On Monday, the White House moved to boost the solar energy sector and encourage domestic production of solar equipment. The measures include pausing new tariffs on solar imports for the next two years as well as invoking the Defense Production Act to prioritize solar equipment through grants and loans.
Wall Street cheered the news, sending most solar stocks higher, though there were a few exceptions. The main beneficiaries appeared to be makers of utility-scale solar trackers and accompanying software, such as Array Technologies Inc. (ARRY, Financial) and FTC Solar Inc. (FTCI, Financial), which saw shares jump 16% and 22%. This technology is responsible for tilting solar panels to follow the sun’s path and maximize energy production.
With more money flowing toward solar energy production and a tariff reprieve on the horizon, we can likely expect a long-term rebound for solar stocks going forward. Let’s take a look at which names are set to benefit the most from these developments.
A much-needed reprieve
To understand how the White House’s sudden tone shift in regard to solar energy will affect the industry, we have to look at why solar in particular has been struggling in the U.S. for the past decade.
Even though clean energy is essential for long-term energy security, the sector has been struggling as it became a focal point of the U.S.-China trade war.
Once the world leader in solar, the U.S. lost that title to China around 2011 because Chinese manufacturers were focused more on production over profits, which dramatically drove down prices worldwide.
With the goal of helping domestic producers of solar cells, the U.S. introduced steep tariffs on solar imports. However, this arguably had the opposite of the desired effect. Many solar installers either indirectly bought Chinese solar cells from other countries in order to avoid paying more or suffered from the increased financial burden from the tariffs, hurting the growth of the industry.
I say arguably because, while the tariffs have been credited with the tripling of domestic solar cell production between 2018 and 2020, these results were skewed heavily by the 2018 U.S. corporate tax reduction, which many companies cited as a key reason behind their decision to ramp up solar equipment production. In my view, this confounding factor makes it impossible to determine whether the tariffs on solar cell imports in and of themselves had much of a positive effect on domestic production.
One key indicator that U.S. solar adoption overall is being harmed by tariffs is that many solar energy companies have only been able to turn a profit by dodging said tariffs.
Just last week, the U.S. Commerce Department said it would investigate claims that Southeast Asian solar panel manufacturers were using parts and materials sourced from China, thus making it count as “dodging tariffs” for U.S. companies to buy from them.
If this case is argued successfully, solar energy costs in the U.S. could double or even triple according to a joint op-ed by president of the Edison Electric Institute Tom Kuhn, CEO of the American Clean Power Association Heather Zichal and President and CEO of the Solar Energy Industries Association Abigail Ross Hopper. Such a development would ruin the profitability of the solar energy business in the U.S., setting the country back on both clean energy and energy independence goals.
In summary, the majority of companies in the solar energy industry stand to benefit from the tariff pause. The notable exception is producers of solar cells that are unable to remain cost-competitive without tariffs, such as First Solar (FSLR, Financial), though these companies should be able to take advantage of the increase in grants and loans from the government.
Solar technology companies will be major beneficiaries of anything resulting in the scaling up of the solar energy industry. That’s because the more solar energy production capacity is built out, the greater the demand for technology that is essential to the operation, monitoring and optimization of solar energy plants.
Additionally, the more complex technology is, the more difficult it is for companies to take advantage of cheap labor in economically disadvantaged countries. This levels the playing field around the world, allowing the companies with the best technology to come out on top.
Solar technology companies include the above-mentioned solar tracker and software producers Array Technologies (ARRY, Financial) and FTC Solar (FTCI, Financial), as well as SolarEdge Technologies Inc. (SEDG, Financial), an Israeli company that produces power optimizers, solar inverters and monitoring systems that are aimed at increasing the energy output of solar power arrays, and Enphase Energy (ENPH, Financial), which designs and manufactures software-driven residential and commercial solutions for solar energy generation, home energy storage and web-based system monitoring and control.
Another class of solar energy companies that can be expected to benefit from cheaper solar energy is residential solar. These are the companies that install rooftop solar panels on houses.
The heavy hitter in the U.S. residential solar market is Sunrun (RUN, Financial), which acquired its chief competitor Vivint Solar a couple of years ago. Sunrun accounts for 13% of the U.S. residential solar market, so this remains a fragmented industry with plenty of room for consolidation. After Sunrun, the second-largest publicly traded solar installer in the U.S. is actually Tesla (TSLA, Financial), though it would be unwise to invest in this stock for the residential solar upside since Tesla generates the vast majority of its revenue from electric vehicles.
A major global residential solar provider is Canadian Solar Inc. (CSIQ, Financial), which manufactures solar photovoltaic modules and runs large-scale commercial and residential solar projects in over 150 countries, including the U.S., Australia, China and Japan.
Aside from individual stocks, those looking to invest in the clean energy sector also have the option of exchange-traded funds, or ETFs. ETFs give up the higher return potential of individual stock picking in exchange for the safety of diversification, which can be especially useful if you have a bullish stance on an industry but do not know enough about individual companies to feel confident in buying their shares outright.
One ETF that holds multiple different types of clean energy assets is the iShares S&P Global Clean Energy Index Fund (ICLN, Financial) ETF. Those investors looking specifically to take advantage of the expansion of the solar energy industry in the U.S. may be more interested in the Global X Solar ETF (RAYS, Financial) or the Invesco Solar ETF (TAN, Financial).
A drawback of investing in ETFs given the current market condition is that you might also catch the downside for solar cell manufacturers that find themselves unable to remain competitive without the help of higher tariffs. However, the long-term goal of the White House’s recent moves is to scale up solar energy in the U.S. Once companies scale up enough, this will naturally reduce their per-unit production costs, resulting in a stronger market position.