Covid-19 clouded rooftop solar companies’ outlook in 2020. This year the culprit is the prospect of higher interest rates.
After riding the Biden-driven clean-energy rally until January, share prices of residential solar companies Sunrun RUN 11.69% —the largest in the industry—and Sunnova Energy International NOVA 0.74% have reversed their gains. They have now declined 27.5% and 6.3%, respectively, since November, while a larger basket of clean-energy stocks is up 12.1%. Because solar installation is a debt-intensive business, they are especially sensitive to interest rates.
That could end up being an overblown fear. For one, consumers looking to buy rooftop solar are typically comparing those rates with normal utility bills. When interest rates rise, it increases the borrowing costs of debt-dependent utilities, too, which typically pass on those increases to customers. Broadly speaking, residential electricity rates have been rising at a healthy clip. In California, Sunrun’s largest market, they have increased at a compound average rate of roughly 3.35% during the past 10 years, according to the U.S. Energy Information Administration.
Moreover, rooftop solar companies’ borrowing costs have been declining for reasons other than just low interest rates. Larger asset pools tend to decrease financing fees overall and so does the growing operating history of rooftop solar, which makes debt investors more comfortable with the risk. Both Sunrun and Sunnova have suggested green bonds as an option going forward, given interest in sustainable investments.
Expenses continue to be an issue for both companies, though. Their so-called creation costs, which include the cost of installation plus sales and marketing, have been increasing despite growing scale. Though the companies achieved some savings through online selling last year, more significant cost reductions will require structural changes, which will take time. Lynn Jurich, Sunrun’s chief executive officer, said on Wednesday’s earnings call that the industry is working to streamline the permitting process, which can be cumbersome because of inconsistent building codes and permitting rules across jurisdictions.
What investors should pay equal attention to, however, is their growth potential. Sunrun, which held its earnings call late Wednesday, saw revenue grow 58.9% in the first quarter from a year earlier, beating the 47% pace expected by analysts polled by Visible Alpha, though this also includes the effect of its Vivint Solar acquisition. Sunnova also reported a brisk start to the year: Its first-quarter results last week showed revenue growth of 38.4% compared with a year earlier. That follows a resilient 2020. Sunrun and Sunnova saw sales grow by 7.4% and 22.2%, respectively, despite fears that Covid-19 restrictions would hamper business.
Power outages due to wildfires in California and extreme cold weather in Texas raised consumer interest in home power generation. Web traffic to Sunrun surged 350% following the Texas winter storm in February. Going forward, electric vehicles could be the next catalyst for rooftop solar’s growth: Charging a vehicle from home can double a home’s electricity usage and will make homeowners even more receptive to rooftop solar.
Investors shouldn’t let shorter-term fears of higher interest rates obscure solar’s blazing growth potential.
Write to Jinjoo Lee at jinjoo.lee@wsj.com
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