Why Renewable Energy Stocks Were Rocked by the CPI Report Today

Renewable energy stocks are dropping Tuesday after the Bureau of Labor Statistics reported inflation data for January 2024. The Consumer Price Index (CPI) was up 0.3% from a month earlier and 3.1% from a year earlier, which was above the 2.9% increase analysts expected.

Investors have been watching the CPI for indications about what the Federal Reserve will do with interest rates and the expectation is that higher inflation will lead to higher interest rates in the future.

The reaction was swift today with NextEra Energy (NEE -4.59%) falling as much as 5.05%, SunPower (SPWR -13.34%) dropping 15.1%, Plug Power (PLUG -9.96%) down 10.7%, and ChargePoint (CHPT -9.47%) declining 11% at their morning lows. At 12:30 p.m. ET, the stocks were down 3.8%, 12.3%, 9.9%, and 9.5% respectively.

Why interest rates are hurting renewable energy stocks

Each of these companies sits in a slightly different position in the renewable energy industry. Plug Power and ChargePoint are making components, SunPower is an installer, and NextEra Energy, through both its utility and subsidiaries, is one of the biggest wind and solar energy asset owners in the world. But they’re all hurt by high interest rates.

When a wind or solar energy project is built it will generate electricity for 30 years or more. Developers often finance projects based on the long-term electricity and ultimately the price they can sell that electricity for to utilities. Higher interest rates mean the long-term cash flows are worth less while lower rates mean cash flows are worth more, at least on a relative basis.

This dynamic is why a delay in lowering rates would be bad for renewable energy companies.

Interest rates in perspective

With that context in place, what investors are really reacting to is the expected pace of Federal Reserve interest rate cuts in 2024. Coming into the year, investors expected multiple rate cuts, potentially starting next month, but that’s likely to be put off if inflation remains high.

The Federal Reserve only controls short-term rates, but long-term rates are impacted by future expectations, and today the 10-year U.S. government bond yield is up 12 basis points to 4.3% and the rate is up 35 basis points over the past month.

This steady increase in interest rates is what’s impacting renewable energy stocks today.

Reversing a recovery

One of the problems today is there was a recovery building for renewable energy companies over the past week. Earnings have indicated that a recovery is on the horizon and investors were betting that some companies would see that recovery by the middle of the year.

I don’t think today’s news fundamentally shifts that recovery chance and companies weren’t predicting an uptick in demand until later in 2024. But the market can be very volatile depending on the news and that’s exactly what’s happening today.

Investors should ignore these short-term moves and stay focused on the direction earnings are headed because that’s ultimately what will drive stocks, more so than a small move in interest rates.

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