High interest rates are sinking renewable-energy stocks, sending some of the biggest players down by double-digit percentages in the past two weeks. Meanwhile, traditional energy companies—which can fund their capital projects out of operating cash instead of having to raise money—are in strong financial shape.
In the past two weeks, stocks of several of the largest renewables companies in the U.S. have tumbled, largely because of interest rates.
NextEra Energy
(NEE), which owns more solar and wind projects than any other public U.S. company, has fallen 26% in just the past two weeks. The problem started with
NextEra Energy Partners
(NEP), a company that NextEra spun off years ago but still partially owns. NextEra Energy Partners told investors in late September that it was cutting its guidance for the distributions it pays out to investors by half through at least 2026, because high interest rates will “affect the financing needed to grow distributions.”
Companies that build wind and solar projects depend heavily on the debt market. They take out large loans to build projects and then pay them off over time with the money that consumers pay for the electricity those turbines and panels produce. When debt is expensive, those projects take longer to pay off, and are likely to offer smaller profits to investors.
The problem of high interest rates isn’t new, but NextEra Energy Partners’ sharp cut to its longer-term growth clearly spooked investors. Other companies that own substantial numbers of renewable projects also fell sharply. Virginia power company AES (AES) is down 23% in the past two weeks, and
Brookfield Renewable Partners
(BEP) is down 16%. High interest rates and high inflation have also rocked offshore wind companies, causing several to cancel plans to build major wind farms off the East Coast. Spanish utility
Iberdrola
(IBDRY) has canceled wind projects, and other companies like
BP
(BP) and Orsted (DNNGY) have tried to renegotiate them.
High rates are even outweighing the effects of the Inflation Reduction Act that Biden signed last year. Most renewable stocks are below where they were when the law was signed, despite the fact that it will direct hundreds of billions of dollars to clean energy.
Oil-and-gas companies, meanwhile, are in much better shape than clean energy companies despite high interest rates. Oil prices have mostly stayed above $75 in recent months, allowing companies to make double-digit returns on their capital. Most major oil companies can fund their entire capital budgets out of their operating earnings, so they don’t even have to tap expensive debt markets.
Exxon Mobil
(XOM), for instance, made $19.5 billion profits in the first half of the year and spent $12.5 billion on capital expenses. It has been paying off debt.
The same is true of coal stocks, which have also benefited from relatively high commodity prices.
Arch Resources
(ARCH) made more than three times as much in profits as it spent on capital expenditures in the first half of the year.
To be sure, high interest rates also affect fossil fuel companies—they tend to slow the overall economy down, and can cause commodity prices to drop. But given the strength of fossil fuel company balance sheets today, high rates aren’t hurting them much yet.
Clean energy is a growing industry. But rates will likely have to fall before it can ramp up enough to replace dirtier alternatives.
Write to Avi Salzman at [email protected]
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