Solar stocks get hit as rising interest rates weigh on demand

Solar stocks are taking a beating this year as higher interest rates and a recent policy change in California are squashing demand for rooftop power installations.

On Thursday shares of solar-related companies were mostly higher along with the broader markets, a much-needed relief from their year-to-date downward trend.

The Invesco Solar ETF (TAN) is 40% lower since the start of the year amid recent headwinds across the renewable energy industry.

“In the third quarter, we continued to see difficult market conditions with a contraction in customer bookings and installations that is more persistent than we had previously forecast as a result of the higher impact of higher interest rates on consumer behavior,” Peter Faricy, CEO of SunPower (SPWR), said during the company’s earnings call this week.

Solar industry executives cite a slowdown in California, the largest US solar market, where a recent policy change reduces the amount of money credited to panel owners for sending excess power they generate into the grid.

“This has been a volatile time across the solar industry with changes in important policies and rising interest rates, leading to difficult conditions in the sector,” Mary Powell, CEO of Sunrun (SUN), said during the company's earnings call this week.

The San Francisco-based solar panel manufacturer lowered its growth outlook and promised to cut costs while pivoting towards its battery storage business. The move to "storage first" was cheered by investors, sending Sunrun's stock up 8% on Thursday. Year to date, shares are down more than 50%.

Solar storage allows for excess electricity to be stored and used during times when solar panels aren't generating enough energy.

Lower demand in Europe is also impacting the results of solar companies. Installations skyrocketed after Russia invaded Ukraine and the cost of energy shot up. Demand has fallen and so have prices for solar panel components amid a supply glut and steep competition from China manufacturers.

“We are facing two challenges in Europe, and the situation has dramatically changed from the last quarter from 90 days ago. We saw a much weaker demand recovery from summer," Badri Kothandaraman, president and CEO of Enphase Energy, told analysts during the micro-inverter maker's earnings call. The company's devices are attached to solar panels and convert energy generated into usable energy.

"We also see a lot of distributors facing oversupply of solar equipment, particularly panels,” he added.

The sentiment was echoed by SolarEdge (SEDG), the maker of inverters, which convert solar power into usable energy for the home. The Israeli-based company warned investors about headwinds in October. SolarEdge now sees fourth quarter revenue in the range of $300 million to $350 million, well below the $719 million anticipated by Wall Street analysts.

"Our shipments in the first half of 2023 were at record levels," Zvi Lando, CEO of SolarEdge, said during the company's latest quarterly earnings call. "However, market demand began to slow in the third quarter and distributors began to experience financial challenges. As a result, we received a large amount of requests to cancel or push out orders."

Despite the headwinds, solar companies are banking on rising electricity costs and tax credit tailwinds from the Biden administration’s Inflation Reduction Act (IRA) to get them through this rough period.

"In California PG&E rates are set to rise 9% to 30% in January of 2024," said Faricy during SunPower's earnings call. "We continue to believe that the value of rooftop solar is likely to continue rising."

"Long term, we continue to expect substantial tailwinds for the US distributed solar market including low market penetration, climate utility bills, a strained electrical grid plus a decade of tax benefits under the Inflation Reduction Act," he added.

One industry player that has been able to buck the headwinds is First Solar. The American manufacturer of solar panels has seen steady demand due to the IRA's tax incentives for panels made in the US.

First Solar (FSLR) stock is up more than 1% year to date.

"We view the shares as undervalued after a selloff in recent months on fears of the global solar panel oversupply spreading to the US market," wrote Brett Castelli, equity analyst at Morningstar Investments.

"The firm continues to benefit from its advantaged US position, which constitutes the vast majority of its sales activities, and where selling prices have been largely decoupled from global prices because of trade restrictions on solar panels," he added.

Ines Ferre is a senior business reporter for Yahoo Finance. Follow her on Twitter at @ines_ferre.

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