What
Renewable energy stocks had a nice recovery this week -- particularly those involved in installing or financing solar projects -- after months of downward pressure.
According to data provided by S&P Global Market Intelligence, shares of Hannon Armstrong (HASI 2.12%) jumped as much as 18.2% this week, Sunrun (RUN 5.97%) was up by as much as 15.3%, and Sunnova Energy (NOVA 8.70%) popped by as much as 16.6%. As of 12:15 p.m. ET Friday, those stocks were up 14.4%, 12.1%, and 12.8%, respectively, for the week.
Image source: Getty Images.
So what
Interest rates were a big driver of those gains as the rates on long-term debt reversed course in the second half of the week from their recent upward run. As I'm writing, the rate on 10-year U.S. Treasuries was 4.63%, down from a peak of over 4.8% earlier in the week.
Solar projects are often financed for 20 or 30 years, so higher Treasury rates would either require installers to reduce their upfront costs or produce higher energy rates to make returns equivalent.
On the cost front, we have seen some indications that suppliers are getting squeezed by solar installers. This week, Maxeon Solar Technologies reported a drop in shipments and profitability in its preliminary third-quarter report, and the market is projecting that other suppliers will report similar trends.
At the same time, prices for commodities like oil and natural gas are rising, which means electricity prices will likely climb, and those sources are the natural competition for solar and other renewable energy sources. Add it up, and the market has had reason to see the future looking a little brighter for these companies.
Now what
The long-term trends are still challenging, with higher interest rates and inflation putting pressure on some costs. So investors should temper their growth expectations for installers like Sunrun and Sunnova. But it's possible they will be able to raise prices a little and put pressure on suppliers, resulting in profitable operations in coming quarters.
Financiers like Hannon Armstrong are likely to face a slightly more challenging environment as higher interest rates put pressure on their cash flows. But this is a period of adjustment for the company and the industry; eventually, there will be a new level of normal financing activity.
As we get closer to seeing the quarterly earnings reports from all of these companies, there are three things I'm going to watch closely.
First is the volume of projects being built and financed. If volume is down, that's bad for everyone.
The second factor is margins for installers. If they're not making money, they might pull back on installations.
Finally, we need to gauge how much pressure is being put on suppliers of solar panels, inverters, batteries, and other equipment. If installers aren't making money, they will pressure suppliers, squeezing their margins.
For this week, the market is a little more optimistic about the future of the renewable energy industry, but there are still a lot of questions to be answered. Some of those answers will come in the next few weeks of earnings.
