There wasn't a lot of positive news in 2023 for the solar energy industry. Rising interest rates, higher labor costs, and regulatory changes all hit the industry hard, sending stocks lower across the board.
According to data provided by S&P Global Market Intelligence, SunPower (SPWR 5.85%) fell 73.2% during 2023, Enphase Energy (ENPH 3.80%) was down 50.1%, and SolarEdge Technologies (SEDG 2.81%) was down 67%. Shares haven't made much of a recovery in the first few days of trading in 2024.
Interest rates take a bite out of solar energy
The biggest impact on solar energy companies in 2023 was interest rates. Higher rates make it more expensive to finance energy projects, and that cuts into margins for installers, putting pressure on the entire industry.
10 Year Treasury Rate data by YCharts
The good news is rates are starting to come down. You can see in the chart that the 10-year U.S. government bond rate has come down nearly a full percentage point in the last few months, which will make it easier to finance projects this year. This could reverse some of the margin pressure we saw last year.
California isn't helping
In spring 2023, California instituted what's known as net energy metering 3.0, which changed the rate consumers received for sending electricity back to the grid. This both made energy storage more valuable and negatively impacted the economics of rooftop solar in general.
There have been signs the industry is starting to figure out pricing and sales under the new structure, but through the third quarter of 2023, sales were impacted significantly by the new rule changes.
While higher rates squeezed margins everywhere, in California bookings have dropped, and only now there are signs that sales are picking up.
Solar energy is down, but not out
Lower-than-expected demand from residential solar installers impacts companies like SunPower directly, and Enphase and SolarEdge are downstream from those installers. They saw fewer orders in the third quarter and expect sales to slow at least through the beginning of 2024.
We also haven't yet seen if the drop in end-market demand will translate to pricing pressure for suppliers like Enphase and SolarEdge. Sunrun, the company with the largest market share in the U.S., said it expects component costs to come down in 2024, so that could mean further margin pressure on suppliers even if demand picks up.
Add it all up, and the market simply threw the solar industry out in 2023. It's understandable that so many headwinds are causing stocks to drop, but there are also some reasons to be optimistic.
The solar industry overall continues to grow both in the U.S. and internationally. That'll be a tailwind for a long time to come. There are also falling interest rates, which should help more projects get financed in late 2023 and into 2024. But the biggest reason to be bullish on solar energy long term is the fact that utility rates are rising rapidly, which is ultimately what a rooftop solar installation is compared against.
The U.S. Energy Information Administration said electricity bills rose 13% on average from 2021 to 2022, and while full data for 2023 isn't out yet, we have seen some utilities request rate increases in excess of 10%. That'll make solar energy more affordable on a relative basis, but it'll take time for customers to see this benefit. The companies that can survive could thrive long term.
