Uncertainty surrounding clean energy incentives and rising interest rates have left these clean energy leaders in a bind.
Share of Clean Energy Leaders quantum scape (QS -4.16%), solar edge (SEDG -10.53%)and sunnova energy (Nova -2.87%) It fell sharply on Tuesday, dropping 4.4%, 10.5% and 3% through Tuesday’s trading.
QuantumScape is an early-stage, next-generation electric vehicle (EV) battery manufacturing company, SolarEdge is a rooftop solar inverter company, and Sunnova is a solar energy services company that provides long-term power generation agreements (PPAs) to customers.
The three companies have several things in common. The companies are highly leveraged in the deployment of clean energy technologies and are currently losing money, making them highly sensitive to long-term interest rates.
Unfortunately, all of these factors have worsened with the election of President Donald Trump, and long-term interest rates have risen particularly sharply today.
Long-term interest rates may be the biggest risk
Long-term interest rates determined by the 10-year Treasury rose more than 12 basis points today, yielding 4.433% as of 3:14 p.m. ET. Notably, long-term interest rates have been rising over the past month and have continued to rise gradually since the election. Although interest rates were lower earlier this year, the prospect of potential tax cuts and tariff hikes from the Trump administration raises the possibility of higher inflation and, in turn, higher long-term interest rates.
Rising interest rates have completely decimated both the solar power and electric vehicle industries this year. Rooftop solar and cars are both big-ticket products that are typically financed, so rising interest rates would be very detrimental to both industries. So it’s no surprise that all three stocks are down as long-term interest rates rise today.
Additionally, all three stocks have struggled since Trump and the Republican Party were elected to Congress last week. It is believed that Republicans may seek to repeal Inflation Control Act incentives for both rooftop solar and electric vehicles.
However, the second threat may be a bit of an exaggeration. Many of the IRA’s incentives go disproportionately to red districts, and 18 Republican senators recently wrote a letter to Speaker Mike Johnson warning him not to eliminate incentives altogether. Additionally, having Elon Musk as a big Trump backer and donor could lessen the impact on electric vehicle incentives.
Still, even if IRA incentives remain in place, a higher interest rate environment could pose a serious headwind for these companies.
Image source: Getty Images.
QuantumScape recently achieved a major goal by shipping its first anode-free solid-state battery for customer testing, but the company is still largely unprofitable and burns through cash every quarter. Management said recent cost cuts have extended the company’s cash runway through 2028, but any equity financing would be dilutive or debt financing would be more costly in a high interest rate environment. QuantumScape, which burned through $110 million last quarter alone, is now hard at work aiming for commercial adoption of its next-generation solid-state battery cells.
The situation is dire for SolarEdge, too, with revenue collapsing and profits slipping into the red over the past year. Rising interest rates and a changing regulatory landscape have devastated the rooftop solar market, particularly in Europe. Last quarter’s revenue decreased by a significant 64.1%, and gross profit margins were significantly negative. SolarEdge has slightly more cash than convertible debt, but if losses continue at the current pace it may need to raise more capital, which would still be bad for shareholders in a high interest rate environment. This will be costly.
A similar phenomenon applies to Sunnova, which is more of a services company than a hardware company. Still, Sunnova’s financial profile resembles that of a financial company, as it installs solar power systems and collects revenue under long-term PPAs. A rising interest rate environment and a potential decline in fossil fuel prices could limit demand for solar PV services, while rising long-term interest rates also reduce the value of long-term fixed cash flows from PPAs .
And of course, none of these three companies are profitable, so if long-term interest rates rise, the present value of each company’s theoretical cash flows over the future will decrease, even if each company manages to be profitable at some point. will decrease.
There may be opportunities in clean energy technologies, but these three appear to be in jeopardy
The recent decline in clean energy prices in general could present some bargain opportunities. Indeed, QuantumScape’s product milestone is worth noting because it has the potential to revolutionize batteries.
But it would be wise to look for bargain clean energy opportunities in healthy companies that are currently at least profitable, or close to it. You probably shouldn’t bet on clean energy stocks right now, as the interest rate environment could change quickly and the regulatory environment could become less stringent. Unfortunately, it looks like each of these three elements will need to change. The sooner the better.
