Congress Attacks Solar (Again)

...and there will be winners

Solar stocks came under pressure again last week. And it was despite another strong round of earnings up and down the value chain, from leading manufacturers like FirstSolar (NSDQ: FSLR) and Jinko Solar (NYSE: JKS) to utility adopters like NextEra Energy (NYSE: NEE) and rooftop aggregator/installer Sunrun (NSDQ: RUN).

The biggest positive for all four companies, as well as most of their smaller and less financially powerful rivals: Robust demand for all things solar. But the numbers and management’s accompanying guidance showed clear benefits from a lessening of the past couple years’ supply chain disruption. And the easing of global polysilicon prices—triggered by a massive increase in Chinese manufacturing capacity—has also started reining in the inflation that had reversed more than a decade of sharply falling solar deployment costs.

We’re also seeing for the first time that the tax credits from the Inflation Reduction Act are accelerating the electricity sector’s renewable energy deployment plans. NextEra Energy, for example, announced it will double the pace of solar adoption at its south Florida utility unit. The new target is to generate 35 percent of energy from the sun by 2032--up from 5 percent currently. And management forecasts hundreds of millions of dollars in fuel cost savings, which it will pass on to its Sunshine state customers.

Nonetheless, investors largely shrugged off the good news on the business front. And that’s because there were far more dramatic developments in the political arena, where America’s so-called culture war has now decidedly infected the historically arcane world of energy policy.

On the one side is the increasingly vocal “keep it in the ground” crowd that’s insisting at increasing volume that the world must cease using all fossil fuels at the earliest possible date. On the other, a rising chorus of opinion that at the current rate of adoption, renewable energy will trigger even worse consequences, from an unbalanced power grid to developing world mining disasters and a future landfill crisis with obsolete solar panels and wind turbines.

The debate has become increasingly acrimonious with neither extreme willing to compromise and increasingly unwilling to listen to the other. Both “sides” are increasingly willing to use government policy to implement more radical measures. And while up to now they’ve mostly involved carrots like the IRA, we’re now seeing the stick of increasing regulation and even outright bans.

Last week, for example, New York became the first state in the nation to outright ban new buildings and residences from using natural gas. That legislation also included an implicit threat to electricity generators. Mainly, if the private sector can’t scale up renewable energy fast enough, the state-run New York Power Authority will build it with taxpayer money.

New York’s actions are likely to be challenged in court. Nonetheless, they already appear to be inspiring similar action in other states like Maryland. And as if on cue those on the fossil fuel side of the culture war responded.

Not surprisingly, Texas has taken the lead. The state in recent years has become a leading developer and deployer of both wind and solar energy. But it’s also the most important for oil and gas production. And it’s become clear that industry still wields far more political power in Austin.

Earlier this year, the Texas government passed a plan to build 10 gigawatts of natural gas-fired generation, offering generous subsidy to private sector builders. At the same time, the state is studying numerous new regulatory barriers to building new wind and solar, including new siting and environmental requirements for deployers.

Politicians’ rationale for their actions is building more gas and slowing solar is needed to avoid a repeat of Winter Storm Uri in 2021, which triggered widespread deadly power outages and spiked natural gas and electricity prices for business and consumers. That’s despite considerable evidence it was a gas shortage combined with extreme weather—not generally solidly performing renewable energy—that triggered the worst of Texas’ woes.

Now the US Congress is getting into the act. Last week, the US Senate joined the House of Representatives in passing legislation to repeal President Biden's two year suspension of tariffs on imported solar panels imposed by the Commerce Department last year. The purpose of the tariffs was to prevent Chinese manufacturers from circumventing duties by producing a portion of their panels in southeast Asia—and in some cases they would have been more than 250 percent of product value.

Their mere threat triggered chaos in the solar industry, as panels contracted for projects were held up while Customs tried to determine what if any tariffs should be applied. Biden’s action unfroze the situation and he has promised the industry he’ll veto this legislation.

Despite several Democrats joining all Republicans, there don’t appear to be enough votes to override, which should ensure the suspension remains in place until June 2024. Nonetheless, the vote at a minimum demonstrates that many politicians are at least giving lip service to the idea that rapid solar deployment has the potential to destabilize electricity service. And that could emerge as an important factor as Congress and the president attempt to reach an agreement to raise the federal debt ceiling by June 1, the date when the Treasury secretary has said Uncle Sam will run out of money.

The House of Representatives’ debt bill didn’t pass by much. But what it lacked in voting margin it more than made up for in radical proposals, one of which is to basically repeal the Inflation Reduction Act and its estimated $347 billion in tax credits to the energy industry.

As I’ve pointed out to Conrad’s Utility Investor readers, the IRA is a lot more than just wind and solar subsidy. In fact, some of the biggest benefits flow to oil and gas companies, for example for carbon capture and hydrogen development that without them would arguably not be economic. And unlike plans in New York and Texas that involve direct government action, the IRA is specifically structured to produce a multiplier effect in the private sector—that is every government dollar pushing several dollars of investment by industry.

Nonetheless, forced repeal of the IRA has apparently become a serious target for a number of Congressmen. And with the country heading into unknown territory under threat of a first ever federal government default, at least some scaling back of the spending can’t be wholly ruled out.

Given all that, it’s no wonder many investors are now spooked and at least considering unloading their renewable energy stocks, including solar. But as is typically the case in the stock market, not every player in the sector is equally exposed to what the politicians may or may not do. In fact, more than a few companies that could actually stand to win if the IRA is repealed and tariff walls rise again for solar.

That’s basically the largest and financially strongest players on the solar energy value chain. NextEra Energy, for example, owns and operates by far the largest wind, solar and storage generation fleet in the US. It was a first mover in renewable energy in this country, locking down business with local governments, utilities and now corporations long before the IRA. The company has also moved aggressively to re-direct its supply chain from China in recent years, even inducing a major Chinese firm to build a major production facility in Florida.

NextEra would obviously miss the tax credits from the IRA, but not nearly as much as smaller, financially weaker rivals. That could actually make it lot easier for its unregulated contract wind, solar and storage business to win contracts, as well as its budding transmission operations. And having fewer rivals could also drive down its costs by eliminating competing orders for solar panels, wind turbines and other needed components for deployment.

The increasing need for scale to compete in the renewable energy business has been highlighted this year by Consolidated Edison’s (NYSE: ED) sale of its wind and solar business to German giant RWE AG (Germany: RWE, OTC: RWEOY). And we’re set for further consolidation in coming months, with Dominion Energy (NYSE: D) and Duke Energy (NYSE: DUK) likely to put their operations up to sale to concentrate on regulated utility CAPEX.

Rising deployment costs are also triggering consolidation of offshore wind. Later this year, EverSource (NYSE: ES) will likely to sell its ownership interests in New England projects developed by Denmark’s Orsted (Denmark: ORSTED, OTC: DNNGY). And Dominion Energy has won permission to sell a portion of the 2.6 gigawatt capacity project it’s developing off the Virginia coast, a move it’s likely to make despite locking in more than 90 percent of project costs.

The bottom line: Rising costs are already tilting the renewable energy playing field heavily in favor of large companies that can spread them out and most easily fund them. Repealing IRA, raising tariff barriers and onerous new regulations in heretofore pro-business states will only accelerate the process.

The same holds for manufacturers of solar panels and the like. But a couple appear to enjoy big advantages over rivals. One is FirstSolar, which was actually exempt from the last round of tariffs and is further bullet-proofing itself by relocating facilities to the US. The other is China’s Jinko Solar, which was explicitly excluded from the Chinese companies named by the Commerce Department and as noted above has also located manufacturing in this country.

FirstSolar is arguably a manufacturer trading at a technology stock valuation. It’s a go-to stock for large money managers looking for solar manufacturing exposure. But from a value standpoint, Jinko’s stock is far cheaper. It’s also a significant player around the world including China, which has become far and away the most aggressive solar energy adopter. That’s the best possible guarantee it will continue growing earnings, no matter what US politicians do.