The transition to clean energy, once seen as important solely for environmental purposes, has now become a key cornerstone of supply chain security efforts. As governments around the world become more aware of the risks of globalized supply chains in light of the Covid-19 pandemic and the Russia-Ukraine war, one way to decrease the potential drawbacks of future geopolitical developments is to build out renewable energy infrastructure.
In light of this and several other factors, such as emerging markets being reluctant to invest in fossil fuel infrastructure due to the high cost and eventual obsolescence of these systems, Fatih Birol, the executive director of the International Energy Agency, believes that 2022-2023 will mark a turning point in the energy transition. The 2022 IEA World Energy Outlook forecasts global fossil fuel demand will peak by the end of the decade.
However, while many investors and industry analysts may be positive on the clean energy sector, one group remains starkly bearish on these stocks: company insiders.
Insiders remain mostly bearish on solar stocks
According to GuruFocus’ All-in-One Screener, a Premium feature, there have not been any notable insider buys for solar energy stocks since September, excluding a small handful of penny stocks (you can find the list here).
Expanding the timeline to the beginning of 2022, we do see some insider buys for big names like First Solar Inc. (FSLR, Financial) and Array Technologies Inc. (ARRY, Financial).
First Solar’s Chief Commercial Officer and its Chief Quality Officer bought shares on Aug. 5, and its Chief Financial Officer bought shares on Aug. 1. However, there have been 32 instances of insider selling in the stock over the same timeframe.
Array Technologies’ ratio of insider buying to selling is much better. There have been four insiders buying shares in 2022: the CEO, Chief Financial Officer, Chief Commercial Officer and a director. This is only slightly outpaced by sells from five other insiders.
Other popular solar energy stocks have seen a flood of sells and no buys from insiders over the past year. For example, Sunrun Inc. (RUN, Financial) had 54 insider sells, SolarEdge Technologies Inc. (SEDG, Financial) had 29 and Enphase Energy Inc. (ENPH, Financial) had 23.
A heavily cyclical industry
It’s certainly not encouraging to see little to no insider buying for solar energy stocks, but part of the reason for insiders’ bearishness is likely due to the fact that energy is a heavily cyclical industry.
As shown by the shale oil boom and subsequent supply glut, as well as the Covid-19 lockdowns resulting in oil prices briefly turning negative, investing in energy is a risky prospect. Many well-established fossil fuel giants offer attractive dividend yields to keep investors interested, but since clean energy companies are still in their growth phase, dividends are not in the cards at the moment.
Government incentives still favor fossil fuels
Then there’s also the issue of government incentives. For those who aren’t familiar with the energy sector, fossil fuel subsidies are one of the biggest reasons why oil companies have the potential to be so profitable for shareholders. Additionally, without subsidies, the cyclical nature of the energy industry would result in more bankruptcies, tighter supply and higher energy prices.
There is a long history of government incentives in energy markets because governments are generally willing to do whatever it takes to keep energy flowing. Without energy, today’s interconnected economy that has come to rely on long-distance travel and near-constant internet connection would come to a screeching halt.
Due to the many types of subsidies, tax breaks and under-the-table deals, it’s impossible to accurately estimate just how many government incentives the fossil fuel industry receives. The G20 scorecard for 2020 gave the following estimates:
“G20 governments provided $584 billion annually (2017–2019 average) via direct budgetary transfers and tax expenditure, price support, public finance, and SOE investment for the production and consumption of fossil fuels at home and abroad. Governments provided more support to oil and gas production than any other stage of fossil fuel-related activity, at $277 billion (47% of the total support to fossil fuels).”
Currently, incentives for the clean energy industry pale in comparison to the massive incentives offered to the fossil fuel industry. According to the International Renewable Energy Agency, subsidies for renewable energy power generation only make up about 20% of total energy sector subsidies.
Another way governments are trying to encourage the clean energy transition is by offering tax breaks for consumers who purchase clean energy products such as electric vehilces or rooftop solar panels, but these measures are often overestimated in terms of their ability to boost clean energy adoption, since they still put the onus on consumers to help fund the clean energy transition.
A turning point could take a bit longer
While renewable sources of energy such as solar are finally becoming price-competitive with (or even cheaper than) fossil fuels in many cases, the industry still has a long way to go, especially in terms of its ability to provide returns for shareholders.
It’s undeniable that the world needs to eventually reach a turning point where fossil fuel demand peaks and the majority of new energy demand is met by renewable energy sources. The turning point could come soon, though it may come at a different time for investors compared to the industry itself.
A key factor to watch is government financial and policy support for the clean energy industry. Since government subsidies are an essential piece of the puzzle for fossil fuel stocks, I don’t see much of a chance of the situation being any different for clean energy. Energy is the lifeblood of the economy, so prices remaining low enough are paramount to continuing economic growth. I’m also keeping a close eye on insider buys in the sector.
