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Clean energy stocks are stuck in a monumental slump in Canada and around the world, with steep losses piling up on the year despite billions in government support and booming demand from countries committed to reducing greenhouse gas emissions.

The rise of interest rates and bond yields have proven toxic for renewable energy companies, which came to rely on easy access to cheap capital to finance solar and wind projects.

There are other pressure points as well. Inflation has caused a huge rise in production costs, adding to the strain of soaring interest costs on corporate debt.

The long-term investment thesis behind the green economy is intact, said Rupert Merer, an equity analyst at National Bank Financial who specializes in renewable power. There is little doubt that renewables will contribute more and more to the global energy mix in the decades ahead.

The pace of the transition, however, is very much in doubt. The broken economics afflicting the sector are not likely to be fixed anytime soon.

“There’s some concern that these companies will never grow again,” Mr. Merer said. That’s not his personal view, he added. But many investors have turned their backs on what was one of the market’s hottest trades going into this decade.

The selloff in renewables has come in waves over the past three years. The first hit was in early 2021 when the most overheated pockets of the pandemic-era bull market ran out of steam. For example, this was around the time meme-stock mania began to fade.

The next wave came a year later when the market turned against the tech sector. Inflation and rising interest rates prompted a mass rethinking of the innovation space, and renewables were lumped in among the casualties.

This year has seen yet another marketwide retreat from green names. The S&P Global Clean Energy Index, which is made up of 100 of the world’s largest solar, wind, geothermal and related public companies, is down by 30 per cent year to date.

The cumulative loss from the index’s January, 2021, peak, now sits at nearly 60 per cent. No longer can the downslide be blamed on the broader technology sector falling out of favour. Tech is the runaway leader of the stock market in 2023, with the S&P 500′s IT constituents collectively gaining 50 per cent.

The same sector patterns are in play in Canada. Domestic tech names such as Shopify Inc., Constellation Software Inc., and Celestica Inc. have realized enormous gains this year. Meanwhile, the S&P/TSX Renewable Energy and Clean Technology Index is down by 19 per cent.

Northland Power Inc., one of the biggest names in the group, has dropped by 40 per cent this year, with cost overruns in the company’s offshore wind projects and plummeting profitability running afoul of investors already in a selling mood.

Smaller names have also been hit hard, with Innergex Renewable Energy Inc. down by 40 per cent, and Boralex Inc. down by 24 per cent.

The long fall of the renewables space appears to be at odds with the recent wave of government subsidies and tax breaks meant to foster a transition away from fossil fuels.

The U.S. Inflation Reduction Act, which President Joe Biden signed into law in August, 2022, put in place a vast series of incentives that could end up totaling more than US$1-trillion to increase the manufacturing of wind turbines and solar panels, the development of carbon capture technologies, hydrogen and biofuels, and more.

Any optimism that the bill might restore stability to the sector was misplaced. Since its signing, the S&P Global Clean Energy Index has lost 41 per cent.

Clearly, tax breaks and subsidies alone cannot fix what ails the sector. They might accelerate growth, but not necessarily profit at the company level, Mr. Merer said.

“If the government is going to give me a 30-per-cent tax credit toward building a wind farm, they’re giving the same thing to everybody else,” he said. The competition for contracts among those companies will serve to drive the price of power down.

That’s why interest rates are such a dominant force in the renewables space right now. Many of these companies entered into contracts at set electricity prices before inflation spun out of control. That fixed the price at which they can sell their energy, while being squeezed on costs by inflation and higher costs of capital.

There have been some glimmers of hope for the sector recently. Encouraging U.S. inflation data has seen bond yields back off and renewable energy stock indexes tick higher. And the prices being guaranteed in some large government contracts for renewable energy have been rising. But it will take a considerable amount of time for the economics of the industry to recalibrate.

Ultimately, ample demand will support the growth of renewables, which currently contribute only about 10 per cent to global energy needs.

“There are still aggressive targets around the world to increase the share of energy that comes from renewables,” Mr. Merer said. “There will be growing demand for clean energy.”

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