Please ensure Javascript is enabled for purposes of website accessibility

Why Solar Energy Stocks Are Suddenly Hot Again

By Travis Hoium – Nov 2, 2021 at 8:43AM

Key Points

  • Fossil fuel prices are up, and that's helping solar energy stocks.
  • Billions of dollars in subsidies could be on their way to the alternative energy industry.
  • If interest rates continue to decline, it could be a boon for solar energy development.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Headwinds have turned into tailwinds for the solar industry.

The past few months have been kind to solar energy stock investors, with many of the industry's biggest names rising 50% or more. There haven't been significant changes in the industry yet, but there's speculation that brighter days are ahead. 

The residential solar industry has been particularly hot with Enphase Energy (ENPH 2.45%), SunPower (SPWR -0.93%), SolarEdge Technologies (SEDG -0.04%), and Sunrun (RUN -1.77%) all moving sharply higher. But First Solar (FSLR -0.94%) is rising as well, and this may simply be a tide that lifts all solar boats in 2021. And there's good reason to think that the increase in stock prices could last. 

SPWR Chart

SPWR data by YCharts

Energy is up

One big help is that energy commodities are up quite a bit in 2021 and show no sign of stopping. Fossil fuel consumption is back to pre-pandemic levels in most cases, and suppliers simply can't keep up. Companies from coal to oil and gas cut back spending during the pandemic, which reduced output just as demand returned. The result is the sharp rise in prices that you see below. 

Henry Hub Natural Gas Spot Price Chart

Henry Hub Natural Gas Spot Price data by YCharts

When will high energy prices subside? There's no clear answer. Energy producers don't seem particularly interested in investing heavily in increasing supply now that they're swimming in profits again. And a strong economy means consumers have the money to spend on energy to drive and heat their homes without cutting down consumption. 

High energy prices seem to be here to stay for a while, and that means that alternatives like solar energy should get more investment. 

Subsidies are coming

Just as solar is growing on the back of being cost-competitive with fossil fuels, there could be subsidies on the way. The most recent infrastructure package making its way through Congress includes $320 million for clean energy and electric vehicles, which should give the industry a boost. 

Subsidies have always been a key to solar industry growth, but at a time when competing energy costs are already high, they could be a further boon for the industry. Whether you're a homeowner or utility, it's hard to see how increased subsidies wouldn't make solar energy a no-brainer. 

Large hill with solar panels.

Image source: Getty Images.

The biggest fear in solar is subsiding

At the end of the day, oil and gas prices and subsidies have less of an impact on the solar industry than interest rates. Solar projects produce energy for 20 years or more, and they're normally financed for a long period of time as well. Rising interest rates mean future cash flows are less valuable, making a solar project less valuable. 

You can see below that late in 2020 and early in 2021 interest rates were rising, which was a concern to investors. But interest rates have stabilized, and that's been a positive for the future of solar. 

10 Year Treasury Rate Chart

10 Year Treasury Rate data by YCharts

If interest rates stay stabilized, or even fall, it would help make every solar project more cost-competitive. That's why interest rates can often be the biggest driver of solar energy stocks. 

Momentum could continue for years

I don't see fossil fuel prices coming down anytime soon given the economic environment and alternative energy subsidies that could be in place for many years, depending on what's passed in Washington D.C. So, the increase in solar energy stocks may not be short-lived this time. We may be seeing a real turning point for the industry, and that's why I remain bullish on solar stocks as leaders in the energy industry today. 

Travis Hoium owns shares of First Solar and SunPower. The Motley Fool recommends First Solar and SolarEdge Technologies. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.