Hillcrest Energy Technologies. (CSE: HEAT)
From concept to commercialization, Hillcrest is investing in the development of energy solutions that will power a more sustainable and electrified future.
The US Department of Labor released CPI data for June on Thursday, with the Consumer Price Index falling 0.1% from previous month, further cementing expectations that the Federal Reserve could cut interest rates as early as September.
U.S. solar stocks, including SunPower (SPWR), Sunrun (RUN) and Sunnova (NOVA), reacted positively after the CPI data was released. The three stocks were up 7% , 15% and 19%, respectively, by Thursday’s close.
Interest rates have been a key driver of the solar industry, as most installations are paid for upfront by the installer and pay off over 20 to 30 years. All three companies derive most of their sales from what are known as power purchase agreements, long-term agreements in which the installer owns the customer’s rooftop solar system while selling electricity to the customer. That means installers first need to find financing, and higher interest rates mean higher costs.
Rising interest rates over the past two years combined with policy changes in California have been negative for the solar industry and solar stocks have been dragged down as a result.
In addition to interest rates, two other ways that companies can improve their profit margins one is to cut costs and reduce the upfront investment in solar installations, or to raise prices to customers, which ultimately makes it less attractive to install solar equipment. As the cost of solar panels and inverters have been falling over the past two years, the cost reductions have been reflected in the overall system, but interest rates have continued to hold the industry back. And that may be changing.
According to Bloomberg, the 10-year Treasury rate fell nine basis points today after the June CPI report, and 21 basis points over the past month, which is now at 4.19%.
Falling rates are good news for the solar industry. The next thing investors need to watch is the trend in installed costs to see if costs are falling, as this will provide a continued boost to the industry.
Major U.S. solar companies will be releasing earnings reports in the last month or so to make it easier for investors to learn more about progress on costs and prices, but the worst for the industry appears to be behind us. Solar stocks are likely to outperform in the second half of 2024, driven by favourable interest rate declines.