Hedge Funds Are Shorting Stocks That Biden’s IRA Was Meant to Help

A number of hedge funds have started shorting renewable energy stocks, as they bet climate stimulus will tip debt-reliant green companies over the edge by fanning inflation and triggering even higher interest rates.

(Bloomberg) — A number of hedge funds have started shorting renewable energy stocks, as they bet climate stimulus will tip debt-reliant green companies over the edge by fanning inflation and triggering even higher interest rates.

Renaud Saleur, chief executive officer at Geneva-based Anaconda Invest, expects the vast sums of cash being pumped into the US economy by the Inflation Reduction Act to actually make life harder in the near term for many of the companies it was supposed to help.

“People have forgotten” that a lot of green businesses are still “project financing and therefore extremely sensitive to interest rates, extremely sensitive to the discounted future cash flows,” he said in an interview. “And extremely sensitive to the cost of commodities that are going to be used to build the turbines or to build the offshore wind farms.”

Read More: ESG Veteran Says Recession Odds Expose Leverage Trap in Strategy

The IRA, which was signed into law by President Joe Biden a little over a year ago, may end up channeling as much as $3.3 trillion into renewable technologies and other green assets over the coming decade, according to analysts at Goldman Sachs Group Inc. That’s almost 10 times the amount initially indicated by the US government.

The huge cash injection has been hailed by environmentalists as a program that’s helping bring the planet closer to the goal of limiting global heating to 1.5C. The finance industry has also been quick to embrace the stimulus, with analysts and bankers from Goldman, UBS Group AG and JPMorgan Chase & Co. among those betting Biden’s IRA will drive a significant expansion in green investing.

But investors are getting cold feet around a number of green stocks. Shares of California-based SunPower Corp. have lost about 30% since late July, partly because of anxiety about rising US interest rates. And SunPower panel supplier Maxeon Solar Technologies Ltd., which recently announced plans to build a $1.2 billion US polysilicon solar panel factory, is down by roughly half over the same period.

That’s in part as consumers hesitate with investments, as they react to the immediate impact of inflation and higher borrowing costs.

“It could be more truthfully named the Inflation Acceleration Act,” said David Allen, head of long-short strategies at Australia-based hedge fund Plato Investment Management, which oversees about A$11 billion ($7 billion) of assets. “Maybe in the long term it will reduce inflation, but certainly not in the short and medium term.”

And according to Anaconda, it’s now clear that climate stimulus has contributed to the correction gripping the solar sector. “Solar companies have been completely inflated by the IRA, and because there weren’t a lot of liquid, good companies, people poured money into them and the valuations became far too high,” Saleur said.

Short interest relative to shares outstanding in Maxeon Solar is roughly 6%, up from 3.5% in June, according to IHS Markit data. For SunPower, short interest has soared to 25% from closer to 10% at the beginning of the year.

Read More: Year on From Inflation Reduction Act, Solar Stocks Collapse 

Opportunities to short green stocks aren’t limited to North America, according to Argonaut Capital Partners, which is based in the UK. Barry Norris, founder and chief investment officer of Argonaut, says in addition to shorting US solar stocks and some electric-vehicle producers, he’s looking at wind turbine producers and hydrogen stocks in Europe. 

In the UK, “pretty much all new wind projects currently being built will be unprofitable without stupidly high power prices to compensate,” Norris said. That’s as the cost of debt increases by about 500 basis points on average for UK offshore wind projects, according to Argonaut. 

Global offshore wind cumulative capacity is on track for eightfold growth by 2035, according to BloombergNEF analyst Chelsea Jean-Michel. But countries installing the technology face several obstacles, including rising costs and supply-chain bottlenecks, she said. 

And on Wednesday, Orsted A/S shares plunged the most on record after the renewable energy company warned of impairments of as much as $2.3 billion to its US portfolio because of supply-chain issues and soaring interest rates.

Read More: 1H 2023 Offshore Wind Market Outlook: Hurdles Delay Build

In the meantime, clean energy firms are seeing their free cash flows turn negative, a recent analysis by BNEF shows. 

BNEF estimates that even industry giants are continuing to ratchet up spending. Chinese electric-vehicle maker BYD Co.’s capital expenditure is up 113% per year since 2019; at Tesla Inc., capex is up 75% in the same period, BNEF says.

Still, such investments may help green companies do well in the long term, according to BNEF. And to be sure, the MSCI ACWI IMI Renewable & Energy Efficiency Index is up 17% this year, beating the 13% gain of the MSCI AC World Index. That’s as analysts at Goldman say investors shouldn’t underestimate the potential of the IRA to boost green stock valuations over time.

“While increasing leverage can push up a company’s risks, it can also make for a prudent growth strategy if the debt is being utilized for productive purposes,” BNEF analyst Ryan Loughead said in an Aug. 16 report. 

For now, though, “high interest rates have definitely made life more difficult for many companies,” Plato Investment’s Allen said. 

–With assistance from Nishant Kumar.

(Adds reference to Orsted slump in 14th paragraph.)

More stories like this are available on bloomberg.com

©2023 Bloomberg L.P.