The surge in Clean Energy Stocks, namely Lucid Motors, Plug Power, and NextEra Energy Partners, can be attributed to their strong performance today.

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Lucid Motors (LCID 7.46%), Plug Power (PLUG 11.78%), and NextEra Energy Partners (NEP 6.12%) experienced significant surges of 6.6%, 11.1%, and 8.3%, respectively, by 2 p.m. ET on Tuesday.

These companies share two prominent characteristics. Firstly, they are all leading players in the clean energy revolution. Lucid Motors designs and manufactures luxury electric vehicles, Plug Power is constructing a comprehensive clean hydrogen ecosystem, and NextEra Energy Partners collaborates with the clean energy-focused utility NextEra Energy (NEE 4.04%).

Secondly, they rely on external funding to a certain extent due to their current growth phases. Consequently, they were adversely affected by the recent sharp increase in long-term interest rates in the market.

However, a Federal Reserve official’s dovish remarks and a notable reversal in long-term bond yields provided some relief for their stocks on Tuesday.

Why is this significant?

The primary driving force behind Tuesday’s rally seemed to be the decline in long-term Treasury Bond yields. As of the latest data, the 10-year Treasury bond yield had decreased by approximately 16 basis points to 4.645%, down from its recent peak of 4.887%.

Understanding the reasons behind shifts in bond yields is often complex. However, investors sometimes perceive long-term Treasuries as “safe haven” assets during uncertain times. The recent unfortunate geopolitical events over the weekend might have contributed to this movement. It’s also plausible that the rapid rise in yields in the past had simply run its course.

Moreover, on Tuesday, Atlanta Federal Reserve Bank President Raphael Bostic, speaking at an American Bankers Association convention, expressed his belief that the Federal Reserve might not need to further increase interest rates to achieve its 2% inflation target. He also stated that he does not foresee the U.S. economy slipping into a recession.

While the Federal Reserve doesn’t directly control long-term interest rates as it does short-term rates, the simultaneous decrease in long-term rates and the suggestion that peak short-term rates have been reached sparked a significant upswing in many stocks sensitive to interest rates.

These three clean energy companies fall into this category, both in terms of valuation and operations. Lucid Motors and Plug Power, for instance, are currently unprofitable growth-oriented companies that are experiencing significant losses on their balance sheets. Consequently, their value hinges on anticipated future profits. As long-term interest rates rise, the present-day value of these future earnings is diminished.

Additionally, all three companies either currently require external capital or might require it in the future. While Lucid recently announced the commencement of deliveries for its new Lucid Air Sapphire, the production ramp-up is proving to be expensive. Last quarter, Lucid missed revenue estimates and incurred a substantial operating loss of $838 million.

Even though Lucid is backed by the Saudi Arabian Public Investment Fund, a further decline in its stock price could lead to greater dilution for shareholders if the company needs to raise more capital, even from the PIF.

Likewise, Plug Power is aggressively expanding its vertically integrated ecosystem of hydrogen-powered electricity infrastructure, including liquifiers, cryogenic tanks, and hydrogen fuel cells for vehicles. While there is a considerable opportunity in the hydrogen power market, Plug’s ambitious vision also demands substantial capital investment. Although the company’s revenue grew by more than 72% in the last quarter, its operating losses also increased by 59% to $233.8 million.

Similarly, despite NextEra Partners’ profitability, its business model relies heavily on accessing the capital markets. Essentially, the company sells equity and/or debt to acquire renewable energy projects and subsequently distributes an increasingly higher dividend. However, NextEra’s stock has dropped too much for it to issue equity and acquire projects profitably. Consequently, its entire model has hit a standstill until it can raise funds again, either through equity or debt. For this condition to be met, lower interest rates or an increase in its stock price would likely be necessary, and the stock may not experience a substantial upward movement until rates drop.

Considering the sensitivity of each of these stocks to interest rates, the notable rally following the decline in interest rates and rate expectations isn’t unexpected.

What’s next?

While it might be tempting to invest in these currently undervalued companies, it’s crucial for investors to recognize that while these stocks offer promising growth potential, they also carry substantial risks. Although all stocks bear some degree of interest rate risk, these three companies are particularly sensitive to rates and external capital access, factors that are largely beyond their control. Hence, for these companies to thrive, not only do they need to execute their plans effectively, but they also require some degree of favorable market conditions.