For Clean Energy Stocks, It’s All About Bond Yields Right Now
Renewable energy stocks have been badly pummeled, underperforming 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 26.2% in the year-to-date, incomparable to the 14.5% gain by the S&P 500 over the timeframe and 3.9% return by the S&P Energy Sector Index. The solar and wind energy benchmarks have not fared any better, with Invesco Solar ETF (NYSEARCA:TAN) having cratered -31.4% YTD while First Trust Global Wind Energy ETF (NYSEARCA:FAN) has declined -21.0%. Investors ditched renewable energy funds at the fastest rate on record in the September quarter as clean energy shares took a beating from higher interest rates and soaring material costs, which have been squeezing profit margins.
Thankfully, lately, the sector has been able to claw back some losses thanks to falling treasury yields following last week’s deadly attack by Hamas on Israel. ICLN has gained 3.7% over the past five trading sessions, coinciding with a 21 bps decline in the 10-Year Treasury bond yield to 4.65%, the biggest fall in interest rates since August.
Battered Solar And Hydrogen Stocks Rebound
The solar sector has been particularly badly hit thanks to surging financing costs for panel installations as well as persistent supply chain disruptions stifling residential and corporate solar system orders through much of 2023. Meanwhile, a reduction in incentives for rooftop installations in California, the largest U.S. solar market, has also contributed to the poor performance of the sector. The renewable energy sector in general 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.
Related: France Tightens Energy-Saving Measures To Avoid Another Crisis
Thankfully, the sector could be about to catch a break. Solar and other alternative energy shares ripped higher Tuesday, as the French government unveiled plans to more than double its renewable power capacity by 2035, saying it intends to bring unprecedented amounts of solar and wind power online in a bid to become carbon neutral by 2050. Top gainers were Emeren Group Ltd (NYSE:SOL) +15.4%, Sunrun Inc. (NASDAQ:RUN) +13.6%, SunPower Corp. (NASDAQ:SPWR) +12.1%, Sunnova Energy (NYSE:NOVA) +11.1% and JinkoSolar (NYSE:JKS) +8.8%.
Even better, Saxo Bank head of commodity strategist Ole Hansen has predicted that Middle East tensions may mean the Fed will not"...continue to hike rates into increased uncertainty, and the prospect for peak rates have suddenly moved closer despite the potential inflationary impact of higher oil prices," which could signal a low in gold prices,
But solar is not the only sector that has seen serious gains this week. Stocks of hydrogen producers and hydrogen tech companies have been on a tear with the Biden administration set to announce this Friday as much as $7B in federal grants that will go into building out regional hydrogen projects. Leading gainers were FuelCell Energy (NASDAQ:FCEL) +13.4%, Plug Power Inc. (NASDAQ:PLUG) +11.7%, Bloom Energy (NYSE:BE) +8.6% and Ballard Power Systems (NASDAQ:BLDP) +7.1%.
The infrastructure bill passed by Congress in 2021 allocated up to $7B to launch the Regional Clean Hydrogen Hubs program, which will help fund 6-10 regional clean hydrogen hubs across the country. According to Bloomberg, among the top contenders for Department of Energy funding are the Rochester, New York, project led by a coalition of northeast states in conjunction with Plug Power as well as a California-based public-private partnership including Amazon Inc. (NASDAQ:AMZN) and Air Products & Chemicals (NYSE:APD).
The Federal funds are especially critical for the burgeoning hydrogen economy.
After a strong showing in 2022 courtesy of ample backing by the Biden administration, hydrogen stocks have badly lagged in the current year as investors scrutinize their fundamentals. Leading hydrogen and fuel cell makers returned mixed Q2 2023 results but with one common theme: all remain unprofitable despite posting mostly robust topline growth. Limited adoption and high costs remain a major challenge for hydrogen tech companies. First off, these companies have to contend with high research and development costs as they innovate and improve their fuel cell technologies. Further, additional expenses like manufacturing and production costs are high as they scale up their manufacturing capabilities.
By Alex Kimani for Oilprice.com
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