Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Clean Energy Stocks Are Falling Faster Than Oil This Week
Transcript
- Lucas: Luna, in a week where oil prices dropped seven percent, you'd think clean energy stocks would be the place to hide. But that is not what happened. Luna: No, it is not. The iShares Global Clean Energy ETF — ICLN — is down more than nine percent over the same five days. That is a bigger drop than crude. Lucas: Right. And it gets worse when you look at the solar names. Enphase dropped ten percent. First Solar fell nine point two percent. Meanwhile, NextEra Energy — a utility with a big renewable fleet — actually gained almost two percent. So the story is not simply 'clean energy is falling.' It is specifically project developers and equipment makers getting hit. Luna: And we should say, the broader market is having a rough week too. S&P 500 heading for a losing week, chip stocks adding to losses. But clean energy is falling much harder. What gives? Lucas: Let's start with the most obvious culprit: interest rates. The ten-year breakeven inflation rate ticked up to two point two one percent this week. That's the market's expectation for average inflation over the next decade. Higher inflation expectations mean the Fed is less likely to cut rates soon. And for capital-intensive renewable projects — think building a solar farm — higher rates directly hurt the math. Luna: Because those projects are financed with debt. If the cost of borrowing goes up, the returns shrink. And if returns shrink, the stock prices of companies that build those projects should shrink too. Lucas: Exactly. And that's separate from the oil price dynamic. But there is also a dollar story here. When geopolitical tensions flare — like Trump saying Iran violated the ceasefire with drone attacks on Strait of Hormuz ships — money tends to flow into the dollar as a safe haven. A stronger dollar makes dollar-denominated oil cheaper for foreign buyers, which can push oil prices down, but it also makes US exports more expensive. For solar panel manufacturers like First Solar, which sells globally, a strong dollar is a headwind. Luna: So oil is down partly on demand fears and a strong dollar, but clean energy is getting hit by both the rate story and the currency story. Plus, there's a tariff angle. Lucas: Right. Trump threatened one hundred percent tariffs on countries that impose digital services taxes on American companies. That raises the specter of a trade war. Trade wars are bad for growth, which hurts oil demand, but they also raise costs for imported components — including solar panels and inverters. Enphase makes its microinverters in the US, but they still rely on global supply chains for raw materials. Tariff uncertainty is poison for capital expenditure decisions. Luna: And yet NextEra Energy is up. Why the divergence? Lucas: NextEra is a regulated utility. Its earnings are largely guaranteed by state regulators. It can pass through higher borrowing costs to ratepayers over time. It also has a huge existing fleet of wind and solar that is already generating cash. It is not dependent on new project financing for its near-term profits the way a pure-play solar developer is. So when rates rise, the market punishes the growth names and rewards the steady cash flow. Luna: That makes sense. But let's also talk about the oil side. WTI crude is at sixty-nine dollars a barrel, down seven percent in a week. That is a big move. And it is happening even though the Strait of Hormuz is in the news again. Lucas: Normally, a threat to the Strait of Hormuz would send oil prices spiking. But the market seems to be looking through it. Why? Because demand concerns are overwhelming supply fears right now. The US economy is still growing, but inflation is running above four percent, the Fed is not cutting rates, and tariff threats are adding to uncertainty. Global PMIs have been softening. The market is pricing in a demand slowdown. Luna: And that demand slowdown hits clean energy too, because if factories are shutting down, they don't need as much power. But you'd think the substitution effect — high oil prices make renewables more attractive — would offer some support. Instead, oil is down and clean energy is down more. So the substitution effect is not operating here. Lucas: It is not, because the substitution effect is a long-term decision. You do not switch to solar because oil drops for a week. You switch because you have a ten-year view on carbon costs or regulatory mandates. And right now, the ten-year view is clouded by high rates and trade policy. That is why a name like Enphase, which had already fallen from over three hundred dollars in 2022, is now below fifty dollars. Luna: Tough. But we should also note that natural gas — Henry Hub — actually rose almost one percent this week. That is a bit of a safe haven move within energy. Lucas: Natural gas is mostly a domestic market, insulated from the Strait of Hormuz and tariffs on digital services. It benefits from the same high inflation expectations, because utilities that burn gas can pass through costs. And it is seen as a hedge against oil supply disruptions that don't materialize. So there is a flight within energy from oil and clean energy to natural gas and regulated utilities. Luna: Let's zoom out then. The clean energy ETF is down nine percent, solar stocks are down double digits, oil is down seven percent, natural gas is flat to up. What is the one takeaway for an investor? Lucas: The market is telling you that clean energy is not a monolithic sector. NextEra is not Enphase. And the macro drivers — rates, dollar, tariffs — are overwhelming the traditional 'oil up, clean energy up' correlation. If you are long solar names right now, you are basically short a strong dollar and short sticky inflation. Luna: Short sticky inflation — that is a good way to put it. And speaking of sticky inflation, the core PCE price index ticked up again in May. That is the Fed's preferred gauge. So no rate cuts on the horizon. Lucas: Exactly. And that is the through-line. The market is repricing risk across the board, and capital-intensive growth stories are taking the biggest hits. It is not a clean energy story per se — it is an interest rate story that happens to be landing on clean energy right now. Luna: All right, so if rates stay high, do you expect this divergence to continue — regulated utilities outperforming, while developers and equipment makers keep falling? Lucas: I think so, unless we get a clear signal from the Fed that cuts are coming. And with inflation still above four percent and breakevens rising, that signal is not likely soon. But there is a wild card: the election. If the political landscape shifts, renewable subsidies could change. But that is a 2027 story, not a 2026 story. Luna: Good point. Let's leave it there. For now, the energy trade is about rates, not barrels. Lucas: And that is a key distinction for anyone watching these moves.