Utilities give clean energy investors a boost over solar: Maguire
The opinions expressed here are those of the author, a columnist for Reuters.
By Gavin Maguire
LITTLETON, Colorado, Aug 15 (Reuters) -Investors in the clean energy sector have taken a drubbing from steep drops in solar stocks this year, but have made strong returns on positions in utilities, which have been one of the brightest spots in the United States equities arena in 2024.
Surging demand for power from artificial intelligence (AI) applications and data centers have spurred investments across the utilities and power producer space, which is set to see rising revenues from all major customer segments going forward.
Some utilities stocks have outshone even the brightest stars of the tech arena, with Texas-based power producer Vistra Corp VST outperforming microchip major Nvidia NVDA.O since March.
Equity analysts are upbeat on the outlook for utilities for the rest of the year, especially if U.S. interest rates are lowered and reduce the cost of debt financing for infrastructure development, service expansions and grid upgrades.
That positive forecast contrasts with that of the solar industry, which was rocked by a high-profile bankruptcy this month that may spark a pivot by clean energy investors into the utilities arena instead.
DIVERGENCE
The bankruptcy filing by SunPower SPWR.O is just the latest blow to the solar arena.
The 40-year-old firm boasted a market capitalization of over $9 billion in early 2021, but agreed to sell off the bulk of its assets for $45 million in cash this month after racking up billions of dollars in debt.
Solar installation firms have been hit over the past two years by rising interest rates that lifted system prices for potential buyers, steep cost inflation for parts and labour, and cuts to power sale prices in key markets.
And the pain of the solar sector stretches well beyond the U.S., with Israeli firm SolarEdge and China's Longi both announcing layoffs this year.
The price of the largest U.S. solar exchange-traded fund (ETF) - the Invesco Solar ETF TAN - has lost 24% so far this year in reflection of the sector's woes, and is down 55% since August 2022.
In contrast, the largest utilities ETF, the Utilities Select Sector SPDR Fund XLU, has gained roughly 18% year-to-date, which is more than the gains posted by the popular Vanguard Information Technology ETF VGT over the same period.
NUCLEAR GROWTH
The upswing in utility share prices extends well beyond Vistra, with Constellation Energy CEG.O and NRG Energy NGG both posting gains of well over 50% year-to-date.
Nextera Energy NEE, Southern Company SO and American Electric Power Company AEP.O have all gained around 20% this year, and may make further progress if investors in the solar sector pull up stakes and opt to switch holdings to utilities instead.
Exactly which companies are targeted by investors in the utilities arena may depend on the proportion of power generated by nuclear plants within each power system.
So far this year, the shares of Vistra and Constellation have outperformed the rest of the sector because both companies generate a larger share of total power supplies from nuclear reactors than their peers.
Utilities with large nuclear fleets are attractive to power-hungry firms because nuclear plants can deliver large and stable volumes of clean power around-the-clock, and so can fulfil the demand needs of companies that require massive computing power.
However, power producers that are building out renewable energy generation capacity as well as battery storage systems will also likely be on the radars of power consumers that need abundant clean electricity supplies.
That means that utilities that may lack nuclear generation but have plans for large increases in alternative forms of clean generation could see a rise in demand for power going forward.
Equity analysts have flagged firms including NiSource NI, which has a service area spanning from Pennsylvania to Ohio, and Florida-based NextEra as firms with strong growth potential thanks to rising revenues and established plans to bring on more renewable power this decade.
Duke Energy DUK, which has a large generation footprint in the Carolinas, and Southern Company, which operates across Georgia, Alabama and Mississippi, are also regularly touted by stock analysts in the utilities space.
Investors opting for basket exposure through an ETF also have plenty to choose from, with Vanguard, S&P Global, Fidelity, and Invesco all also offering dedicated utility ETFs.
Given that clean energy investors are nursing losses in the solar space for the second straight year, some may be tempted to steer funds elsewhere in the energy sector where the outlook is far more upbeat.
And given that nearly all utilities are developing and integrating growing volumes of clean power into their distribution systems, many will fulfil the criteria for clean energy investors even if they are not purely dedicated to renewable energy production.
<The opinions expressed here are those of the author, a columnist for Reuters.>
Key US utility ETF outperforms solar, wind and even tech ETFs so far in 2024 https://tmsnrt.rs/3YMvgru
Year-to-date stock price moves of key utilities & power producers https://tmsnrt.rs/3YLxJ5b
Solar’s rough run https://tmsnrt.rs/4dJ931v
Major utilities exchange-traded funds (ETFs) https://tmsnrt.rs/4fIjbJL
Reporting by Gavin Maguire; Editing by Stephen Coates
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