What happened 

Shares of renewable energy stocks were crushed in trading on Monday as fears over rising interest rates hit the market. Losses were widespread, but the biggest names in renewable energy were hit hard. 

Shares of SunPower (SPWR -13.37%) dropped as much as 11.7% and are down 10.2% at 2:05 p.m. EST. Enphase Energy (ENPH -2.17%) dropped as much as 11.2% and is now down 9.4%. Sunworks (SUNW) had fallen 15% and is currently off 13.9%. Finally, Bloom Energy (BE 0.82%) dropped 8.7% midday and is now down 7.2%. 

Solar farm with a setting sun in the background

Image source: Getty Images.

So what

The market's whims can move in a number of different directions day to day, and today the focus is on interest rates. As you can see below, interest rates have been rising all year, and investors are now worried that higher rates are going to slow the economy and lower returns for renewable energy projects

10 Year Treasury Rate Chart

10 Year Treasury Rate data by YCharts

The concern over rising rates for renewable energy companies is very real. Wind, solar, energy storage, and other assets have large up-front investments that are paid back over decades. To pay for the up-front cost, developers normally use debt financing, so higher rates mean lower rates of return on projects, all else equal. That tends to result in fewer projects being built and lower margins all the way down to component manufacturers. 

The chart above may look scary when you consider how reliant renewable energy companies are on debt financing. But let's put today's rates into a bit of perspective. A year ago (prepandemic) rates were higher than they are today, and three years ago rates were more than double what they are today. If renewable energy could thrive in those environments, a small increase in rates off historic lows shouldn't be the end of the world. 

10 Year Treasury Rate Chart

10 Year Treasury Rate data by YCharts

When you look at it this way, the rise in rates doesn't seem as daunting. 

Now what

Some of the losses today can be attributed to renewable energy stocks running too high too fast over the last six months. And now we have a combination of rising rates and companies reporting earnings that don't quite fit the high-growth narrative. But the reality for the renewable energy business is that it's a long game for investors. Now that wind and solar energy are competitive with fossil fuels on a broad scale, the industry will grow and need new technologies like hydrogen to fill an energy storage gap (which is where Bloom Energy comes in). Today's move isn't a reason to change your investment thesis, but rather a time to understand how interest rates can be a tailwind or a headwind depending on which direction they're heading.