The rally in renewable energy stocks continued on Thursday and it extended to everything from utilities to product suppliers. Yesterday's Federal Reserve meeting and the expectation of lower interest rates in 2024 and 2025 have given the market a boost and energy assets have become some of the favorites today.
Both NextEra Energy (NEE -1.36%) and its subsidiary NextEra Energy Partners (NEP -0.89%) jumped as much as 3.3% and 8.5%, respectively, in morning trading. More direct renewable energy companies were also up sharply with QuantumScape (QS 5.69%) rising 11.9%, SunPower (SPWR 5.85%) jumping 20.9%, and Plug Power (PLUG 1.26%) gaining 15.5%. At 1 p.m. ET, shares of all five stocks are near their daily highs.
Interest rates provide the market fuel
The Federal Reserve said it will keep short-term rates flat for now, but it doesn't control long-term rates that provide a benchmark for corporate borrowing. Those are set by the open market.
After falling sharply yesterday, the 10-year yield fell another 10 basis points for U.S. government bonds, 20 basis points in Mexico, and between 5 and 14 basis points in Europe. Clearly, the financing environment will get less expensive for companies building renewable energy projects.
This has two impacts on renewable energy companies and stocks. One is the market moving to riskier assets as yields fall, which pushes up the value of stocks like QuantumScape and Plug Power that are still very speculative. Second, lower rates will make investment in the projects more compelling. Just like with a mortgage, lower rates mean lower monthly payments and better margins for installers.
Where do we go from here?
It's important now to understand the difference between the companies that will benefit directly from lower interest rates and where rates will be a more indirect tailwind.
Companies financing projects like NextEra Energy, NextEra Energy Partners, and SunPower are going to benefit from lower rates and that benefit could hit in the next few quarters. NextEra Energy Partners specifically fell in 2023 because investors were concerned that it wouldn't be able to refinance project debt at attractive terms, but that concern has likely gone away as rates have dropped. I would expect management to lock in some of the current rate drop in the next few quarters to reduce long-term risk.
SunPower drops projects down to its financing partners and the current rate environment should lead to higher margins relatively quickly. Volume may take a while to pick up, but there will be a noticeable tailwind from interest rates in 2024, just like there was a headwind in 2023.
Companies like QuantumScape and Plug Power are in a more precarious position. They need customers to buy their systems and finance them, so they're not directly benefiting from lower rates. And while utilities or auto companies may be interested in their technology, those customers are now also thinking about the risk they have in taking on new technology and the interest rate risk that flared up in 2023. As a result, benefits may take much longer to materialize and that's why their current losses are a big concern.
Expect interest rates to be a hot topic for the renewable energy industry throughout 2024, and if rates keep falling it would be very bullish for the industry.
