Why energy stocks fell this week

Renewable energy reserves fell sharply this week after Donald Trump was elected to another term as president and Republicans won control of the Senate. Generous subsidies that have helped solar, electric vehicle (EV) and charger companies over the past four years are expected to end, which could put a huge strain on the industry.

According to data provided S&P Global Market Intelligence, SolarEdge Technologies (SEDG -9.07%) shares fell 25.4% this week, EVgo (EVGO -9.62%) fell by 30%, and Sunnova Energy (NEW STAR -13.97%) fell by 47.8%. At the end of the week, shares fell by 24.1%, 29.1% and 45.5%, respectively.

The subsidy train may be coming to an end.

The Inflation Control Act (ITC) included a number of subsidies that directly impacted solar companies, and if these subsidies were removed, it would be a huge setback for the industry. For example, there is a 30% investment tax credit for solar panels and energy storage installations, a $0.04 per watt subsidy for US-made solar cells, a $0.35 per kilowatt-hour subsidy for battery cells, and $10/kWh for battery storage. battery modules.

These subsidies can stack on top of each other, so if they were eliminated, it would impact both profits and sales velocity as fewer renewable energy projects make financial sense.

Tariff issues hit energy stocks

In addition to the potential loss of subsidies, President-elect Trump has proposed tariffs of 60% on goods from China and 20% on all other goods, which could make solar cells, batteries and everything else more expensive.

Supply chains for many products are flexible, but if it costs more to make products in the U.S. and costs more to import goods, costs will rise.

Toll infrastructure financing issues

There have been huge subsidies for EVgo, including $623 million in grants announced earlier this year to install 500,000 EV chargers. But these funds could be reduced or eliminated by the new administration.

The federal government is pouring money into expanding electric vehicle infrastructure, using both direct funding and tax breaks that could be at risk.

Assess the headwind

To make matters worse, interest rates are rising: the US 10-year government bond rate has risen from 4.01% to 4.30% in just the last month.

Most renewable energy projects are expensive initially but generate income over decades, making them similar to bonds. If bond yields rise, project rates of return should also improve, putting pressure on the economics of many renewable energy projects.

Uncertainty rules the day

To be clear, these concerns are speculation about what might happen under the Trump administration. However, the economic impact is significant given how much support has been directed towards renewable energy over the past four years.

Investors are taking a “sell now, ask questions later” approach to the industry, and that may not be a bad idea. Profits could dry up quickly if subsidies end, and most of these companies don’t generate sustainable profits to begin with.

Travis Hoyum has no position in any of the stocks mentioned. The Motley Fool recommends SolarEdge Technologies. The Motley Fool has disclosure policy.