Solar Stocks Find More Sure Footing, At Last

Solar stocks have long beguiled thrill seekers, staging dazzling price run-ups only to leave investors gasping in the inevitable next dive. But the tax credits promised in the new Inflation Reduction Act could put solar energy companies on a less gut-wrenching path.

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The federal IRA, as it’s known, passed in August. Solar energy stocks already were getting a boost from international agreements to slash carbon emissions and lessen the impact of global warming. The act kicks in $369 billion to expand renewable energy over the next 10 years, the largest spending plan for alternative energy in U.S. history.

Economics also are pushing renewables such as solar and wind energy to the fore, thanks to tax credits and cheaper equipment. According to the International Energy Agency, solar is now less expensive than natural gas and coal. Some analysts believe it’s as much as 33% cheaper on a raw production basis, though others note battery storage costs can make it more expensive as an all-day energy source. Some also contend startup costs for solar can be formidable.

Regardless, massive solar farms are popping up throughout the U.S. as utilities tap the skies for power sources along with residential installers. Utilities are now the largest solar energy producers and transmission providers.

The massive government subsidies aim to hurry the conversion to clean energy. Rebates and tax credits in the new law are designed to spur renewable energy demand and adoption by electric utilities.

“The incentives in the IRA are like pouring gasoline on a fire,” Pol Lezcano, a solar industry analyst at research firm BloombergNEF, told Investor’s Business Daily.

Solar Stocks And New IRA Law

According to research firm Wood Mackenzie, large community and utility installations will lead the solar industry’s growth over the next five years.

Signed into law by President Biden on Aug. 15, the Inflation Reduction Act aims to expand U.S. solar manufacturing, thanks partly to long-term tax credits well above anything in the past. Equally important, it hopes to ease the nation’s reliance on solar panels from China, the dominant supplier by a wide margin.

The landmark climate and energy law contains more than $60 billion for clean energy manufacturing in the U.S., including tax credits for producing wind turbines, solar panels and electric vehicles.

“Our outlook is bullish heading all the way into 2023,” said Lezcano.

Solar industry manufacturers have matured from in the past few years. Companies now specialize in making various key elements of a solar energy system and don’t always try to be the one-stop shop.

Those components include solar panels, inverters, batteries and trackers. By focusing, companies became more efficient and profitable.

Shackles Come Off For Solar Companies

In years past, the solar industry was restrained by tariffs, import barriers and insufficient tax benefits. The tax benefits, while well-intentioned, sometimes failed to provide adequate stimulus, leading to financial uncertainty as solar energy stocks rose and fell, analysts say.

Only a year ago, the solar energy sector was getting slammed. Rising materials costs, accusations of forced labor among Chinese solar firms and a worsening trade war caused investors to retreat into cash.

But solar energy stocks have mostly roared since lawmakers paved the way for passage of the Inflation Reduction Act. Further, utilities will likely see substantial demand for renewables from business and residential customers. They need to be prepared.

The IRA is designed to entice utilities to reduce carbon emissions by making the transition to renewables more financially appealing. Tax credits provide incentives to scale up the deployment of renewables and accelerate the development of decarbonization technologies.

Among utilities making this transition is NextEra Energy (NEE). NextEra Chief Executive John Ketchum recently said the IRA will drive clean energy growth for the next two decades.

Solar Stocks: Renewables ‘In the Money’

“We already have been making advancements in preparation for what’s coming because we thought, with or without IRA, renewables were going to be in the money,” Ketchum said at an energy conference in late September.

NextEra has a 100-gigawatt head start on the rest of the industry in terms of project siting and development potential, he said.

“We are scaling up big time across the board, but the good thing is we already have the pieces in place.”

Meanwhile, the IRA pushed many solar energy stocks to new highs.

Since lawmakers reached agreement on the IRA in late July, First Solar (FSLR) stock has doubled as of Wednesday. Enphase Energy (ENPH) climbed 37% and Array Technologies (ARRY) rocketed 147%. Other winners include Maxeon Solar Technologies (MAXN), up 46%, and Shoals Technologies (SHLS), 16% higher.

Others such as Daqo New Energy (DQ), Canadian Solar (CSIQ), JinkoSolar (JKS) and SunPower (SPWR) could feel the glow from federal subsidies as well.

The legislation supports the development and build out of solar power and other renewable technologies in various ways. One is unprecedented tax credits that last 10 years. That time frame provides a significant amount of time for clean energy companies to build new capacity and reap the benefits.

“Right now, demand for solar energy is at a fever pitch, the highest it’s ever been,” Michelle Davis, principal analyst at Wood Mackenzie, told IBD. “The solar industry has gone though many ups and downs, but this is first time the industry has a 10-year certainty, as a result of tax credits. It used to be one or two years, or sometimes five (for previous tax credits).”

Solar Energy Expansion Plans

A record amount of renewable energy capacity was established in 2021, according to the Solar Energy Industries Association, or SEIA. That’s despite post-pandemic delays, supply chain woes, rising raw material costs and tariffs, it said.

Shortly after Biden signed the Inflation Reduction Act, First Solar announced plans to invest $1 billion to build a new solar panel plant in the Southeast. It also tossed in another $200 million to expand production in Ohio.

“We continue to evaluate more investments in incremental capacity and could announce further expansion plans in the future,” First Solar Chief Executive Mark Widmar said in written remarks with the announcement.

First Solar is just one of multiple companies to commit to new domestic facilities. These expansion plans are an early sign of the IRA doing what legislators intended.

“The Inflation Reduction Act will catalyze the already rapidly growing clean energy sector,” said Raghu Belur, co-founder and chief product officer at Enphase Energy, in an email to Investor’s Business Daily.

“We believe there is a tremendous amount of opportunity ahead for solar, batteries, electric vehicles and other technologies to make the ways we use energy every day more sustainable and affordable,” Belur said.

Reshuffling The Portfolio For Solar Stocks

Goldman Sachs analyst Brian Lee, in a note to clients in early September, said the rapid growth in many solar stocks caused him to reshuffle his portfolio to reflect the major upside drivers from the Inflation Reduction Act.

Lee wrote: “The number one question we are fielding from investors after the move is ‘What to do with the solar energy stocks from here’ especially considering the consensus view that IRA is a significant positive for the entire solar sector and the group has acted that way.”

Further, he believes the major upside drivers of the new policy include greater medium- to longer-term demand. That’s due to extended tax credits and higher returns stemming from other manufacturing incentives.

Lee upgraded First Solar and Maxeon to buy from sell but downgraded Shoals to sell from buy. He also downgraded Canadian Solar.

He has buy ratings on Sunrun (RUN), SolarEdge (SEDG), Enphase and Array Technologies.

“We believe the IRA bill is positive for the entire solar sector,” he said. “But we are more selective on the group and highlight our rating changes.”

Parts Makers Share The Wealth

Among solar stocks that will benefit early on are the makers of solar modules. Also benefiting are makers of solar inverters, batteries and trackers. Companies in this field include First Solar, Enphase, SolarEdge and Array.

First Solar is a leading maker of solar modules.

SolarEdge is the leading supplier of inverters, which convert direct current produced by solar panels into alternating current. It’s also transitioning to supplying home energy systems: solar, storage, and software.

Meanwhile, Array is one of the largest manufacturers of trackers, used in ground-mounted solar energy projects. Trackers adjust and align solar panels throughout the day to face the sun at the optimal angle.

Along with other companies, Enphase designs, develops and sells all-in-one energy solutions for homes, including battery storage. The popularity of electric vehicles has implications for home energy management.

China Remains The Dominant Solar Supplier

China currently dominates the global supply chain for solar panels, producing a significant share of the materials and parts needed.

For now, most solar module buyers in the U.S. will continue to rely heavily on factories in Southeast Asia. These are owned by Chinese…