Reasons for the mixed performance of renewable energy stocks

The significant damage brought about by Severe Tropical Storm “Kristine” (international name: Trami) highlights the urgency to fight climate change.

One way to combat climate change is by switching from fossil fuel to renewable energy sources, which emit little to no greenhouse gasses.

Under the National Renewable Energy Program, the government is targeting to increase the share of renewable energy in the power generation mix from 22 percent currently to 35 percent by 2030 and 50 percent by 2040.

Although the growth outlook for the local renewable energy sector seems bright, investing in related companies that are listed on the Philippine Stock Exchange has not automatically yielded attractive returns in the year-to-date period.

While shares of Alternergy and AC Energy rose by around 20 percent and 12 percent, respectively, shares of Repower Energy, SP New Energy and Raslag were down by around 27 percent, 11 percent and 2 percent, respectively, so far this year.

Meanwhile, Citicore Renewable Energy, which listed only in June, is up by around 26 percent from its initial public offering price.

Aside from company-specific factors, there are many opportunities and challenges facing renewable energy companies which explain their mixed performance.

On the positive side, demand for power in the Philippines continues to grow due to the country’s rapid economic growth.

According to power distribution firm Manila Electric Co., demand for energy in its franchise area grew by 8.7 percent during the first half of 2024. It is also expected to grow by 4.1 percent in the third quarter.

Moreover, as mentioned earlier, the government wants to increase renewable energy use. To support this goal, it has issued a moratorium on new coal-fired plants.

Growing demand coupled with government incentives to help grow the share of renewable energy plants in a short amount of time provides local renewable energy companies an advantage in growing their capacity.

Finally, the cost of putting up solar plants is on the decline. This makes it more affordable for renewable energy companies to expand.

However, there are other numerous challenges.

One of the main challenges is the shortage of transmission capacity for newly built plants. Although the National Grid Corp. is expanding transmission capacity, the pace of growth is not enough to accommodate the rapid increase in renewable energy plants’ power generation capacity.

Lower prices of some fossil fuels like coal and oil also reduce the urgency to shift to renewables. Note that after climbing sharply to around $450 per metric ton (MT) because of the war in Ukraine, the price of coal is now much lower at $145/MT.

The same is true for oil. After hitting a peak of $123 per barrel in 2022, the price of oil is now only $70 a barrel. This is despite the ongoing war in Ukraine and the Middle East.

The small size of most renewable energy companies also negatively affects the liquidity of their stocks.

Note that aside from AC Energy, no other renewable energy company is part of the Philippine Stock Exchange Index.

In fact, Alternergy, Repower Energy and Raslag have market capitalization of less than P10 billion.

Renewable energy companies’ small market capitalization makes them unattractive to institutional investors that account for a large share of the local market’s trading volume. Their lack of liquidity is one of the reasons why they trade at lower valuations.

Finally, renewable energy stocks are currently out of favor globally.

One of the reasons for this poor sentiment is growing expectation that Donald Trump would win the US presidential elections.

Note that Trump believes that renewable energy is unreliable and costly which is why he is against such initiatives.

Given the numerous factors affecting renewable energy companies, there is no guarantee that investors who buy their stocks will be profitable.

Aside from knowing renewable energy companies individually, investors who buy these kinds of stocks must constantly monitor changes affecting the sector. This is necessary to identify companies that are dynamic enough to adapt and innovate in response to both market demands and regulatory changes. INQ