Why Solar Stocks Soared on Thursday

Solar stocks rose double digits Thursday after inflation data came in cooler than expected. The closely watched Consumer Price Index (CPI) fell 0.1% month-on-month in June after being flat in May. Prices have risen just 3% over the past year.

Inflation is a key indicator that investors watch to predict what the Federal Reserve will do with interest rates. High inflation has led to higher interest rates over the past two years, and now inflation appears to be reversing. The Federal Reserve could change its interest-rate policy to stimulate the economy as early as its September meeting.

Shares of solar energy companies, including Solar power (SPWR 8.86%), Sun Run (START 15.59%)AND Sunnova (NEW 18.31%)reacted positively because interest rates are a key driver of the value generated by long-term contracts to sell electricity to customers. SunPower shares were up 10.5% on Thursday, while Sunrun was up 14.2% and Sunnova was up 17.6%. The shares were up 6.5%, 14% and 16.8%, respectively, as of 3 p.m. ET.

Solar, Energy and Interest Rates

Interest rates have always been a key driver of the solar industry, as most installations are paid for upfront by installers and generate a payback over 20 to 30 years. All three companies generate the majority of their sales through power purchase agreements, or long-term contracts to sell electricity to customers, while the installer owns the system on the customer’s roof. This means the installer must find financing to justify the installation in the first place.

Higher interest rates over the past two years, combined with policy changes in California, have had a cooling effect on the solar industry, with solar stocks taking the biggest hit.

Other than interest rates, the only two levers companies can pull to increase margins are cost reductions, which reduce the upfront investment in solar installations, or raising prices for customers, which ultimately makes switching to solar less attractive. Cost reductions are working their way through the system, and solar panels and inverters have been falling over the past two years, but interest rates continue to hinder the industry’s growth. That could change.

Caution on interest rates

According to Bloomberg, the 10-year Treasury rate fell 9 basis points today, mainly based on CPI information. Rates are down 21 basis points over the past month to 4.19%.

This is a benchmark for the photovoltaic industry and the decline would be welcome, but for now these moves are still modest and will not make companies profitable overnight.

Investors need to watch the trend in installed costs to see if costs are falling, which would be a lasting boost for the industry. We’ll learn more about progress on both the cost and pricing fronts when earnings are released in a month or so, but it seems like the worst may be behind us for the industry. Falling interest rates could be the boost solar stocks need to finish 2024 on the right foot.