Renewable energy stocks are a hot topic right now. They’re part of a broad category that mainly includes utility companies in the solar and wind space. But I can also include electric vehicle manufacturers and even listed investment companies that focus on putting capital to work in energy projects. Such stocks enjoyed a positive 2021. Unfortunately, this year hasn’t started in such a good way. Here are two reasons why the sector is struggling.
Cost pressures
Firstly, the energy stocks are facing cost-related pressures. We all know that headline inflation is high at the moment. The latest figures show that it’s running at over 5% in the UK. Yet if we break down some of the elements that go into higher prices, some of them are stemming from the energy sector.
For example, take the rise in price of lithium carbonate. Since the beginning of September, it has tripled in price. This is good for lithium producers, but what about electric vehicle manufacturers that need lithium in some form for the batteries? In this case, the higher prices mean higher costs of production. This increases direct costs and means operating profit margins decrease.
As an example, the Tesla share price is down 18% since the start of the year, although it’s up 10% over a longer one-year period.
So renewable energy stocks from that sub-sector are under pressure in part from this cost-related issue. In terms of the outlook, it doesn’t seem like the surging prices are slowing anytime soon, with demand also high.
Higher projected interest rates
The second reason why renewable energy stocks are under pressure is interest rates. Capital expenditure on large projects such as wind farms is not a cheap exercise for utility providers. Although some of this can be financed by retained profits, some also has to come in the form of debt. Debt is raised at the prevailing market rate of interest. With analysts calling for three or even four interest rate hikes from the Bank of England this year, this rate is going to increase. It ultimately makes it more expensive for these companies to raise new money.
For example, take SSE. The company’s renewables arm is pushing forward on some large projects. In the half-year report, the company had £9.6bn in adjusted net debt and hybrid capital, a large amount relative to revenue. I think this is one reason why the share price is down over 5% in the past three months (up 6% over one year).
Should I buy renewable energy stocks now?
Personally, I see this as a good dip to buy some stocks in this sector. However, I’d be selective. I’d much rather buy a lithium producer than a company that is a price taker at the end. Or, I’d rather buy a utility provider that has the infrastructure more in place rather than having billions of debt on the books.