What if 2024 became the year of renewable energy companies? The question is worth asking.
Last year and this year, high interest rates have driven down the share prices of clean energy companies, potentially delaying the transition to a low-carbon economy.
Rising rates are making it harder for this heavily indebted industry to meet its costs, prompting many companies to revise their earnings forecasts downwards, cut dividends and review expansion plans, triggering a stock market meltdown.
The question of how long these climate-critical industries will remain in the doldrums remains open, as central banks today seem in no hurry to cut interest rates.
However, one encouraging sign is that investors have shown keen interest in climate-related funds in recent weeks, indicating that they are optimistic about the industry despite the recent carnage in share prices.
As you're no doubt aware, clean energy stocks are sensitive to high interest rates because they need a lot of debt to finance the expansion of their infrastructure, such as solar and wind farms. When rates rise, overall costs rise sharply, while energy utilities and other buyers pressure these companies to keep electricity prices low.
Unlike the oil and gas sector, which can increase fuel production by drilling into existing reserves, clean energy companies have to borrow massively to expand.
The clean energy sector's debt-to-equity ratio is 3.8 times trailing 12-month earnings, almost four times higher than the 1.1 ratio of the major oil and gas companies.
But this could soon change as expectations of lower interest rates take hold in Europe and the USA.
Ultimately, investors will increasingly allocate their capital to this indispensable part of the economy as central banks ease their monetary conditions.
