Stock Market: Green Energy Companies Remain Under Stress
The S&P/TSX Renewable Energy and Clean Technology Index has lost 29 per cent in the last 12 months. Photo: Mimadeo/Getty Images
It’s been a miserable year for companies in the green energy and clean technology business.
Over the 12 months to March 17, the S&P/TSX Renewable Energy and Clean Technology Index lost 29 per cent. That’s deep bear market territory and a huge disappointment to investors who want to direct their money to climate-friendly businesses.
The only consolation in the numbers is that we may be near the bottom. The Index is only off 1.62 per cent so far in 2023.
So, what’s the problem? Demand for energy is high and fossil fuel companies continue to thrive. The S&P/TSX Capped Energy Index (mainly oil and gas companies) shows a three-year average annual gain of 64.45 per cent, although it’s been virtually flat over the past 12 months.
Given the amount of government support they receive, you’d expect green energy companies would be doing better. Here are some reasons why they’re not.
Overvaluation: From March of 2020 to February of 2021, investors piled into green energy stocks. They were seen as the wave of the future (which they are), but the enthusiasm to own them resulted in the irrational exuberance that sometimes grips the market. Between March 23, 2020 and Feb. 11, 2021 the Renewable Energy and Clean Technology Index rose from 112.93 to 303.80. That’s an astonishing 169 per cent in less than 11 months.
The collapse was almost as fast. From the peak in February 2021, the Index fell 40 per cent to 182.47 one year later. The slide continued to the end of 2022. Investors had been caught in a valuation bubble which at some point was going to burst.
High capital expenses: Green energy companies must spend millions in up-front investment costs. Wind farms, hydro dams, and solar plants don’t come cheap. As a result, their balance sheets resemble those of electricity and gas utilities – high debt loads.
Rising interest rates: Companies with large debt balances might escape the worst effects of a rising interest rate environment if most of their borrowing costs are fixed. But those carrying a lot of variable debt will face escalating expenses every time the Bank of Canada and/or the Federal Reserve Board raises rates. This also applies to acquisitions, such as the pending purchase of Kentucky Power by Algonquin Power & Utilities.
Inflation: It’s expensive to build new energy projects and the costs continue to rise – materials, labour, transportation, and more. Initial cost projections must be updated to reflect this reality, meaning it will take longer for companies to see new investments become profitable.
Competition: This is a highly competitive field and many of the players are quite small. This leaves them with little leverage in negotiating deals and obtaining profitable rates for their energy output.
Fluctuating Output and Demand: Some companies have had to deal with fluctuations in output – if the wind doesn’t blow as expected or the sun doesn’t shine for as long, power generation will be reduced, with revenues following suit. Unplanned maintenance work at some companies has had the same effect.
Also, green energy companies may experience fluctuating demand due to factors such as changes in energy prices, government support, weather, or consumer preferences. This can make it difficult for some companies, especially small ones, to forecast revenue and plan for growth.
Most green energy stocks have lost ground in the past couple of years, but that doesn’t mean investors should avoid them. In fact, if you believe they are indeed at the forefront of an energy revolution, the time to buy is when they’re cheap.
The popular Motley Fool website recently rated Brookfield Renewable Energy Partners (BEP.UN-T) as one of its top five energy picks for 2023. Brookfield Renewable has been a recommendation of my Income Investor newsletter since 2009, when it was known as Great Lakes Hydro.
Brookfield Renewable operates one of the world’s largest publicly traded, pure-play renewable power platforms. Its portfolio consists of hydroelectric, wind, solar, and storage facilities in North America, South America, Europe, and Asia.
Brookfield recently reported record results for fiscal 2022 and raised its quarterly distribution by 5.5 per cent, to US$1.35 a year. The units yield 4.6 per cent.
I think BEP is oversold and the market seems to agree as the price has been edging higher this month. It’s worth a look.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca/subscribe