Over the past two years or so, the clean energy sector has emerged as a major laggard with investors giving it a wide berth. The iShares Global Clean Energy ETF (ICLN), a catch-all bet on clean energy, is trading 30% below its January 2021 peak after a major rally fueled by ESG optimism drove many stocks in the sector to record highs and stratospheric valuations.
Luckily for the sector, the passing of the historic climate bill dubbed the Inflation Reduction Act has given it a much-needed shot in the arm. IRA allocates $369 billion to renewable energy with the American Clean Power Association estimating it could more than triple clean energy production, cut emissions by 40% by 2030, and create 550,000 clean energy jobs. A major goal of IRA--the largest federal government spending increase on alternative energy in U.S. history--is to strengthen energy independence, reduce dependence on Chinese imports, and reinvigorate the industrial sector.
Investors are loving it: according to Jon Hale, global head of sustainability at Morningstar, clean energy funds attracted net inflows of about $433.6 million in the two weeks after the July 27 disclosure of Congress' IRA agreement compared to net outflows of $223 million in the two weeks prior to the deal.
The solar sector in particular has grown red-hot after a White House statement said the U.S. is on track to triple domestic solar manufacturing capacity by 2024: First Solar Inc. (NASDAQ: FSLR) stock has soared 56% since the IRA passed muster; Enphase Energy (NASDAQ: ENPH) has climbed 34% in that time, SunPower Corp. (NASDAQ: SPWR) has jumped 66%, Canadian Solar (NASDAQ: CSIQ) has gained 29% while Sunrun Inc. (NASDAQ: RUN) has surged 48%.
In fact, solar is now the top-ranked sector: IBD's "Energy-Solar" industry group holds the No. 1 spot out of 197 industry groups tracked. IBD industry groups are a combination of companies in the same business.
There’s a method to the ongoing madness, though
Incentives For Solar Panel Production
Key to the passage of the IRA bill was the Solar Energy Manufacturing for America Act. The new act creates fresh tax credits designed to rapidly expand domestic solar production and also bring key solar supply chains online. According to Abigail Ross Hopper, president and chief executive of the Solar Energy Industries Association, the bill intends to accelerate the transition to clean energy..
“The act will immediately spur private investments in production capacity across the solar supply chain, including batteries, helping to create thousands of manufacturing jobs and support our energy independence," Hopper said in written remarks after the act was passed.
The act also "includes important incentives that will, over time, lead to a renaissance in American solar manufacturing. As a direct result of the IRA, we expect to see significant new investments in domestic solar module, tracker, inverter and racking capacity within the next 2-3 years, followed by new investments in solar ingot, wafer and cell capacity within 3-5 years," according to the solar energy association.
Key beneficiaries of the IRA bill include First Solar, which manufactures solar modules for residences and businesses worldwide.
"For the first time, solar manufacturers would benefit from a durable, long-term industrial policy designed to revitalize and expand domestic manufacturing and innovation at scale," First Solar CEO Mark Widmar has declared in a written statement.
Guggenheim has raised FSLR stock to Buy from Neutral with a $135 price target while J.P. Morgan has upgraded it to Overweight from Neutral with a $126 price target, up from $83. FSLR stock was trading at $127.18 in Tuesday’s intraday session.
"Of all the names in our coverage, we believe First Solar appears positioned to benefit the most from the provisions of the Inflation Reduction Act that passed the Senate. Investors have not fully digested how transformational the IRA could be for FSLR's business," Guggenheim's Joseph Osha has written in a note to clients.
Meanwhile, Needham has picked First Solar and Sunrun Inc. as the biggest beneficiaries in the near term and added that Enphase Energy Inc. and SolarEdge Inc. (NASDAQ: SEDG) will also benefit from higher government spending and more solar adoption.
Inflation Reduction Act: A Clean Energy Game-Changer
The White House has set aside a $700 billion package that will address inflation by lowering energy and health care costs for families and by helping to bring down the deficit.
The Inflation Reduction Act will extend a number of tax credits already available for renewable energy and also create new incentives for investment in clean energy technology or energy generation. For the first time ever, would-be investors in clean energy have assurances in the form of a decade of subsidies from the federal government.
Over the past decade or so, generous tax credits for wind and solar projects have triggered explosive growth in U.S. installations. Unfortunately, these credits often have short time horizons, spooking risk-averse investors and leaving project developers scrambling to meet looming deadlines.
The IRA offers long-term tax credit commitments for wind and solar, wrapped up in a $430 billion bill and including new credits for energy storage, biogas, and hydrogen.
Solar and wind project developers will also get more support if they build their projects in poorer areas or use U.S.-made equipment. The bill also includes incentives for companies to manufacture more green tech needed to accomplish this.
"This is going to be a golden period of 10 years, at least. That is a long horizon for people to plan and really get this transition to clean energy into high gear," Keith Martin, an attorney with Norton Rose Fulbright who works on financing renewable energy projects, has told Reuters.
"Before this bill, we were looking at one- and two-year extensions on the tax credit while trying to finance projects that take three to five years to build. For the first time, this gives the industry and investors certainty for what the financing environment will look through 2034," Tom Buttgenbach, CEO of U.S. solar developer 8minute Solar Energy, has told Reuters.
The bill also offers home improvement credits that will allow households to deduct 30% of the cost of improvements like heat pumps or insulation from their taxes as well as a further deduction of 30% of the cost of solar panels and battery storage.
People looking to replace their gasoline and diesel cars with electric vehicles will also benefit from tax credits. Couples with a combined annual income of less than $300,000 and individuals on less than $150,000 will be eligible for $7,500 credit on new EVs and $4,000 for used ones.
Rewiring America, an energy efficiency awareness non-profit, projects that combined with the new tax credits and other efforts to improve efficiency, Americans could save some $1,800 a year, per household.
Shawn Kravetz, president of solar-focused hedge fund Esplanade Capital, has told Reuters that his fund will change tack after the new bill and focus more on the U.S. market instead of Europe.
"Our tactics have changed because we're seeing more opportunity in the U.S. The magnitude and scope of the opportunity have just grown," Kravetz has said.
The top U.S. utility trade group says the bill will encourage many members to eliminate carbon emissions from their systems by 2050 because it creates subsidies for technologies beyond just wind and solar.
By Alex Kimani for Oilprice.com
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