The stock market is having a rough start to 2024, and that's causing the renewable energy industry to give back a lot of what was gained late in 2023. Today, stocks dropped because the Federal Reserve's meeting minutes from December were released and weren't as rosy as the market thought.
Shares of renewable energy asset owner NextEra EnergyPartners(NYSE: NEP) fell as much as 5%, SunPower(NASDAQ: SPWR) fell 11.5%, and Maxeon Solar Technologies(NASDAQ: MAXN) dropped 10.1%. At the market close, shares were down 2.8%, 7.8%, and 5.6%, respectively.
What the Federal Reserve really said
After the Federal Reserve's December meeting, investors began speculating on when the central bank would start cutting interest rates. The timeline seemed to move up and there was bullishness about what that would mean for the stock market and renewable energy stocks in particular.
Today's minutes, which give much more detail about what was discussed, told a different story. Rate increases are not off the table, and the Federal Reserve only thought rates were "likely at or near its peak for this tightening cycle."
It also seemed to indicate that rates could remain at current levels for a long period of time, depending on how the economy does.
What the market reacted to in December was a survey of where officials expected rates to be in the future, which largely predicted rates falling. But this was not the consensus or the final policy of the Federal Reserve.
Why the Federal Reserve matters to solar
Renewable energy investors have been watching interest rates because most projects are financed with debt, so when rates rise it's more costly to develop new projects or refinance old ones. This is what got NextEra Energy Partners in trouble in 2023, but if you look at the trajectory of the 10-year Treasury rate, you can see that rates have been falling for more than two months.
10 Year Treasury Rate data by YCharts
So, the narrative today and the reality of the last few months are very different. We even saw the 10-year rate fall 2 basis points in trading today, which would be very bullish for renewable energy stocks long term.
Falling rates will be felt in different ways by the industry. For NextEra Energy Partners, lower rates means there's more left for equity investors for existing projects and it may be able to finance more growth projects.
SunPower is building and financing residential solar projects that are directly impacted by higher rates through both fewer sales and lower margins. And downstream of that is Maxeon, a SunPower supplier and panel manufacturer focused on the rooftop market.
No matter where you sit in the value chain, interest rates impact renewable energy companies and that's why the market is reacting so harshly today. And it doesn't help that the market overall is down and renewable stocks generally magnify the market.
But look deeper and you find that rates that matter for borrowing in the renewable market -- like the 10-year -- are down since October and that should be bullish for the industry long term.
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Travis Hoium has positions in NextEra Energy Partners and SunPower. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
