The Real Reason Renewable Energy Stocks Are Struggling Amid the AI Boom – What Investors Need to Know

The Korean stock market has been heating up recently. The KOSPI soared by 35% from 2,280 in April to 3,880 in October. Samsung Electronics jumped from 53,000 won to 97,000 won, and SK Hynix skyrocketed from 170,000 won to 480,000 won. Notably, power infrastructure companies have shown remarkable growth. Hyosung Heavy Industries rose from the 400,000 won range to 1.74 million won, more than quadrupling, and LS Electric surged from the 140,000 won range to 360,000 won.

However, what’s strange is that the stock prices of renewable energy companies, which should be leading this power infrastructure expansion, have not risen much. In fact, some have been on a downward trend. Is this a temporary phenomenon, or is there a more fundamental issue at play?

Personally, I believe this situation starkly reveals the reality of the Korean renewable energy industry. The gap between the government’s rosy projections and the actual market conditions, along with the uncertainty felt by investors, is being directly reflected in stock prices.

## The Real Reason Behind the Struggles of Renewable Energy Stocks

The stock movements of companies related to wind and solar energy make this issue clearer. Renewable energy developers like SK Eterics and Daemyung Energy rose from the 30,000 won range in June to the 34,000 won range, only to fall back to the 20,000 won range. The initial optimism at the start of the Lee Jae-myung administration has turned into disappointment as it clashes with reality.

The same goes for wind supply chain companies. Unison, which manufactures turbines and towers, fell from 1,900 won in June to 1,100 won now, and CS Wind adjusted from 53,000 won to 43,000 won. SK Ocean Plant also rose to the 30,000 won range on news of a sale but is now hovering around the 22,000 won range.

The situation is similar for solar companies. Hanwha Solutions climbed near 40,000 won in the first half of the year but is now fluctuating in the 30,000 won range. HD Hyundai Energy Solutions exceeded 50,000 won but remains stuck in the 45,000 to 53,000 won range.

The core reason for this sluggishness lies in the gap between policy and reality. According to industry insiders, “The government presents goals at the level of a rosy blueprint, but the institutional and environmental conditions necessary to achieve these goals are not in place on the ground.” This uncertainty is directly reflected in the market, causing related stocks to struggle.

What specific issues are there? First, there is the complexity and delay in the permitting process. Wind power projects often take years to complete, from environmental impact assessments to obtaining resident consent and grid connection approvals. Solar projects also face unexpectedly long times in obtaining farmland conversion or forest land conversion permits.

Additionally, the limitations of grid connection capacity are a significant hurdle. No matter how many power plants are built, it is meaningless if there is insufficient capacity to connect to the power grid. This issue is particularly severe in regions rich in renewable energy resources, such as Jeju Island and Gangwon Province.

Profitability issues cannot be ignored either. The price of Renewable Energy Certificates (RECs) is unstable, and price competitiveness in the electricity market remains lacking. There is also analysis that the recent rise in raw material prices is further deteriorating project profitability.

## Signals of Rebound in the Battery Industry and Implications

In contrast, the battery industry is showing signs of rebounding from a prolonged slump, drawing attention. In mid-October, LG Energy Solution surged by 7% following its preliminary third-quarter earnings announcement, and EcoPro soared by 27%, igniting the entire battery theme. EcoPro BM (13.29%), Samsung SDI (8.26%), and L&F (12.80%) also rose in tandem.

Several favorable factors have contributed to this rebound. According to Romotion, global electric vehicle sales in September reached 2.1 million units, a 26% increase from the same month last year, setting a new record. The ESS market is also rapidly growing due to the AI data center construction boom.

Notably, the decline in prices of key raw materials like lithium and nickel is improving the production cost of electric vehicles. Additionally, the U.S. has imposed high tariffs of up to 58.4% on Chinese batteries, allowing Korean companies like Samsung SDI, LG Energy Solution, and SK On to secure a competitive edge in the U.S. market.

Japanese automakers and battery companies’ interest is also a positive factor. With customer diversification, dependence on China can be reduced. In the medium to long term, the development of next-generation technologies such as solid-state batteries, large cylindrical 46 series batteries, and high-capacity NCM cathode materials is accelerating, securing growth momentum.

The rebound in the battery industry offers clear lessons for renewable energy investors. The market dislikes uncertainty, and stock prices respond when there is clear demand and technological superiority. The renewable energy industry must also possess these elements to attract investor interest.

However, caution is advised even in battery investments. If the recovery in electric vehicle demand is slower than expected, performance improvement may be delayed, and policy uncertainties such as the potential reduction of the U.S. IRA tax credit could act as variables. The low-cost offensive by China’s CATL and BYD and their expansion into the European market are also factors pressuring profitability.

## Risk Management Strategies for Renewable Energy Investment

So, what should investors consider when contemplating renewable energy investments? Personally, I believe it is crucial to properly identify and manage several key risks.

The first is policy risk. The renewable energy industry heavily relies on government policies. Changes in RPS (Renewable Portfolio Standard) ratios, REC price policies, and grid connection policies can significantly impact corporate profitability. Therefore, it is important to continuously monitor policy changes and choose companies with low policy dependency.

The second is technological risk. While renewable energy technology is rapidly advancing, there is also significant technological uncertainty. Especially for technologies related to ESS or hydrogen, which are still in the early stages of commercialization, there is a risk of technical issues or safety concerns. When investing, it is essential to carefully examine the company’s technological capabilities, patent holdings, and R&D investment scale.

The third is market risk. The renewable energy market is not yet mature, so demand volatility is high, and competition is fierce. The ongoing low-cost offensive by Chinese companies is putting significant pressure on profitability. Therefore, it is important to choose companies with global competitiveness, especially those differentiated in terms of technology or brand power.

The fourth is financial risk. Renewable energy projects require large initial investments and have long investment recovery periods. Therefore, it is crucial to pay close attention to the company’s financial health, particularly its debt ratio and cash flow. It is also advisable to avoid companies overly reliant on project financing or government subsidies.

Finally, ESG risk should also be considered. Just because renewable energy is environmentally friendly does not mean there are no ESG risks. Issues such as the disposal of solar panel waste and the noise and ecological impact of wind turbines can become risk factors in the long term.

To manage these risks, portfolio diversification is important. Instead of focusing solely on specific technologies or companies, it is better to diversify investments across various fields such as wind, solar, ESS, and hydrogen. Additionally, investing evenly across the value chain, including developers, equipment manufacturers, and material suppliers, is a way to reduce risk.

Above all, it is essential to adopt a long-term investment perspective. While the renewable energy industry may experience short-term volatility, it is a sector with assured long-term growth. The transition to renewable energy is an inevitable trend due to carbon neutrality goals and energy security issues. Therefore, it is important to invest with a long-term perspective rather than focusing on short-term profits.

The current sluggishness in renewable energy stocks is disappointing, but paradoxically, such times can also present good investment opportunities. The market’s excessive pessimism may be reflected in stock prices. However, it is advisable not to jump in without thorough research and risk management. Making investment decisions based on realistic business environments and the actual competitiveness of companies, rather than the government’s rosy blueprints, seems wise.

This article was written after reading the Untitled article, adding personal opinions and analysis.

Disclaimer: This blog is not a news outlet, and the content reflects the author’s personal views. The responsibility for investment decisions lies with the investor, and no responsibility is assumed for investment losses based on this article.