Why NextEra’s energy partners sank today

Shares NextEra Energy Partners (NEP -6.66%) fell today, down to 8.1% as of 2:45 p.m. ET. The renewable energy limited partnership company purchases and maintains cash-flowing solar, wind and geothermal energy projects under long-term power purchase agreements (PPAs) and then pays out most of the cash flows in distributions to unitholders.

NextEra has been amid bullish sentiment on renewable energy stocks in recent days as potential winners in AI data center-driven electricity demand.

However, on Thursday, one Wall Street analyst threw cold water on this thesis.

Not as big a beneficiary as you might think

Thursday, JPMorgan Chase analyst Mark Strouse downgraded NextEra from Neutral to Sell with a $25 price target, down from the company’s $34.55 share price earlier in the day, which is slightly below NextEra Partners’ share price for most of the year.

NextEra was severely punished last year as rising long-term interest rates made financing purchases of renewable energy projects much more difficult and expensive. Given NextEra’s need to continually tap capital markets to finance projects and development, this has caused the company’s stock to decline, depriving the company of a potential source of financing through a capital raise. In fact, given continued high interest rates, Strouse believes NEP will need to conduct a highly dilutive capital raise or sell other assets to finance new purchases.

As if that wasn’t enough, it appears that from June, the tariff exemption on imports of solar panels from China and Southeast Asian countries will be removed, adding a tariff of between 25% and 50% on panels imported from these low-cost countries. In 2022, the Biden administration imposed a two-year waiver on Asian solar panels to spur the deployment of renewable energy while American production capacity increases. While some developers like NextEra may have hoped for an extension, it appears the administration is sticking to its schedule, which could drive up costs for new projects.

NextEra should survive this bumpy period, but the stock is risky

During a conference call held last quarter, NextEra Energy (FROM HOME -1.31%) CEO John Ketchum noted that the affiliate will be able to handle any potential cost increases, that it has inventory under contract through 2026 and that its power purchase agreements have language that protects against cost increases. Still, the potential for more expensive panels could mean NextEra Energy Partners will have to raise more money to finance projects, even if the returns on those projects are the same.

While NextEra Energy Partners’ dividend may look juicy today at over 10%, it’s important to remember that it will need to finance new projects in order to grow. Long-term PPAs being paid out today will not increase solely due to new demand for electricity from data centers. So it may have been a bit premature to buy NextEra Energy Partners stock, especially over the last few weeks.