A sharp correction in technology and innovation stocks is hitting renewable energy companies again, fostering a new bout of whiplash for their share prices – and raising questions about investors’ recent emphasis on environmental, social and governance concerns, commonly known as ESG principles.
Renewable energy stocks first crashed last February when the market’s frothiest sectors sold off, and they are struggling again as investors turn on young technology companies and others in the broad innovation sector, including Zoom Video Communications Inc. Netflix Inc. Goodfood Market Corp.
Many of these innovative businesses flourished while people remained at home because investors assumed that the companies were attempting to change how people live. The same is true for the renewable sector. Many of the optimism has waned in recent months. Ark Innovation ETF, once a symbol of growth stock movement, has fallen by 43% since Nov. 1.
So far, Canadian renewable energy companies haven’t been decimated to the same extent, but they have certainly struggled. The S&P/TSX Renewable Energy and Clean Technology Index, which includes 21 companies developing green technologies in a range of industries, had slid 18 per cent since the start of November, while the S&P/TSX Composite Index is down 1.4 per cent over the same time frame.
Brookfield Renewable Partners LP has been hit hard by the recent selloff as well as established producers with long-term contracts, such as Innergex Renewable Energy Inc. Boralex Inc. The correction has been especially harsh on companies that traded once as high-flying growth stocks like Burnaby’s Ballard Power Systems Inc. The fuel cell producer’s shares have been on a roller coaster over the past two years, echoing their rise and fall during the dot-com boom. Ballard’s stock is down 48 per cent since Nov. 1.
Companies that are newly listed have also suffered. Montreal’s Lion Electric Co. , which is backed by the Desmarais family and hopes to electrify the heavy-duty vehicle industry, is one of the sector’s worst performing stocks, down 42 per cent since November. Loop Energy Inc., a Burnaby-based producer of fuel-cells, shares down 42 percent. The stock, which is referred to as a Baby Ballard, was listed on the TSX in early 2021. It has fallen 79 percent since then.
Oddly enough, the sector’s reset is playing out following last fall’s COP26Summit, which was held following months of severe and deadly weather, including floods, heatwaves, and wildfires. Many countries have made commitments to reach net-zero emission by 2050. These pledges should be encouraging for producers of electric vehicles as well as other renewable energy technology. However, the market slide continues since the climate summit. Meanwhile, the share prices of fossil fuel producers are on the rise.
The recent selloff is largely due to investors cashing in profits in the innovation and technology sectors as the market froth. The same applies to the renewable industry. However, renewables are also reeling from fundamental issues – notably, cost inflation and the expectation of future interest rate hikes. On top of these forces, renewable energy – and wind power, in particular – proved to be a fickle energy source at various points in 2021.
The roots of the sector’s recent whiplash are best understood by zooming out. Renewable power companies have been treated as yield stocks for many years because many producers lock into long-term power supply agreements that provide stable cash flows over time. This is similar to bond interest payments.
Over the first year of the pandemic, however, investors started to consider society’s other major vulnerabilities and in no time many renewable energy producers were treated as growth stocks based on their future potential, rather than their existing supply contracts. Ballard Power’s shares surged 306 per cent from March, 2020, to February, 2021.
U.S. President Joe Biden’s election in November, 2020, was another major catalyst, because he had preached the virtues of a green economy throughout his presidential campaign. After he won, “there was a massive inflow of money into ESG funds that drove through the whole sector,” Rupert Merer, an equity analyst at National Bank Financial who specializes in renewable power, said in an interview.
Due to dysfunction in U.S. Senate, much of this optimism has faded over the last year. COVID-19The United States has concerns. “As long as there’s uncertainty over the Biden legislation, there’s going to be uncertainty in the sector,” Mr. Merer said.
The sector’s renewable sector was also hit by a crisis last year when wind virtually vanished for weeks in parts Britain and Europe. In addition, recent cost inflation has put pressure on the sector. The solar industry is especially suffering because it depends on commodities like aluminum and copper, whose prices have risen. Wood Mackenzie is an energy consultancy that recently slashed its growth projections in the U.S. for utility-scale projects with solar power by one third for 2022.
“There’s been a real change in how investors are perceiving these asset classes, because of inflation mostly,” Darryl McCoubrey, an analyst at Veritas Investment Research, said in an interview. Higher costs not only affect profit margins on development projects but also make it more difficult to reap the benefits from higher power prices over time.
Inflation is a major problem in the US and Canada, prompting central banks to announce they will increase interest rates in March. Mr. McCoubrey explained that renewable energy producers tend to have higher debt levels compared to fossil fuel-fired generators or oil producers. This has prompted investors to look at how much it would cost to borrow in a higher interest rate environment.
This is not to say that green products and services will cease to be in demand. Canada is one of the countries that will need to invest heavily in technology and new technologies to meet their Paris Agreement commitments to reduce emissions. “We know that investments in the energy transition will need to triple in the next few years to meet our net-zero goals,” said John Bai, chief investment officer at sustainable investing firm NEI Investments.
However, investors will need to be more selective about which companies are best positioned to capitalize on this transition.
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