Utilities give clean energy investors a boost over solar

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 centres 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 outperforming microchip major Nvidia 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.
The bankruptcy filing by SunPower is just the latest blow to the solar arena.
The 40-year-old firm boasted a market capitalization of over US$9-billion in early 2021, but agreed to sell off the bulk of its assets for US$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 – has lost 24 per cent so far this year in reflection of the sector’s woes, and is down 55 per cent since August, 2022.
In contrast, the largest utilities ETF, the Utilities Select Sector SPDR Fund, has gained roughly 18 per cent year-to-date, which is more than the gains posted by the popular Vanguard Information Technology ETF over the same period.
The upswing in utility share prices extends well beyond Vistra, with Constellation Energy and NRG Energy both posting gains of well over 50 per cent year-to-date.
Nextera Energy, Southern Company and American Electric Power Company have all gained around 20 per cent 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 fulfill the 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, 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, 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 fulfill the criteria for clean energy investors even if they are not purely dedicated to renewable energy production.
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