After President Donald Trump made good on his promise to withdraw from the Paris Climate Agreement, some renewable energy stocks fell, as investors assumed that future demand for alternative power would dim.
Companies like Vestas Wind Systems and First Solar (ticker: FSLR) were among the initial casualties. Renewable energy investments in general have put in a mixed and even weak performance over the past few years because of falling prices for fossil fuels, which reduce the demand for solar and wind. Although the biggest U.S.-centric exchange-traded funds — like PowerShares WilderHill Clean Energy Portfolio ETF ( PBW) and First Trust Nasdaq Clean Edge Green Energy Index Fund ( QCLN) — are up sharply year-to-date, 17.25 percent and 17.20 percent, respectively, the three-year returns are negative, down 11.14 percent and 2.07 percent, respectively.
[See: 10 Energy ETFs That Will Clear Your Conscience.]
Yet energy analysts and market watchers say concerns that the U.S. withdrawal from the Paris agreement would harm the renewable energy sector are overblown. The sector may face some hurdles, such as the possible end of federal investment and tax credits in a few years, but renewable energy generates so much U.S. electrical power that it’s not going away.
That should be good news for investors, but analysts and market watchers caution buyers to pick stocks carefully as the sector remains a nascent field.
Falling carbon emissions. Renewable energy investors have seen environmental agreements sidelined before. Phil Flynn, senior market analyst and author of The Energy Report for The Price Futures Group in Chicago, says there was an outcry when the U.S. did not sign the 1997 Kyoto Protocol to lower carbon emissions. The agreement went into force in 2005 and required nations to reduce carbon emissions 5.2 percent by 2012. As of 2015, the most recent data available, U.S. energy-related carbon dioxide emissions were about 12 percent below 2005 levels, according to the Department of Energy.
“In fact, there were more advances in the U.S. to lower greenhouse gas emissions than in countries adhering to the accord,” Flynn says. “Sometimes these political agreements, on the face of it, sound great.” But political agreements don’t always work in the real world, he says.
Carbon emissions fell for two reasons. First, utilities began using more natural gas, which is cleaner than coal, because hydraulic fracturing increased the supply of natural gas dramatically, driving down prices. Second, renewable energy use grew. The Department of Energy notes all renewable energy sources — hydropower, wind, solar, biomass and geothermal — now comprise 14.9 percent of total U.S. electricity generation.
[See: 7 Socially Responsible ETFs for Investors of All Stripes.]
There are other reasons why the withdrawal from the Paris treaty may not affect U.S. renewable energy use and investment. Ken Locklin, director of Impax Asset Management, says most U.S. states support clean energy development regardless of federal policies.
According to a Morgan Stanley research note, “renewable energy economics have eclipsed policy in driving decarbonization,” and the U.S. is likely to surpass the carbon reduction requirements of the Paris accord.
“Our analysis shows that coal retirements, economics-driven fuel switching, and renewables development will drive a natural 34 percent reduction in U.S utility carbon emissions by 2030, exceeding both the Paris climate accord and the now defunct EPA Clean Power Plan,” the Morgan Stanley analysts say.
Although a few tax credits may sunset in 2020 and 2030, Flynn believes the renewable energy markets have reached critical mass and now support themselves.
Economics on their side. The costs of investing in solar and wind power also have dropped, driving installations, Locklin says. The photovoltaic industry average in the last eight years shows that solar panels costs fell 80 percent, and Energy Department research projects capital costs for building new solar and wind plants in 2022 to be less than the fuel and operating costs of a combined cycle natural gas plant, the baseline standard for the minimal cost of energy.
Better technology and more interest in renewables from institutional investors, like insurance companies and pension funds, also help. Because these investors view investments in terms of decades, they can provide stable funding. In fact, institutional money in clean technology, which includes energy efficiency, shot up 168 percent last year, to $354 billion, from 2014 levels, says the Forum for Sustainable and Responsible Investment in its biennial Trends Report.
Investment ideas. Because the sector is young, not every clean energy stock is a good investment. “Even houses like Impax, which invest as part of their core activity, do so carefully,” Locklin says. He suggests that investors look beyond renewable energy to the wider world of clean energy technology, as these companies may have a more stable track record.
The Morgan Stanley analysts favor utilities, especially those that can achieve above-average earnings-per-share growth by adopting renewable energy faster. They include California utilities Pacific Gas & Electric Corp. ( PCG) and Sempra Energy ( SRE), both with superior earnings growth, and the largest renewable developer in North America, NextEra ( NEE).
[See: The Best Energy Stocks to Buy for 2017.]
“These utilities offer superior growth and returns on invested capital, and their stock prices do not reflect this dynamic,” the analysts say. “NEE’s wind business has significant barriers to entry in our view.” As a result, the analysts expect NEE to generate returns ranging from the high teens to low 20 percent over a long time.
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Why Renewable Energy Investing Has a Bright Future originally appeared on usnews.com
