Renewable energy stocks continued their hot streak this week, but it wasn't strong earnings or big signings that had investors buying shares. Instead, it was simply speculation about the future of interest rates and pushed valuations higher.
According to data provided by S&P Global Market Intelligence, shares of Enphase Energy (ENPH +1.63%) were up 16.3% between the close of the market last Friday and the close on Thursday, SunPower (SPWR +0.00%) was up 14.2%, Brookfield Renewable Corp. (BEPC +0.00%) gained 16.3%, and ChargePoint Holding (CHPT +0.48%) popped 15.5%.
Despite the strong start to the week, ChargePoint ended up falling as much as 37.7% early in trading on Friday, which I'll get into.
NASDAQ: ENPH
Key Data Points
Interest rates rule the day
The biggest reason renewable energy stocks are down in 2023 is rising interest rates. Higher rates make it more expensive to finance renewable energy projects, just like higher financing costs make the monthly payment on a mortgage more expensive. The industry's choices are then to cut back installations to match where they make sense financially, or put pressure on suppliers to lower up-front costs.
This dynamic has led to declines in demand for installers, lower sales and margins for suppliers, and fear of higher long-term costs for financiers.
You can see that trend has turned in the past month, and this week, rates continued to go sharply lower.
10 Year Treasury Rate data by YCharts
This week's reduction in rates accelerated when inflation data showed consumer prices being flat month over month. This is just the latest sign that prices are cooling, demand for products may be slowing, and the Federal Reserve may pause rate hikes long term or even reduce rates if prices start to fall.
At ChargePoint, the CEO and CFO announced their resignations yesterday, and the company said preliminary third-quarter 2023 results would be much worse than expected. It's now questionable how the company survives long term, given its cash burn rate.
Will the renewable energy comeback continue?
The market has been speculating on rates all year, so on a day-to-day basis, that's what's driving stocks. But we've seen in just the last month that renewable energy companies are distinctly impacted by rates because of the cost dynamic I covered. Companies like Enphase and SunPower have announced both lower demand and lower margins late in the year, and that has accelerated stock declines.
If rates indeed stop going up, or even fall, in 2024, that would make it easier to finance renewable energy projects at a profitable level and make it easier for companies to grow profitably.
I showed the 10-year U.S. Treasury bond in the chart because that's often a proxy for the long-term financing cost of renewable energy projects, and it's actually lower than short-term rates.
Despite the relatively positive financing news, the renewable energy industry isn't out of the woods. Financiers are going to have to refinance low-cost debt over the next few years, and that may pull resources from what may have been invested in new projects previously.
On the plus side, rates are falling just as utilities are increasing their rates for consumers, which will make it more attractive to install solar panels on roofs.
The push and pull of cost and demand continues to move back and forth. For this week, falling rates is a benefit to renewable energy companies, but that may not last for long.
