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Renewable energy stocks have sold off sharply in recent months, underperforming fossil fuel companies by a distance, as the sector battles the impact of higher interest rates and contracts struck at unfavourable prices.
The S&P Global Clean Energy Index, which is comprised of 100 of the biggest companies in solar, wind power and other renewables-related businesses, has dropped 20.2 per cent over the past two months, putting it on course for its worst annual performance since 2013. The oil and gas-heavy S&P 500 Energy Index, in contrast, has added 6 per cent.
The declines, which come despite tens of billions of dollars in tax credits, subsidies and loans being offered by governments to green energy companies in the US and Europe, highlight how their finances are being squeezed.
Many companies have agreed long-term contracts, fixing the price at which they would sell energy, before developing the projects. They were then hit by a huge rise in costs as global inflation surged, while elevated interest rates have made their high levels of borrowing more expensive to service.
“There’s a dark cloud hanging over green stocks,” said Martin Frandsen, a portfolio manager at Premier Asset Management.
“Two years ago we got a huge growth in commitments to hit net zero, which translated into a lot of investment opportunities. Then we hit this inflation wave and companies that locked in their [electricity] prices have been left very exposed,” Frandsen said. “The lag effect is hitting now.”
Solar power and wind turbine groups are among the hardest hit stocks. Swedish wind turbine developer Vattenfall in July said its costs had climbed 40 per cent. Korean manufacturer CS Wind is down 28 per cent since the start of August, while US-based wind and solar generator NextEra Energy on Wednesday announced a cut to its three-year growth expectations.
“Tighter monetary policy and higher interest rates obviously affect the financing needed to grow distributions” to shareholders at 12 per cent, said NextEra chief executive John Ketchum. Turbine manufacturer Vestas fell to a €130mn loss in the second quarter.
The threat of less generous tax credits and delays affecting the US manufacturers of turbine foundations have made life even harder for Danish developer Ørsted, whose shares have tumbled about 30 per cent since late August. Analysts at UBS estimate that sensitivity to higher interest rates could cost Ørsted between DKr5bn ($709mn) and DKr10bn ($1.42bn).
Some traders argue that renewable groups’ business models are poorly suited to a high inflation, high interest rate world.
“Most important is that a lot of these companies disappointed in their profitability,” said David Souccar, a portfolio manager at Vontobel Asset Management. “To support rapid growth you need to keep leveraging the balance sheet or issue equity. In a zero-rate environment, this formula worked. In a higher rate environment, it falls apart.”
“The whole value chain is in trouble,” said Renaud Saleur, a former trader at Soros Fund Management who now heads Anaconda Invest and who is shorting wind stocks Ørsted and Vestas. Shorting means betting on a lower share price.
“The contracts signed for offshore [wind] will be heavily lossmaking for a long time until the different governments realise that they need to give $80-$100 per MWh and not $30-$40.”
European solar module manufacturers last month warned that a flood of cheap Chinese alternatives are pricing local companies out of the market. “Big supply-demand imbalances have been building up over the past year or so,” said Fiona Manning, an emerging markets portfolio manager at Premier Miton.
Yet manufacturers in China, which dominates the solar supply chain, are nursing heavy share price losses of their own, having been caught up in this year’s sell-off in the country’s equity markets. Since January, S&P Global Clean Energy Index constituents Sungrow Power Supply, JA Solar Technology and Risen Energy have fallen about 32 per cent, 33 per cent and 44 per cent respectively.
The median company in the global solar panel manufacturing sector trades at an enterprise value to ebitda (earnings before interest, tax, depreciation and amortisation) multiple of about nine times, according to BloombergNEF. That is down from about 16 times a year ago.
However, Anaconda’s Saleur said he was no longer shorting solar companies and had bought in to some stocks in the sector. “We believe the large part of the value destruction is over,” he said.
Additional reporting by Rachel Millard and Laurence Fletcher
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