Renewable energy developers and suppliers earning growing, positive returns in North America should outperform the sector in 2024, according to Morgan Stanley analysts.
AES Corp. and NextEra Energy Inc. should continue to provide "lower risk, lower volatility" exposure to renewables in the coming year even as soaring capital costs and demand for tax equity financing pressure contract prices and construction, Morgan Stanley wrote in a Dec. 8 report.
"We would consider the renewable developer business model to have defensive characteristics in that it is a mature industry that has had rational competitive dynamics in which higher costs have been passed through to customers and returns have been preserved," the analysts said. "There may be additional opportunities for these companies to acquire late stage profitable development pipelines from smaller developers that are unable to execute given the market challenges."
First Solar Inc., Altus Power Inc. and Bloom Energy Corp. should also offer lower risks for renewables investors in 2024, according to the report.
Persistent high interest rates, inventory gluts, supply chain shortages and project delays and cancellations pummeled US-listed industry stocks in 2023.
Facing billion-dollar impairments, offshore wind giant Ørsted A/S nixed projects entirely and paused spending on a third. A fourth project under development with Eversource Energy terminated all power purchase agreements and plans to rebid in an upcoming solicitation, while Avangrid Inc. also canceled contracts for two projects.
Rooftop solar specialists Sunrun Inc., SunPower Corp., Sunnova Energy International Inc., SolarEdge Technologies Inc. and Enphase Energy Inc. faced expiring net energy metering incentives for California customers, which also drove a share-price sell-off during the second half of the year.
Electrolyzer manufacturers suffered setbacks as sales failed to translate into profits, with Plug Power Inc. warning investors in November that it could run out of liquidity during the next 12 months, while NuScale Power Corp. terminated its first-of-a-kind small modular nuclear reactor project in Idaho.
Clean energy companies faced negative impacts from supply chain disruption and adverse policy changes in 2023, but Morgan Stanley asserted that high interest rates caused the most problems, hitting the values of even more financially stable companies in the sector as higher rates "fueled a concern that renewable energy projects, which use a high degree of debt leverage, were suddenly uneconomic."
The rise in interest rates was particularly hard on companies that operate capital-intensive businesses and rely on recurring access to capital markets to fund growth, Morgan Stanley noted, as well as those companies that are currently unprofitable and may now be grappling with a delayed path to profitability.
2024 elections loom
Solar panel and battery storage prices are expected to moderate in 2024, according to the report, but that could change in 2025 if a Republican wins the next US presidential election.
A Republican administration would likely work to repeal the Inflation Reduction Act and "limit how much of the approved tax credits could be used in practice" while also implementing new tariffs on clean energy imports, "particularly battery storage technology," Morgan Stanley wrote.
Hydrogen tax credits in particular could prove a "convenient political target," analysts at Guggenheim wrote in a Dec. 11 report, while both Guggenheim and Morgan Stanley agreed that manufacturing tax credits would remain "secure" given that most of the plants announced since the IRA was enacted will be located in Republican jurisdictions.
Congressional Republicans are also seeking information related to the US Energy Department's landmark $3 billion debt deal for Sunnova after a partial loan guarantee, touted as the federal government's "single largest commitment ever" to solar power, closed in September.
In a letter to DOE Loan Programs Office Director Jigar Shah, released Dec. 8, House Energy and Commerce Committee Chair Cathy McMorris Rodgers (R-Wash.) and Senate Energy and Natural Resources Ranking Member John Barrasso (R-Wyo.) voiced alarm over "troubling" allegations about the Houston-based company's "maintenance delays" and "predatory" sales practices.
Sunnova stock fell 16% Dec. 8 following the release of the letter to the Loan Programs Office, which received an additional $350 billion in new loan authority under the IRA.
Analysts at Roth Capital Partners and Guggenheim told clients the claims are likely meritless and reiterated their "buy" recommendation on Sunnova's NYSE-listed stock.
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