What happened

Shares of SolarEdge Technologies (NASDAQ:SEDG) fell as much as 10.6% in trading on Monday as solar energy stocks plunged across the board. The stock closed near its low, ending down 10.3% for the day.

So what

The biggest factor driving shares of solar energy stocks lower today was interest rates. The market was suddenly worried about rising interest rates, which can increase the cost to borrow money to pay for residential and commercial solar projects.

Light glinting off solar panels on the roof of a large home

Image source: Getty images.

Higher rates don't directly impact SolarEdge's business, but indirectly they do. If installers have to pay more to finance solar projects, they'll have to charge their customers more, making solar energy less viable for homeowners and businesses. Installers' other option is to put pricing pressure on suppliers, like SolarEdge, which then squeezes its margins.

Now what

You can think of low interest rates as rocket fuel for the solar industry, and some of that fuel is being pulled out of the market right now. Rates are still extremely low by historical standards, but they're up sharply from lows in late 2020, which has investors concerned.

I don't think higher rates will be a hindrance to solar energy short-term, because the business doesn't change quickly based on rates. But investors should be aware that higher borrowing costs could slow the industry over the next few years if this trend continues.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.