manning, emerging markets portfolio manager at Premier Miton, said: “A serious supply and demand imbalance has been growing over the past year or so.”
However, Chinese manufacturers, which dominate the solar supply chain, have also suffered heavy losses in their share prices as they have been hit by the Chinese stock market sell-off this year. Since January, S&P Global Clean Energy Index components Sungrow, JA Solar and Risen Energy have fallen approximately 32%, 33% and 44% respectively.
According to Bloomberg New Energy Finance, the enterprise value of the median company in the global solar panel manufacturing industry is about nine times its earnings before interest, taxes, depreciation, and amortization (EBITDA). That’s down from about 16 a year ago.
However, Anaconda’s Saleur said he is no longer shorting solar companies and has bought some stocks in the sector. “We believe most of the value destruction is over,” he said.
Additional reporting by Rachel Millard and Lawrence Fletcher
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