Rising Interest Rates Cast a Shadow Over Green Energy Stocks

Shifting Sands in the Green Energy Landscape as Hedge Funds Tread with Caution by reducing positions.

Renewable energy stocks are feeling the pressure. Despite abundant support from governments in the form of tax credits, subsidies, and loans, the sector has seen a sharp sell-off in recent months. The reasons? Rising interest rates and escalating costs in a world where inflation continues to surge. For those invested in the green industry, these are turbulent times.

The S&P Global Clean Energy Index, a benchmark for the renewable sector, has plummeted 20.2% over the last two months. This marks its most severe downturn since 2013. Comparatively, the oil and gas-centric S&P 500 Energy Index has witnessed a 6% uptick. "There's a dark cloud hanging over green stocks," observes Martin Frandsen, a portfolio manager at Principal Asset Management.

One might wonder why, especially when governments across the US and Europe are pouring tens of billions into green energy companies. The answer lies in the business models of these companies and the shifting economic terrain. Many renewable energy corporations secure long-term contracts, setting the price for their energy output well before projects get off the ground. As inflation soars globally, these companies grapple with ballooning costs, making their sizeable borrowings more costly to maintain.

Frandsen explains, "Two years ago, we witnessed a surge in commitments to achieve net zero. This led to a plethora of investment opportunities. However, the subsequent inflation wave has left companies that pre-set their electricity prices in a vulnerable position. The impact of this lag is now becoming evident."

Among the worst hit are solar power and wind turbine groups. Vattenfall, a Swedish wind turbine developer, reported a staggering 40% increase in costs in July. In a similar vein, Korean manufacturer CS Wind's stock price has shrunk by 28% since the onset of August. And it's not just costs. Companies like US-based wind and solar generator, NextEra Energy, are slashing growth expectations.

"Higher interest rates significantly affect the financing required to grow distributions," remarks NextEra's CEO, John Ketchum. It's a sentiment echoed by many in the industry. Turbine manufacturer Vestas posted a €130mn loss in Q2. Offshore wind companies, already grappling with potential reductions in tax credits and manufacturing delays, find themselves in particularly rough waters. Danish developer Ørsted, for instance, has seen its shares dip by about 30% since late August.

Despite this challenging landscape, not everyone is pessimistic. Some industry insiders believe that the downturn will force companies to streamline their strategies, renegotiating contracts, and axing unprofitable ventures. In the end, the market could be left with resilient, future-ready energy businesses.

Yet, the broader stock market isn't insulated from the effects of these rising interest rates. With returns on bonds and cash at a two-decade high, investors are naturally inclined to opt for these more stable assets. As a result, riskier stocks, including those in the renewable sector, are being sidestepped.

The list of the 5 Most Sold Clean Energy Stocks paints a clear picture of this trend:

Brookfield Renewable Partners L.P. (NYSE:BEP): Despite providing renewable energy across North America and beyond, its shares have dropped by 13% over six months. Hedge fund positions have similarly decreased from 17 in Q1 to 13 in Q2 of 2023.

JinkoSolar Holding Co., Ltd. (NYSE:JKS): JinkoSolar, amid broader market challenges and controversies linked to China, has witnessed fluctuations in hedge fund interest. By the end of the second quarter of 2023, 12 hedge funds had positions in JinkoSolar, a drop from 15 in the previous quarter. This shift indicates that even with a 34% decline in its share price year to date, hedge funds are treading with caution.

Enphase Energy, Inc. (NASDAQ:ENPH): Enphase Energy, a prominent solar solutions provider, has seen a marked decrease in hedge fund attention. From holding 62 hedge fund positions at the end of 2022, the number dwindled to 55 by the end of the first quarter of 2023. The decline continued into the second quarter, with only 50 hedge funds retaining positions. This reduced exposure aligns with the company's challenges, including stock value losses and decreased shipment expectations.

Sunnova Energy International Inc. (NYSE:NOVA): Sunnova Energy, grappling with significant losses and share price decline, has also seen dwindling hedge fund interest. The number of hedge fund positions in Sunnova dropped to 19 by the end of the second quarter, from 27 at the end of the first quarter of 2023. This decline highlights the apprehension among hedge funds given the company's financial struggles.

Shoals Technologies Group, Inc. (NASDAQ:SHLS): Shoals Technologies Group, despite reporting record revenues, has not been immune to the broader trend of hedge fund disinterest in clean energy stocks. By the end of the second quarter of 2023, only 24 hedge funds held positions in Shoals, a drop from the 34 in the preceding quarter. This decline showcases the caution exercised by hedge funds in light of broader economic pressures and market trends.