This week witnessed a significant drop in value for several energy-related stocks.
Green energy shares nosedived this week following Donald Trump's re-election as president and the Republicans securing the Senate majority. The presumption is that the generous incentives that boosted solar, electric vehicle (EV), and battery businesses over the previous four years will be scrapped, potentially leading to a severe strain on the sector.
According to information from S&P Global Market Intelligence, shares of SolarEdge Technologies (SEDG 0.74%) plummeted by up to 25.4% this week, EVgo (EVGO -2.52%) slumped 30%, and Sunnova Energy (NOVA 1.89%) lost 47.8%. The closing figures for the week showed declines of 24.1%, 29.1%, and 45.5%, respectively.
The incentive bonanza could end
There were numerous incentives in the Inflation Reduction Act (ITC) that directly benefited solar companies, and if these incentives are repealed, it would pose a significant challenge for the industry. For instance, a 30% investment tax credit applies to solar and energy storage installations, there's a $0.04-per-watt incentive for U.S.-produced solar cells, and a $0.35-per-kilowatt-hour incentive for battery cells with additional $10 per kWh for battery modules.
These incentives can be combined, thus if they're abolished, both profits and sales velocity will be affected as fewer green energy projects become financially viable.
Tariff threats loom over energy shares
In addition to the possibility of incentive cuts, President-elect Trump has proposed tariffs of 60% on Chinese goods and 20% on all other imports, which could increase the cost of solar cells, batteries, and other items.
While supply chains for many products can be flexible, if constructing products in the U.S. becomes more expensive and foreign imports grow costlier, costs will inevitably increase.
Financing issues for electric vehicle infrastructure
For EVgo, substantial subsidies include $623 million in grants announced in early 2022 for installing 500,000 EV chargers. However, these funds could be reduced or eliminated by a new administration.
The federal government has poured resources into expanding EV infrastructure, both via direct funding and tax credits, which could be at risk.
Rising interest rates put a damper on renewables
To make matters worse, interest rates are climbing, with the 10-year U.S. government bond rate rising from 4.01% to 4.30% in just a month.
Most green energy projects are pricey to initiate but provide income for decades, making them similar to bonds. If bond yields increase, the return on investment for projects will also need to improve, putting pressure on the economics of many green energy projects.
Uncertainty lingers
To reiterate, these concerns are based on conjecture about potential developments under a Trump administration. Nevertheless, the potential economic impact is substantial given the level of support provided to green energy over the past four years.
Investors are taking a "sell now, ask questions later" stance towards the sector, which might not be misguided. Profits can evaporate swiftly if incentives disappear, and most companies in this sector aren't generating sustainable profits yet.
The ending of incentives as mentioned in the Influx Reduction Act (ITC) could pose a significant challenge for the green energy sector, as it would affect both profits and sales velocity, making fewer green energy projects financially viable for investing. With President-elect Trump proposing tariffs on Chinese goods and imports, the cost of solar cells, batteries, and other related items could increase, potentially leading to financing issues for electric vehicle infrastructure.
