Renewable energy developers could still see a significant rise in stock prices despite inflation triggering higher capital costs that could drive estimated future cash flows, Morgan Stanley analysts said.

Since November 2021, when inflation concerns escalated, the iShares Global Clean Energy ETF has plunged more than 24% from the S&P 500’s 15.5% loss, as the threat of a recession economy has exacerbated existing commodity bottlenecks and trade policy uncertainty. Many cleantech companies have yet to achieve positive cash flow, so they remain “fairly sensitive to changes in the discount rate,” which measures value based on anticipated earnings, according to a report from Morgan Stanley. June 13.

But renewables remain an inflation hedge compared to fossil fuels like natural gas and coal because of high barriers to entry for clean technologies and the ability for Congress to pass a set of incentives. federal taxes.

“In many cases, we believe the market has overpriced equities for these short-term factors, as several catalysts are poised to put the sector back on its solid trajectory of long-term profitable growth,” the company said. investment bank to its clients.

“We are increasingly of the view that clean energy can, in the long run, disrupt traditional energy providers, especially utilities with high (and growing) customer bills, above-average exposure to the physical risks of climate change and challenges in ensuring adequate power supply to its customers,” Morgan Stanley analysts said in the note.

Even so, analysts have lowered their near-term price targets for most of a select group of companies they track, largely due to the rising cost of capital.

AES Corp., Plug Power Inc. and Sunrun Inc. have the most upside prices with “built-in limited growth”. Bloom Energy Corp., Stem Inc., Fluence Energy Inc. and NextEra Energy Inc. are also well positioned to benefit from federal tax cuts.

The approaching Congressional recess in August puts pressure on Democrats to act quickly. But U.S. Sen. Joe Manchin, DW.Va., a deciding vote in the equally divided Senate, sounded less optimistic in recent public comments, suggesting a deal could still be a long way off.

Bloom Energy and Plug Power in particular would benefit from a production tax credit of $3 per kilogram for producing hydrogen with near-zero emissions, according to Morgan Stanley, because the cost of producing and delivering Green hydrogen could drop to less than $1.50/kg, making the fuel competitive with more carbon-intensive types of hydrogen.

Green hydrogen could also be boosted by the Biden administration’s invocation of the Defense Production Act to accelerate the manufacture of electrolyzers, fuel cells and the platinum metals they are built with, among other technologies. renewable.

Although the Defense Production Act aims to expand domestic manufacturing of solar panels, Morgan Stanley remains cautious after the law was invoked alongside an order for the US Department of Commerce to freeze anti-dumping duties for two years on the solar cells and panels imported from Malaysia, Vietnam, Thailand and Cambodia.

“We see limited competitive differentiation between solar panel manufacturers and racking vendors” such as First Solar Inc., Array Technologies Inc. and Maxeon Solar Technologies Ltd., the analysts wrote.

These federal actions could also benefit Array Technologies as utility holding companies transfer capital for their affected solar projects, setting up “a surprisingly strong 2023 rollout year.”

S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.

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