This year is proving a challenging landscape for players in the clean-energy sector. While the general energy sector, largely driven by fossil fuels, saw a modest rise of 3.06%, renewable or alternative energy exchange-traded funds have experienced a substantial downturn, depreciating by 28.30% so far this year.
Last week was particularly harsh for clean-energy ETFs, which plunged 6.03%. However, it wasn’t just renewable energy affected; fossil fuel-based equities also suffered a sizeable blow, with crude oil prices plummeting nearly 9%.
Analysts attribute a large portion of this downward trend to rising interest rates, which negatively affect clean-energy companies operating on long-term contracts at preset prices - established before project development commences. Clean-energy companies primarily propel their operations using leverage and borrowing, both of which become significantly costlier as interest rates rise.
These alternative energy entities heavily rely on financial debt or leverage to seize growth opportunities presented by environmentally beneficial policies such as Net Zero 2050. However, with escalating inflation and stagnant pre-agreed pricing frameworks, profitability is under immense strain.
The trajectory of interest rates continues upward, and many clean-energy companies have been stung by the surge in borrowing costs. Some firms have even reported a hike of up to 40%. This heightened borrowing expense, subject to fluctuating interest rates, adds to the liabilities column, thereby eating into potential profits and deterring investors.
As a result, returns from clean energy ETFs have been significantly waning – a direct residual effect of increasing inflation against locked-in prices that had been agreed upon prior to the onset of inflationary pressures.
It appears that sustainable investments and ETFs are feeling the heat within this dynamic economic climate, where interest rate adjustments can drastically sway capital costs and overall profitability. As we navigate through uncharted financial territory, the resilience of these alternative energy investments will indeed be put to the ultimate test.