Solar energy is poised for a record year in 2023, but stocks in the sector are broadly lower this year as interest rates were hiked to a 16-year peak.

Data from the Solar Energy Industries Association (SEIA) on Thursday reported the U.S. solar industry added 6.5 gigawatts of new generating capacity in the third quarter, a 35% year-on-year increase, putting the industry on target for a record 33 gigawatts of solar capacity in 2023.

Meanwhile, recent data from BloombergNEF, showed global renewable energy investment has already set a new record in 2023 in the form of record inflows in the first half of the calendar year, with investment up 22% at $358 billion.

So, why are solar stocks performing so badly? Among the largest developers, Enphase Energy (NASDAQ:ENPH) is down 59% this year, while SolarEdge Technologies (NASDAQ:SEDG) is off by 71% and First Solar (NASDAQ:FSLR) is down just 3%.

The Invesco Solar ETF (NYSE:TAN), an exchange-traded fund that tracks the MAC Global Solar Energy Stock Index, is down 35% this year.

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Energy Crisis

Much of the poor performance for solar stocks can be attributed to the global energy shock that followed the Russian invasion of Ukraine in February 2022.

Soaring oil and natural gas prices led to some serious rethinking on energy security and billions of dollars were poured into new oil and gas production facilities, dealing a shock to expectations of a shift towards renewable energies.

At the same time, the energy crisis led to higher interest rates globally. According to an analysis by the International Energy Agency, a 5% rise in interest rates increases the cost of electricity from wind and solar power by a third, while only marginally increasing the cost of electricity from natural gas plants.

This is due to the cost of investment in new developments. While most oil and gas facilities are part of an existing infrastructure, the higher cost of new solar projects requires funding at higher rates of interest.

COP28 And Renewed Commitments To Phase-Down Fossil Fuels

This year’s COP28 climate change summit has seen fresh commitments from world leaders to shift to cleaner methods of energy production.

“Solar remains the fastest-growing energy source in the U.S. and, despite a difficult economic environment, this growth is expected to continue for years to come,” said SEIA president and CEO Abigail Ross Hopper.

While elevated financing costs, transformer shortages and interconnection bottlenecks remain a challenge to the solar industry, the SEIA is confident that the sector will continue to grow.

And with share prices in the sector at cyclical lows, there could be some bargain investment opportunities.

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