Investors in the clean energy sector have faced significant challenges this year, with solar stocks suffering steep declines. However, the utilities sector has emerged as a bright spot in U.S. equities, delivering strong returns and attracting renewed interest from investors. As the clean energy landscape shifts, utilities are capitalizing on surging demand driven by artificial intelligence (AI) applications and data centers, setting the stage for continued revenue growth across various customer segments.
In a striking contrast to the struggles faced by solar companies, utilities stocks have shown impressive performance. Notably, Texas-based power producer Vistra Corp has outperformed tech giants like Nvidia (NVDA.O) since March, highlighting the sector’s robust resilience. Equity analysts remain optimistic about utilities for the remainder of the year, particularly if U.S. interest rates are lowered. Such a move would reduce debt financing costs for infrastructure development, service expansions, and grid upgrades, further benefiting the utilities sector.
The positive outlook for utilities stands in sharp contrast to the turmoil in the solar industry. This month, SunPower (SPWR.O), a prominent player in the solar sector, filed for bankruptcy. Once valued at over $9 billion in early 2021, SunPower has agreed to sell most of its assets for just $45 million after accumulating substantial debt. The solar sector’s troubles are compounded by rising interest rates, which have increased system prices, cost inflation for parts and labor, and reductions in power sale prices.
The difficulties in the solar industry extend beyond U.S. borders, with major players like Israel’s SolarEdge and China’s Longi announcing layoffs. The largest U.S. solar exchange-traded fund (ETF), the Invesco Solar ETF, has lost 24% of its value this year and is down 55% since August 2022. In contrast, the Utilities Select Sector SPDR Fund, the largest utilities ETF, has gained approximately 18% year-to-date, outperforming the Vanguard Information Technology ETF over the same period.
The upswing in utilities stock prices is not limited to Vistra. Other key players like Constellation Energy (CEG.O) and NRG Energy have posted gains of over 50% year-to-date. NextEra Energy, Southern Company, and American Electric Power Company (AEP.O) have also seen gains of around 20% this year. This strong performance suggests that utilities could benefit further if investors from the solar sector shift their focus.
Utilities with substantial nuclear power portfolios, such as Vistra and Constellation, have outperformed their peers due to the stable and substantial power supply provided by nuclear reactors. Nuclear energy’s ability to deliver continuous, clean power makes it attractive to power-hungry firms requiring massive computing capabilities. Utilities expanding their renewable energy generation and battery storage systems are also well-positioned for future growth, attracting attention from investors seeking abundant clean electricity.
Analysts highlight companies like NiSource, with its service area spanning Pennsylvania to Ohio, and Florida-based NextEra as having strong growth potential due to their increasing renewable power capacities. Duke Energy, with its extensive generation footprint in the Carolinas, and Southern Company, operating across Georgia, Alabama, and Mississippi, are also frequently recommended by analysts.
For investors seeking exposure to the utilities sector, a variety of ETFs from Vanguard, S&P Global, Fidelity, and Invesco offer dedicated options. As clean energy investors grapple with losses in the solar space, many may consider reallocating funds to the utilities sector stocks, where the outlook remains robust and increasingly positive. With most utilities integrating growing volumes of clean power into their systems, they present an attractive option for investors even if they are not solely focused on renewable energy production.
