By Angus McCrone
Bloomberg New Energy Finance
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This coming Thursday brings an important anniversary. I am not referring to the news on 25 July 2012 that North Korean dictator Kim Jong-un had married Ri Sol-ju, or to the ladies’ football matches played the same day, at the start of the London Olympics, but to something even more significant for clean energy investors.
On 25 July last year, clean energy share prices hit what has – so far – proved to have been their multi-year bottom. The WilderHill New Energy Global Innovation Index, or NEX, which tracks 98 clean energy stocks worldwide, touched 102.20. This was its most depressed reading for more than nine years, and down 78.2% from the index’s record high in November 2007.
Spookily, in percentage terms, the NEX’s 78.2% fall was almost identical to the 78.4% tumble in the Nasdaq Composite from the peak of the dotcom craze in March 2000 to its nadir two and a half years later. And the initial rebound in the NEX, since its low point in July last year, has been steep as was that of the Nasdaq in 2003 – in the last 12 months, the NEX has rallied 57%.
Of course, this has so far made up only a small part of the eye-watering collapse in clean energy share prices from 2007 to July 2012. The NEX remains some 66% down on its peak. However rallies have to start somewhere. Sometimes – and not necessarily in this case – mighty oaks from little acorns grow.
The most intriguing things about this rally are why it happened at all, and what we can learn from the individual share price performances that lie behind the headline trend. Some of the latter are remarkable – no fewer than nine of the NEX’s 98 constituents shot up by between 150% and 540% in the period from 25 July 2012 to 11 July 2013, when I started to write this.
Part of the answer lies in the broad stock market trends. The S&P 500 index is up just over 25% in the last year. But the NEX’s rally has been sharper and much more recent – it conspicuously failed to happen in late 2011 or the first half of 2012, when the S&P was starting its own climb.
CLEAN ENERGY INVESTMENT
What is more intriguing is that all of this has unfolded in the teeth of a setback for the volume of global investment in clean energy. Bloomberg New Energy Finance data show that investment fell from $303.1bn in 2011 to $266.9bn in 2012, the first real setback since 2004. And earlier this month, we released figures showing that clean energy investment in 2013, although somewhat higher in the second quarter than the first, has continued to struggle. In the first half of this year, it was $96.7bn, compared to $116.4bn in the first six months of 2012.
Markets often start to do well when the news is bad. The renowned investor Sir John Templeton said: “Bull markets are born on pessimism, grown on scepticism, mature on optimism and die on euphoria.” The idea is that far-sighted investors start to look through the short-term difficulties, towards more promising times ahead.
In January this year, our chief executive Michael Liebreich wrote: “As 2013 opens, the smoke is clearing from the energy sector’s equivalent of the Battle of Borodino. The forces of clean energy have been pushed back, with painful losses, by a combination of economic conditions and fossil fuel’s new Imperial Guard, in the shape of shale oil and gas in North America. The battlefield is littered with dead clean energy companies, and more will die of their wounds in the coming months. And yet, all is not lost.”
It would have taken a brave investor – herd animals at the best and worst of times – to have bet on a recovery in the NEX over the past year. Despite the radical improvements in the cost-competitiveness of renewable energy technologies in recent years, the sector has been mired in a thicket of challenges, including adverse policy changes made to limit costs to electricity bill payers, grid shortcomings, low gas prices in the US, the travails of carbon markets, and a period of generally weak leadership from national politicians on the issue of climate change.
Despite this, some of the individual NEX constituents have achieved truly eye-watering returns. US solar manufacturers SunPower and SunEdison led the pack in terms of share price gains from 25 July 2012 to 11 July this year, with gains of 540% and 389% respectively. Spanish wind turbine maker Gamesa was up 341%; US electric car maker Tesla Motors, up 312%; Danish turbine manufacturer Vestas Wind Systems, up 270%. US thin-film PV company First Solar was up 222%; US LED semiconductor maker Cree, up 206%; solar street lighting manufacturer China Singyes Solar Technology, up 186%; Chinese thin-film production line supplier Hanergy Solar, up 180%. US biodiesel player Renewable Energy Group completes the set, showing growth of 150%.
What was it that those brave investors who backed these companies saw that others missed? Let’s take a look.
Bloomberg New Energy Finance runs three sector indices in association with the New York Stock Exchange, and these show subtle differences within an overall upward trend. The NYSE Bloomberg Global Solar Energy Index hit 427.10 on 25 July last year, but then actually slipped further to a low of 372.93 on 28 November, before rallying 57% to 583.98 on 11 July this year. Its sister index, NYSE Bloomberg Global Wind Energy, bottomed in late July last year and had regained 36% by 11 July this year, while the NYSE Bloomberg Global Energy Smart Technologies Index, comprising 239 stocks in areas such as electric vehicles, smart meters, efficiency and storage, had risen 45% from a low in mid-November.
So we can see that although prices have recovered across the technology board, it is solar that has been the lead sector, at least for the last eight months.
One of the biggest concerns for public market investors over the past few years has been margin erosion in the PV and wind supply chains. The period 2009-12 saw a vicious squeeze on costs as excess manufacturing capacity collided with demand that was growing much less rapidly. Now we are seeing prices starting to stabilise, amid signs that high-cost and low-quality manufacturing capacity is being shuttered. Some PV makers have closed whole factories, others have gone out of business. The latest edition of our Solar Spot Index shows that multicrystalline modules have edged up from $0.80 to $0.83 per Watt since January. So investors are hoping wind and solar equipment makers can finally start repairing their margins.
This has been a big influence on the best-performing NEX member of the last year, SunPower. In May, the US solar company reported better-than-expected sales, helped by its project development business, and a return to positive margins. At an investor day presentation shortly afterwards, Chuck Boynton, CFO, spoke of “improving margin profile”, “selling price stabilisation” and a “strong backlog” of orders, including for MidAmerican Energy’s 579MW Antelope Valley PV project in California, which began construction in April.
Bears of the stock started to throw in the towel as the shares rose – Goldman Sachs raising SunPower from “sell” to “neutral” at the end of May, according to Bloomberg News. The rally enabled SunPower to issue on 29 May some $300m of 0.75% senior convertible debentures due 2018, on the face of it an exceptionally low interest rate.
Also helping solar stocks in general this spring were ABB’s purchase of solar inverter maker Power-One in late April for $748.5m, hopes that the US Congress would extend Master Limited Partnership structures to solar projects, and the performance of new listing SolarCity, the US installer and financier, which has now seen its shares rise fivefold since its initial public offering on 12 December last year.
In wind, as ever, Vestas is the bellwether case. The turbine maker saw steady gains in its share price during the winter, but then a real take-off in May as rival General Electric predicted a rise in US orders on the back of the extension of the Production Tax Credit to the end of this year. Then the company itself posted first quarter results showing a narrowing in its losses, and improvement in cash flow. There was a flurry of broker recommendations from the likes of HSBC and Credit Suisse, and then data showing that short interest in its stock fell to a two-and-a-half-year low – a sign that the bears were being squeezed out there too.
A third example, Tesla, has been a case of blossoming optimism, rather than receding pessimism. Like Vestas, it edged gently upwards in share price terms during the winter. On 1 April, Tesla said it would make its first quarterly profit and that its Model S sedan was beating sales forecasts of 4,500 in the first three months of the year, sending its shares soaring.
Later in that month, Morgan Stanley raised its outlook for deliveries of the Model S, and then in May, Tesla raised its forecast for Model S sales in the year from 20,000 to 21,000. “We exceeded our own target for deliveries,” said chief executive Elon Musk. Its market capitalisation reached $7.9bn, more than that of Italian car giant Fiat. On 22 May, Tesla said it had raised more than $1bn via a sale of shares and convertible senior notes, with Musk himself purchasing $100m worth of equity. This allowed the company to lance the boil of the $452m US Department of Energy loan received in 2010, paying it off early. Finally, this month, Tesla stock got another push when Jefferies raised its share price target from $70 to $130, and then the company reported “hundreds of orders” from Hong Kong for the Model S.
So we are seeing a broad-based rally, led by some strong operating improvements by the industry’s leading players. What can we make of the scale of the upturn? One point is that the violence of some of these rallies may owe something to the fact that those who were short, expecting the clean energy bear market to go on and on, were squeezed hard, forced to liquidate their positions by buying back the stock. Another is that stocks of technology producers in wind and solar are highly volatile, acutely sensitive to a few percentage points of change in the balance of supply and demand.
The rebound in clean energy shares also hints at a geographical effect. Chinese stocks are relatively poorly represented in the top 10 performers in the last year, but there is a healthy helping of US stocks. The shortage of Chinese representation may reflect the bumpy progress of supply chain consolidation in that country, worries about Europe’s tariff on Chinese imports, and the signs of a significant slowdown in the country’s wind market in 2013-14 – all factors that have been extensively covered by our analysts.
The heavy representation of US stocks reflects hopes that the world’s largest economy will step up its investment in clean energy, even as it continues to exploit the shale gas opportunity. Our figures for the second quarter of 2013 show a 155% bounce in US clean energy investment in Q2 compared to the first quarter, although it still remained 20% down on the number for the second quarter of 2012. Tax incentives are still on offer in the US to drive developers to build large solar and wind projects, and homeowners and businesses to install rooftop PV. President Barack Obama’s re-election in November 2012 helped to underpin confidence, as have recent presidential pronouncements – including his Climate Action Plan, unveiled on 25 June.
Stock market enthusiasm can vanish as quickly as it appears, and it might do so again in the second half of 2013. But, for the moment, the NEX’s strong rally is creaking open the equity-raising window more widely than at any time in the last few years.
In the second quarter of 2013, quoted clean energy companies raised $3.8bn, about three quarters of the figure they managed in the whole of last year. That Q2 number owed much to one large issue, of $1.4bn by New Zealand hydro and geothermal company Mighty River Power, with other sizeable equity raisings by biodiesel firm Emerge Energy Services, by Hannon Armstrong Sustainable Infrastructure Capital, by First Solar, and – yes – by Tesla.
So far, that upturn in public market fundraising has lacked breadth, and been dependent on a relatively small number of deals. That is hardly surprising at a time when many investors have been struggling to solve the “strange case” of the rally in clean energy share prices.