Why These Energy Stocks Cratered This Week

Source The Motley Fool

Renewable energy stocks dropped like a rock this week after Donald Trump was elected to another term as president and Republicans won control of the Senate. The speculation is that generous subsidies that have helped solar, electric vehicle (EV), and charging companies over the past four years will be halted, and that could put tremendous strain on the industry.

According to data provided by S&P Global Market Intelligence, SolarEdge Technologies (NASDAQ: SEDG) stock fell as much as 25.4% this week, EVgo (NASDAQ: EVGO) fell 30%, and Sunnova Energy (NYSE: NOVA) dropped 47.8%. At the close of trading for the week, shares were down 24.1%, 29.1%, and 45.5%, respectively.

The subsidy train may come to an end

There were a number of subsidies in the Inflation Reduction Act (ITC) that directly impacted solar companies, and if those subsidies are rolled back, it would be a huge headwind for the industry. For example, there's a 30% investment tax credit for solar and energy storage installations, a $0.04-per-watt subsidy for solar cells produced in the U.S., and a $0.35-per-kilowatt-hour subsidy for battery cells and $10 per kWh for battery modules.

These subsidies can stack on top of each other, so if they're dismantled, it will impact both margins and sales velocity, as fewer renewable energy projects make sense financially.

Tariff questions hit energy stocks

On top of the potential loss of subsidies, President-elect Trump has proposed tariffs of 60% on goods from China and 20% on all other goods, which could make solar cells, batteries, and everything else more expensive.

Supply chains for many products are flexible, but if it's more costly to build products in the U.S. and more costly to import goods, costs are going to rise.

Charging infrastructure funding questions

For EVgo, there have been massive subsidies, including $623 million in grants announced earlier this year to install 500,000 EV chargers. But those funds could be cut back or eliminated by a new administration.

The federal government has been pouring money into expanding EV infrastructure with both direct funding and tax credits, which could be under threat.

Rate headwinds hit

To make matters worse, interest rates are rising, with the 10-year government bond rate in the U.S. up from 4.01% to 4.30% in just the past month.

Most renewable energy projects are costly up front, but generate revenue for decades, which makes them similar to bonds. If bond yields rise, the rate of return for projects will need to improve as well, pressuring the economics of many renewable energy projects.

Uncertainty rules the day

To be clear, these fears are speculation about what might happen under a Trump administration. However, the economic impact is large, given how much support has gone into renewable energy over the past four years.

Investors are taking a "sell now, ask questions later" approach to the industry, and that may not be a bad idea. Profits can dry up quickly if subsidies go away, and most of these companies aren't generating sustainable profits to begin with.

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Travis Hoium has no position in any of the stocks mentioned. The Motley Fool recommends SolarEdge Technologies. The Motley Fool has a disclosure policy.

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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