Renewable energy stocks have badly underperformed their fossil fuel peers and the broader market in the current year, with the selloff accelerating in recent months thanks to higher interest rates and a hawkish Fed outweighing considerable backing by the Biden administration.
The iShares Global Clean Energy ETF (NASDAQ:ICLN), the world’s largest green energy ETF and a catch-all bet on clean energy, has crashed nearly 30% over the past two months, much steeper than the 6% decline by the S&P 500 over the timeframe. The solar and wind energy benchmarks have not fared any better, with Invesco Solar ETF (NYSEARCA:TAN) having cratered 34.0% YTD while First Trust Global Wind Energy ETF (NYSEARCA:FAN) has declined 19.8%.
“There’s a dark cloud hanging over green stocks,” Martin Frandsen, portfolio manager at Principal Asset Management, has told the Financial Times.
The renewable energy sector tends to be highly sensitive to interest rates because clean energy projects require developers to borrow lots of capital up front to build projects. To make matters even more complicated, the cost of electricity generated from renewable energy tends to be impacted much more by rising interest rates compared to electricity generated from fossil fuels.
Indeed, a 2020 analysis from the International Energy Agency found that a 5% rise in interest rates increases the levelized cost of electricity from wind and solar by a third but only marginally for natural gas plants. Two weeks ago, the U.S. central bank left interest rates unchanged but bolstered its hawkish stance with a further rate increase projected by the end of the year.
The 10-year Treasury yield has continued its steep climb in the current week, exceeding 4.7% intraday for the first time since October 2007 to reach 4.781%, good for a 110.7 bps increase over 12 months while the yield on the 30-year Treasury has hit 4.915% from 3.687% a year ago.
It’s somewhat ironic that the deep selloff has come at a time when the clean energy sector is enjoying ample government backing.
Last year, the United States Congress passed the Inflation Reduction Act, hailed as the most important climate legislation in United States history. A major goal of IRA--the largest federal government spending increase on alternative energy in U.S. history--is to strengthen energy independence, reduce dependence on Chinese imports, and reinvigorate the industrial sector.
“The act will immediately spur private investments in production capacity across the solar supply chain, including batteries, helping to create thousands of manufacturing jobs and support our energy independence," Abigail Ross Hopper, president and chief executive of the Solar Energy Industries Association, said in written remarks after the act was passed.
The IRA is expected to provide some $1 trillion worth of incentives for clean technologies, and drive trillions more in investments. According to the American Clean Power Association, IRA could more than triple clean energy production, cut emissions by 40% by 2030, and create 550,000 clean energy jobs.
NextEra Crashes After Cutting Growth Estimates
Popular MLP NextEra Energy Partners, LP (NYSE:NEP) has become the latest victim of the clean energy carnage. NEP stock has crashed 36% to a nearly seven-year low over the past week after the company cut its growth guidance. The company said it expects limited partner distribution per unit growth to clock in at 5% to 8% per year through at least 2026, with a target of 6% growth and no equity growth until 2027.
NextEra Energy Partners said it’s revising its growth rate to better position the partnership to continue to deliver long-term value for unitholders.
"NextEra Energy Partners is revising its long-term growth rate expectations for limited partner distributions to increase its flexibility as it continues to execute on its growth opportunities. Tighter monetary policy and higher interest rates obviously affect the financing needed to grow distributions at 12%, and the burden of financing this growth has had an impact on NextEra Energy Partners' unit price and yield. In the current market environment, the partnership believes revising its growth expectations for now is the appropriate decision for unitholders and better positions it to continue to deliver long-term value," said John Ketchum, chairman and chief executive officer.
NextEra Energy Partners’ crash has dragged down its parent company, with NextEra Energy, Inc. (NYSE:NEE) down 13.4% over the past five trading days. But this is merely a typical sympathy selloff because NextEra Energy’s outlook is actually decent: on Monday, Goldman Sachs maintained its Buy rating on NEE while cutting its price target to $72 from $83, saying the stock's recent decline is overdone. According to GS, NEE’s current valuation fails to take into account ability and willingness to monetize other non-core assets and tax credits; the company's flexibility around financing and balance sheet capacity, or the option to explore sales to third party investors for renewables. GS has forecast above average earnings growth for the company with a five-year earnings CAGR of 9%.
By Alex Kimani for Oilprice.com
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