Uncle Joe Is Sabotaging US Solar
Here's How To Navigate The Fallout
The Obama Administration called its energy policy for America "all of the above," promoting breakthrough research on cleaner sources while sanctioning unprecedented construction of needed infrastructure including pipelines. Trump clearly favored "drill baby drill" over new wind and solar.
Under Biden, however, what we’ve seen for policy is often "none of the above."
The latest salvo: The U.S. Commerce Department probe of Southeast Asian suppliers of solar panels, on the grounds they’re really Chinese companies circumventing tariffs.
The petitioner in this case is Auxin Solar, a privately owned US manufacturer with negligible market share. But it could result in retroactive tariffs of up to 250 percent on solar panels purchased from manufacturers in Cambodia, Malaysia, Thailand and Vietnam, which collectively account for roughly 80 percent of America’s supply.
The Solar Energy Industries Association (SEIA) has asked Commerce officials to throw out the case with a ruling by August, rather than wade through a typical year-long proceeding. But at this point, it could be 2025 before a final decision on actual tariffs is made. And until then, buyers of Asian-made solar components now will be in the dark on the eventual tax.
Not surprisingly, the impact on the sector has been dramatic and almost universally negative. Shares of the largest solar energy developer NextEra Energy NEE -1.4% (NEE) dropped about 15 percent. That followed management’s warning that supply suspensions could force delays for 2.1 to 2.8 gigawatts of solar and storage projects scheduled to enter service this year.
They’ve yet to comment or release Q1 results. But Brookfield Energy Partners (BEP-U, BEP) and other major developers have seen shares decline by like amounts. And the largest rooftop company Sunrun Inc (RUN) is down almost 40 percent.
An SEIA survey published just 8 days after Commerce announced its investigation reported 78 percent of expected solar module supply had been "delayed or canceled" following the announcement. The trade group now estimates up to 51 GW projects of capacity are at risk, potentially reducing planned US deployments by 46 percent and eliminating 100,000 jobs.
As a sector advocate, SEIA is making a maximum case. And there’s still a solid chance Commerce will throw out Auxin’s claim—if for no other reason than its extreme cognitive dissonance with the Biden Administration’s goals of combating global warming with renewable energy deployment.
But with Tesla TSLA -6.8% Inc (TSLA) reporting a 48 percent Q1 decline in solar deployment due to "supply issues," US solar has already been up-ended. And no one should underestimate the anti-China sentiment that pervades both major US parties, or the protectionist bias of agencies like Commerce.
Winners and Losers
As with any regulatory issue that’s still a work in progress, investors should generally sit tight until more is known. Strong underlying businesses will always weather immediate turmoil, ultimately finding a way to boost their position. And buying stocks of best in class companies on the cheap is the surest way to build real wealth.
There are, however, emerging winners and losers from Commerce’s actions, especially in the context of other Biden Administration energy policy moves.
North American natural gas producers and midstream companies are already beneficiaries of the fallout from Russia’s invasion of Ukraine, which has increased European and Asian interest in long-term contracting LN LN 0.0%G. Delaying and raising the cost of solar projects in this country will only re-enforce US domestic dependence on natural gas as well.
Of course, Biden Administration policies on gas are highly conflicted to say the least. The president’s promises to Europe for a major lift in US LNG exports will require construction of major facilities, as well as supporting production and midstream infrastructure. Yet, his majority on the Federal Energy Regulatory Commission has decided to push a new rule that would subject new projects to review on how they affect climate change.
But the bottom line is more government restrictions on development only increase the value of existing wells, pipelines, gathering systems and the like. And that also applies to project inventory leaders can still roll out without major scrutiny, such as Kinder Morgan Inc’s (KMI) potential expansion of its Elba Island LNG export facility in Georgia. That company also plans to expand pipelines and gathering systems to supply gas for LNG operators on the US Gulf Coast like Cheniere Energy Partners (CQP) and Sempra Energy SRE -0.7% (SRE).
Crimping solar should also benefit wind energy, including the massive projects in various stages of development on the US Atlantic Coast. Leading developers like Avangrid AGR +1.9% Inc (AGR) and Orsted DC (ORSTED, DNNGY), for example, have been subject to cost scrutiny due to potential supply chain disruption for turbines. But the combination of energy security concerns and increased US solar protectionism will likely boost their appeal.
As the only major US solar panel manufacturer of note, First Solar FSLR -0.1% Inc’s (FSLR) long-term attraction as a supplier should increase. But while the company is developing new manufacturing capacity in Ohio, it has no output to spare to benefit from current market disruption.
Not so large solar deployers outside the US like Enel SpA (ENEL, ENLAY). They’re likely to see almost immediate lower costs, as Southeast Asian suppliers focus on South America, Europe, Africa and elsewhere in Asia.
Ironically, NextEra Energy and other leading US solar energy adopters could ultimately reap a big net benefit from the havoc. That’s because unmatched scale, financial power and operating flexibility enable them to continue competing for and completing new renewable energy projects, even as soaring costs and scarce supplies force smaller rivals to pull up stakes.
During NextEra’s earnings call earlier in April, for example, CEO John Ketchum blasted the Commerce Department probe as "perverse" and "outrageous." But he also reaffirmed earnings guidance through 2025, demonstrating the company’s resilience even with government throwing this unexpected monkey wrench into its expansion plans.
That’s how you reliably build wealth for long-term, income-focused investors year after year.
To your wealth!
Roger S. Conrad