A month ago, we warned investors in renewable energy stocks to heed the lessons of Robinhood.com. Mainly, capital gains built on investment “themes” rather than solid business fundamentals are usually short-lived. And our advice to cash out of high-flyers and invest in successful adopters of wind and solar has already proven timely.
Since then, the Invesco Solar ETF (TAN) and Invesco Wilderhill Clean Energy ETF (PBW) have lost roughly 20%, and one of the company’s I specifically flagged, FuelCell Energy (FCEL), is off nearly one-third.
By comparison, readers that our suggestion to look for companies with strong business fundamentals, in the offshore wind and carbon neutral natural gas sectors, are in the black despite a slight decline in the Dow Jones Utility Average.
Offshore wind power and energy farm on the ocean.
Renewable energy companies had benefitted from an investor stampede into “green” stocks following Joe Biden’s election as president. Their retreat since has been blamed on multiple factors, including concerns about fallout from Texas’ February deep freeze.
It’s clear that outages of wind generation did play some role in the Lone Star state’s spiking power prices. Worst hit were companies like Germany’s RWE AG (Germany: RWE, OTC: RWEOY) that held bank hedges to lock in selling prices. They had to replace lost output with power purchases up to the state’s $9,000 per megawatt hour price cap.
RWE expects a financial hit of “several hundred million” from the crisis. But multiple wind facilities in the state did keep running, especially in the south and east. Owners like Avangrid Inc (AGR) earned “good money” in the words of Jose Ignacio Sanchez Galan, CEO of the company’s parent and 81.53% owner Iberdrola SA (Spain: IBE, OTC: IBDRY).
Earlier this month, Bloomberg New Energy Finance released a study of financial hedging by Texas wind power generators during the crisis. One conclusion: There’s likely to be a shallower pool of lenders willing to do power hedges going forward, as well as developers entering them.
If true, it will be more difficult for power plant owners to economically lock in selling prices. That means higher risks, which will narrow the ranks of generators in the state as well as already decimated retail marketers. Recently, Just Energy (JE) filed for Chapter 15 bankruptcy. And nearly two-dozen of its Texas competitors are on the brink of doing the same.
It’s possible the state will eventually heed the growing chorus of generators and marketers to revisit at least some of the alleged $16 billion mispricing occurring at the peak of the crisis. And depending on what’s decided, that could deliver a big earnings lift to a host of generation companies, including RWE, Exelon Corp (EXC) and Vistra Corp (VST).
Such a move could mean Texas-sized gains for all of these stocks, as well as others highlighted in the latest issue of Conrad’s Utility Investor. But however this shakes out, the Lone Star state added more wind capacity than any other state last year (3.483 gigawatts). That topped closest rival Oklahoma’s total by more than 3-to-1.
Wind facilities in southern climes are likely to devote more capital to better winterization going forward. But development is unlikely to slow anywhere in the U.S. this year, particularly now that tax credits for both wind and solar have been extended by Congress.
Equally, it’s hard to credibly blame renewable energy stocks’ pullback last month on investor disappointment with Biden Administration policies. We’ve yet to see what “Build Back Better” looks like, as the government continues to work on its omnibus infrastructure bill.
But new appointees at the U.S. Bureau of Ocean Energy Management are already making their mark. Last week, they cleared a final environmental review of Avangrid’s 800- megawatt capacity Vineyard Wind 1 facility, which had been effectively blocked by the Trump Administration for nearly two years.
Vineyard should win final approval to begin construction next month, with a projected 2023 in service date. Equally important, a successful process will be a blueprint for other would-be offshore wind developers like Dominion Energy (D), which has a 2.6 GW project it hopes to bring on line by 2026.
The Biden Administration has set a goal of 42 GW of operating offshore wind generation by 2030. That’s a target it can meet just by clearing away regulatory obstacles for developers like Avangrid and Dominion, which already have all the incentive they need to invest shareholders’ money in projects.
In fact, having a large base of offshore wind generation has arguably become more attractive for utilities up and down the Atlantic coast since the Texas power crisis. Mainly, they face tough decisions on passing through spiking natural gas costs from February to customers and are anxious to avoid a repeat.
Shares of Avangrid, Dominion and other offshore wind developers have gained some ground on these favorable developments. But they still pay generous dividends and sell for sharply discounted earnings multiples to the S&P 500. The big gains are ahead.
Judging from last week’s trading, few investors are paying attention to very real differences between “green” companies. That includes whether they have an actual sustainable business model. They’re effectively wagering on momentum alone, and risking huge losses if it turns against them.
By contrast, our offshore wind investment recommendations offer reliable and robust long-term growth, and their stocks still sell for bargain prices. Now more than ever, they’re where to invest in renewable energy—a sector with very real growth opportunities, but now carrying a heavy burden of breathless hype and dubious promises.
