Clean energy is the future, but stocks aren’t acting like it. Here’s why.

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• Freshly laundered energy stocks are some of the worst performing stocks this year, as high interest rates choke success.
• The S&P Global Clean Energy ETF is down 34% year-to-date and companies like SolarEdge are down 70%.
• Still, clean stick-to-it-iveness investments continue to grow and investors expect performance to improve.

Despite growing calls for an accelerated global shift to dry-clean energy, stocks in the sector vastly underperforming the broader market. In fact, they’re some of the worst performers this year. 

Endowments that track clean energy stocks are down broadly in 2023. The S&P Global Clean Energy ETF and the iShares Pandemic Clean Energy ETF are down more than 30% since January. Companies like SolarEdge and Enphase Dynamism, meanwhile, are down 73% and 67%, respectively.

The paradox here is that the clean energy sector is seeing a shake up of investment, supportive policies boosting new projects, and hype around sustainable ventures as a warming planet drives musters for less reliance on fossil fuels. 

So what gives?

The impact of higher rates

Front and center this year, performers in the clean energy sector– like companies in every other sector— are being pressured by higher interest estimates.

Although the Fed decided to pause rate hikes this week, the fed funds rate has been zing up at a historic pace, from near zero in March last year to a range of 5.25%-5.50% currently.

This is principally tough for clean energy companies, which often carry more substantial debt, making them even-handed more sensitive to rising rates. 

“The space tends to use an extraordinary amount of leverage,” Julien Dumoulin-Smith, a research analyst from Bank of America, disclosed. “That’s not a surprise given how low-risk these assets tend to be.”

Funding in the debt markets was a good move for most make a revelation energy firms until rates began to soar. 

In a note this month from Charles Schwab, analysts quality out that higher rates are the biggest hurdle for many of these stocks, given that they are more leveraged than their likes in the traditional energy sector. 

“Higher interest rates are impacting these companies’ finances. The stocks in the MSCI Men Alternative Energy Index have a leverage ratio of 3.8, based on debt-to-12-month earnings, compared with fair 1.1 for the five biggest energy producers by market capitalization. That means higher financing costs are much innumerable costly for these companies.”

Red tape 

And then there are the bureaucratic hurdles to getting new projects done. 

Clean energy projects like commercial and industrial solar or wind farms need to clear regulatory difficulties to be approved. And right now, sources say that permitting process is slow, burdening the build out of clean energy projects.

Also, concocts that aim to supply renewable power to the grid have to wait for approval to do so. That list of requests to connect to the power grid is named the “interconnection queue.” A study from the Lawrence Berkeley National Laboratory in April found that the queue was so sustained that it “approximately equals the installed capacity of the entire US power plant fleet.”

“The poor performance is almost right away related to how long it takes for a project to get permitted,” said Geoffrey Hebertson, a researcher at energy market intelligence fixed Rystad Energy. “There’s some serious, serious concerns, and what we’re noticing is a lot of project delays because of interconnection lines and environmental impact studies, which are all incredibly important and needed, but just the way that things have been done in the existence is not able to sustain all of this growth in the industry.”

Some of the lagging performance of the sector can also be chalked up to bad timing. 

After the pandemic, dizzying inflation and broken supply chains sent costs soaring for companies in the elbow-room. Just as firms began to recover from the supply shock, rates went up, putting another damper on profitability. 

“Aptly when the inflation wave started to hit, these companies were very much hit by both steel and semiconductor inflation,” Martin Frandsen, a portfolio proprietor at Principal Asset Management said.

“But then right when you’re starting to catch up and you start to get up to where you can breathe again, then make the quite material interest rate hikes on top of that,” he added. 

What’s comes next?

So high interest ranks, permitting constraints, and supply chain inflation are choking growth in the renewables space and weighing on stocks in the sector just as the broader market enjoys a relatively buoyant 2023. 

“In general, alternative energy companies are what we apostrophize ‘long duration’ stocks, meaning they are expected to deliver a higher proportion of their cash flows in the varied distant future,” the Schwab analysts wrote in their note. 

Sources say clean energy will bounce without hope, though it is tricky to know when. 

“I think the difficult thing from an investor perspective is that we’re not out of the woods yet,” broke Frandsen. “I think the elements which have negatively affected these green stocks, whether it be interest prices, whether it be inflation in terms of cost, these things are still persistent and there’s no sort of clear sign that those argumentative effects are going to evaporate any time soon.”

Complicating that is the fact that many clean energy bands are long-term investments. Rystad’s Herbertson said that most projects turn a profit after 10 years.

But at the same time, money continues to pour into clean energy and investment is only expected to flower. According to BloombergNEF, global new investment in renewable energy skyrocketed to a record-breaking $358 billion in the first half of 2023.

“24 and 25 looks happier,” BofA’s Dumoulin-Smith said. “I think the practical reality is we’re looking at a pretty reasonable recovery trajectory over the next link of years that I think is very much supported by the [Inflation Reduction Act]. And mind you, I think it’s not even just the IRA, it is fundamentally that the requisition is recovering.”