Solar Stocks Surge as Prospect of Lower Interest Rates Boosts Sector

Solar stocks have experienced a notable climb in response to the Federal Reserve's indication that interest rates may be cut next year. This announcement has alleviated concerns regarding diminishing demand for solar panels.

In early trading on Thursday, Enphase Energy stock saw a significant surge of 14%, accompanied by Sunnova Energy International. Sunrun also gained 13%, while SunPower and First Solar rose 12% and 8.3% respectively.

Over the past few months, solar stocks have faced significant challenges. The elevated interest rates have hampered demand as homeowners struggle with increased financing costs. However, if the Fed follows through with rate cuts, as signaled in its latest monetary-policy decision, this could prove to be a significant hurdle overcome for the industry as a whole.

According to Baird analyst Ben Kallo, who published a research note ahead of the Fed decision, the rising interest rate environment has not only restricted access to capital but has also been a major driver of the selloff in the broad renewables space. Kallo highlights First Solar as the cheapest stock in the solar sector based on its current valuation relative to historical ranges.

Yet, it is important to note that interest rates are not the sole factor negatively impacting solar energy companies of late. Competition from China, particularly in the European market, has also been a headwind and is expected to persist until 2024.

In a report published on Thursday, analysts at energy consultancy Wood Mackenzie revealed that the cost of producing solar modules in China has decreased by 42% over the past year. They also stated that China currently dominates the supply of solar modules and is likely to maintain this dominance for the next decade or more.