What happened
Growth stocks and renewable energy stocks had a rough day on Thursday as the market weighed the impact of higher interest rates in 2022. The sell-off was broad, and some of the biggest names in renewables dropped double digits.
Enphase Energy's (ENPH -4.60%) shares closed the day down 12.3%, Bloom Energy (BE -4.25%) dropped 11.6%, Maxeon Solar Technologies (MAXN -3.31%) fell 9.6%, and Daqo New Energy (DQ -0.17%) fell 8.5%. Each stock was down over 12% at one point in trading today.
Image source: Getty Images.
So what
During a panel at the International Monetary Fund Debate on the Global Economy, Federal Reserve Chair Jerome Powell said a 50 basis-point rate increase is on the table for its May meeting. Rates were increased by 25 basis points in March and with inflation heating up, the Federal Reserve is looking to get more aggressive.
San Francisco Fed President Mary Daly was even more aggressive. She said that rates would move "expeditiously" higher because the economy doesn't need stimulus any longer.
When the Federal Reserve says they're raising rates, they're really talking about short-term rates of a month or two, but it's the 10-year Treasury rate that's most often seen as the benchmark for the industry. That rate is now 2.89%, up six basis points today and 60 basis points in the past month.
Rates were expected to move higher, but the speed and rate of change is what's jarring to investors. For renewable energy companies, this is unwelcome news because most are borrowing money to fund projects and intending to pay bad debt through revenue generated years or decades in the future.
Now what
While it's not good for renewable energy manufacturers or project developers to see rates go up, this isn't entirely surprising. The industry has been expecting rate increases, and investors have been selling renewable energy stocks across the board in anticipation of higher rates impacting growth.
What's worth noting is that higher rates will lead to higher required rates for electricity sold to consumers or utilities, but we're seeing inflation across the board. Natural gas, oil, labor, metals, and other commodities are all up, and that likely means that competing energy sources are also getting more expensive. On top of that competitive dynamic, interest rates are still near historic lows, so projects should still be profitable.
While no one in renewable energy likes to see interest rates go up, this isn't something I'm concerned about long term. The industry will still be competitive, and long-term costs continue to come down for wind, solar, and hydrogen. These should be tailwinds that are more important than a short-term change in interest rates that investors were expecting, anyway.
