Sign In or Create an Account.

By continuing, you agree to the Terms of Service and acknowledge our Privacy Policy

Economy

The Climate Economy’s Rough Patch, Explained

The Federal Reserve giveth and the Federal Reserve taketh away.

Clean power and a grid.
Heatmap Illustration/Getty Images

Shares in climate-related companies — green hydrogen, residential solar, renewables developers — have been flagging in the past few months, and it seems like the damage may have spread to the private markets as well, where fledgling companies seek funding from individual venture capital firms.

The S&P Clean Energy Index — a group of 100 “global clean energy-related businesses from both developed and emerging markets” — has declined around 30% so far this year, compared to the broader stock market going up 12%.

While there are many different types of clean energy companies, the widespread malaise across the sector’s shares can mostly be attributed to high interest rates and changing public policy.

Many in the environmental business, advocacy, and public policy worlds are optimistic that clean energy can eventually become — or even already is — cost competitive with fossil fuels (not to mention better for the planet), but much of the sector is still both largely future oriented and heavily tied to government-provided incentives and policy preferences.

This means in sectors like hydrogen or offshore wind, big fights over tax credits and contract adjustments can meaningfully impact the future profitability of, or at least investor excitement around, clean energy companies if those battles go the “wrong” way.

The hydrogen company Plug Power is down around 45% this year, as is the residential solar company Sunrun. The energy company NextEra, which has massive wind and solar investments and is looking to be a big player in hydrogen, is down by more than a third. The Northeast energy company Avangrid, which paid $48 million to get out of an offshore wind deal in Massachusetts, is down by about a quarter this year. Orsted, the Danish wind company with projects up and down the East Coast, many now in some form of limbo due to rapidly accelerating costs, is down almost 50% this year.

And there’s evidence that capital may be becoming scarcer in the private markets as well. According to the audit and consulting firm PwC, overall funding from venture and private equity investors for climate technology companies fell by about 40%, taking it down to a level last seen five years ago.

Much of the fall can be chalked up to an overall decline in start-up funding — which fell 50% — the PWC analysis said. Indeed, the portion of all start-up investment that’s devoted to climate investments has actually gone up in the last year. This might be welcome news for the long-term prospects of the sector, but it’s still cold comfort for climate tech companies hunting for cash to stay afloat or expand.

While stock prices and business outlooks are not always the same — a stock price can decline because investors decided they were overly optimistic about a company’s prospects even if it’s still growing — there are some unifying causes to the troubles the clean tech industry is facing.

The one that pops up everywhere is interest rates, which are at the highest level in decades in the United States.

When the Federal Reserve raises interest rates and keeps them high, money becomes more expensive to borrow (just ask anyone who’s trying to buy a house right now). This matters a lot for a bevy of clean energy companies, because they often need to spend now — to, say, build a utility-scale solar array — in order to secure flows of payments in the future. When interest rates are high, funding is not only costlier, but future payments are less attractive compared to, say, buying low risk government bonds, which can offer a sizable return with less risk.

“Recently investors have been concerned that higher interest rates mean shrinking NPV, or value creation, for new renewable projects … lack of access to capital, prohibitively high renewables costs, lower renewables demand, and significantly lower value of future growth pipelines,” Morgan Stanley analysts wrote in a note earlier this week. (They ultimately described the sell-off as “overdone”).

Much of the sell-off, the Morgan Stanley analysts said, was attributable to an announcement made last month by NextEra, which is both a leading renewables company and the owner of a Florida utility. NextEra said that the growth rate of dividends paid out by an affiliated company that buys its renewable projects would be cut in half in order “to reduce financing needs and better position the partnership to continue to deliver long-term value for unitholders.”

That’s a mouthful, but it essentially means that a source of capital for a leading renewables developer is less optimistic about the business and decided to cut what it paid to its investors instead of acquiring another solar, wind, or battery project.

This announcement led to a quick, sudden decline in the company’s stock price, knocking around $30 billion off its market value and dragging the broader sector’s valuations down by about 12% soon after the announcement.

For specific companies and sectors, they’ve had their own challenges that have brought down stock prices.

Publicly traded residential solar companies have seen their valuations fall dramatically in the last year, which can be chalked up to, Morgan Stanley analysts argue, “the combination of higher interest rates and policy changes in California,” referring to a new state policy which dramatically cuts back payments to homeowners selling solar power to the electric grid. “Overall, we expect another rough quarter for residential solar companies,” Citi analysts said, in a note downgrading two solar companies, SunPower (stock down two thirds this year) and Sunnova (down 47%).

“Interest rates are highly relevant for the renewables space as installers are effectively financing companies and as renewable project expected returns are sensitive to interest rate changes,” analysts at Citi said in a note this week.

In August, Sunrun, a leader in residential solar, told investors that “recent interest rate increases, inflationary pressures, and working capital needs have prevented us from generating meaningful cash generation.”

And in offshore wind, there have been declines across the board. “The U.S. offshore wind market has run into challenges as project returns have declined due to cost inflation and higher cost of capital,” Morgan Stanley analysts said in a note. “While some offshore wind projects have proven to be NPV-negative and companies have cancelled contracts, we do not see risk of onshore wind, solar, and storage contracts facing these same issues.”

For companies looking to invest in green hydrogen, there is a lot of money being poured into the sector by the federal government, but also a lot of uncertainty around which projects will qualify for tax benefits. Morningstar analyst Brett Castelli described Plug Power as “a high-risk high-reward investment in the green hydrogen economy” with “operating losses and heavy capital investment associated with its green hydrogen network.” The company, Castelli said, would do better, “the more flexible the [federal] rules.”

There is still, of course, a tidal wave of money from the Inflation Reduction Act and Infrastructure Investment and Jobs Act set to flood into the energy sector, but there’s no guarantee it will go to specific companies or startups. Meanwhile, the rollout of the bills has been, well, let’s say methodical, as rules get written and spending programs get built out.

And that leaves investors asking “show me the money.”

Blue

You’re out of free articles.

Subscribe today to experience Heatmap’s expert analysis 
of climate change, clean energy, and sustainability.
To continue reading
Create a free account or sign in to unlock more free articles.
or
Please enter an email address
By continuing, you agree to the Terms of Service and acknowledge our Privacy Policy
Economy

Trump Is Disabling the Agency That Could Fight China’s Rare Earths Embargo

The Loan Programs Office is good for more than just nuclear funding.

Xi Jinping and Donald Trump.
Heatmap Illustration/Getty Images

That China has a whip hand over the rare earths mining and refining industry is one of the few things Washington can agree on.

That’s why Alex Jacquez, who worked on industrial policy for Joe Biden’s National Economic Council, found it “astounding”when he read in the Washington Post this week that the White House was trying to figure out on the fly what to do about China restricting exports of rare earth metals in response to President Trump’s massive tariffs on the country’s imports.

Keep reading...Show less
Q&A

You, Too, Can Protect Solar Panels Against Hail

A conversation with VDE Americas CEO Brian Grenko.

This week's interview subject.
Heatmap Illustration

This week’s Q&A is about hail. Last week, we explained how and why hail storm damage in Texas may have helped galvanize opposition to renewable energy there. So I decided to reach out to Brian Grenko, CEO of renewables engineering advisory firm VDE Americas, to talk about how developers can make sure their projects are not only resistant to hail but also prevent that sort of pushback.

The following conversation has been lightly edited for clarity.

Keep reading...Show less
Yellow
Hotspots

The Pro-Renewables Crowd Gets Riled Up

And more of the week’s big fights around renewable energy.

The United States.
Heatmap Illustration/Getty Images

1. Long Island, New York – We saw the face of the resistance to the war on renewable energy in the Big Apple this week, as protestors rallied in support of offshore wind for a change.

  • Activists came together on Earth Day to protest the Trump administration’s decision to issue a stop work order on Equinor’s Empire Wind project. It’s the most notable rally for offshore wind I’ve seen since September, when wind advocates protested offshore opponents at the Preservation Society of Newport County, Rhode Island.
  • Esther Rosario, executive director of Climate Jobs New York, told me the rally was intended to focus on the jobs that will be impacted by halting construction and that about a hundred people were at the rally – “a good half of them” union members or representing their unions.
  • “I think it’s important that the elected officials that are in both the area and at the federal level understand the humans behind what it means to issue a stop-work order,” she said.

2. Elsewhere on Long Island – The city of Glen Cove is on the verge of being the next New York City-area community with a battery storage ban, discussing this week whether to ban BESS for at least one year amid fire fears.

Keep reading...Show less
Yellow