Why Renewable Energy Stocks Dropped on Thursday

Renewable Energy

A number of pressure points have hit renewable energy all at once today.

What happened 

Renewable energy stocks struggled on Thursday, as a combination of falling energy prices and rising interest rates hurt the industry. Plug Power (PLUG -5.14%) fell as much as 7.1% in trading today; Blink Charging (BLNK -3.54%) fell 10.4%; ChargePoint Holdings (CHPT -5.12%) dropped 7.3%; and First Solar (FSLR -1.26%) declined a more modest 4.4% at its low. The stocks closed the day down 6.2%, 6.7%, 5.4%, and 2.8%, respectively.

So what 

The most notable move in energy markets today was natural gas falling 7.6% in U.S. trading. That’s a big decline in prices for a commodity that provides most of the electricity in the U.S.. You’ll notice that Plug Power, Blink Charging, ChargePoint, and First Solar are all suppliers in the electricity market, so when a competing commodity falls in price, it makes sense that your product would become less valuable, as well.

A more problematic headwind is the increase in interest rates around the world. In the U.S., 10-year government bond rates were up 17 basis points today alone and have risen 68 basis points in the past month and 239 basis points this year.

Interest rates are particularly important for renewable energy projects because they usually have high upfront costs and long useful lives, which means they can be financed for decades. Higher interest rates mean the future cash flows from each project are less valuable, lowering the value of all renewable energy projects. That’s why we’re seeing a decline in valuations for all types of renewable energy assets.

The macro challenge is that higher interest rates are intended to slow the economy, which may also mean incrementally less demand for energy. That would put new construction for renewable energy at a disadvantage against the legacy fossil fuel asset.

Why are renewable energy stocks down? Today is a worst-case scenario of lower fossil fuel prices, higher interest rates, and a potentially weaker economy.

Now what 

Ups and downs like today are really par for the course for renewable energy. The industry has benefited from falling interest rates over the last decade, but even that hasn’t meant strong profitability for most companies.

While I think higher rates and falling commodity prices are a headwind, I don’t think this is worth giving up on the industry. There’s a bright future for wind, solar, hydrogen, and electric vehicles.

I suggest focusing on companies that are profitable and can adapt to any market condition. In this list of companies, only First Solar is making money and has any kind of differentiation in the market.

FSLR Net Income (TTM) Chart

If you’re buying high-quality renewable energy stocks like First Solar, this could be a great buying opportunity. But it’s also a warning that less-established companies that have been built on hype are facing difficult market conditions for the foreseeable future.

Source: Fool.com