Investors are flocking to solar stocks and other green companies thanks to the recently passed Inflation Relief Act, which provides about $369 billion for energy development and fighting climate change. It’s not clear how long the party will last, but it could go well into the evening and beyond.
The act, known as the IRA, aims to strengthen energy independence, reduce dependence on Chinese imports and revitalize the industrial sector. It is also designed to create American jobs and accelerate the transition to renewable energy.
This is the largest increase in federal government spending on alternative energy in US history. Moreover, its influence may continue into the next decade.
“Years from now, we’ll be looking at a time when the federal government has committed to supporting the clean energy transition and addressing climate change more broadly,” Jon Hale, Morningstar’s global head of sustainability, told Investor’s Business Daily.
Solar energy production will increase 3 times
The Senate passed the IRA bill on August 12. President Joe Biden signed the law on August 16.
The U.S. will triple its domestic solar power generation capacity by 2024, the White House said in a statement. He sees the IRA’s transition spurring more interest in clean energy and solar stocks.
Hale noted that in the two weeks before Congress announced the IRA deal on July 27, there were $223 million in net outflows from exchange-traded funds in the clean energy sector.
But within two weeks of the announcement of the deal, investors flocked to the group of funds. The ETFs attracted about $433.6 million in net inflows, Hale said. Morningstar tracks about 24 solar and other renewable energy ETFs.
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“Legislation makes it more likely that investors will look at how to position their overall portfolios to account for climate risks and benefit from the imminent transition to a low-carbon economy,” Hale said.
Taking the number 1 spot
IBD’s “Energy-Solar” industry group ranks #1 among 197 industry groups tracked. IBD industry groups are combinations of companies in the same business.
The ranking of the industry groups is based on the six-month price and average performance of the stocks in each group. The rating is updated daily, published in IBD Weekly and in spreadsheets on Investors.com.
Included in the reserves of the solar energy group First Sun (FSLR), Enphase energy (ENPH), Canadian Sun (CSIQ) and Dago New Energy (DQ).
Others SolarEdge Technology (SEDG), Jinko Sun (JKS) and SunPower (SPWR).
It’s unclear how long the group can stay at the top of the IBD industry pile, or whether those stocks are showing signs of slowing.
New Tax Credits for Solar Energy Production
Key to the passage of the IRA bill was the Solar Energy Manufacturing Act for America. It creates new tax credits designed to rapidly expand solar production and bring major solar supply chains online. It could also accelerate the transition to clean energy, says Abigail Ross Hopper, president and CEO of the Solar Energy Industries Association.
The act would “immediately stimulate private investment in manufacturing capacity across the solar energy supply chain, including batteries, help create thousands of manufacturing jobs and support our energy independence.” Hopper said in written statements when the act was adopted.
Major beneficiaries of the bill include First Solar, which manufactures solar modules for homes and businesses around the world.
“For the first time, solar manufacturers will benefit from a sustainable, long-term industrial policy designed to stimulate and expand local manufacturing and innovation,” First Solar CEO Mark Widmar said in a written statement.
Big Break in Solar Energy Stocks
First Solar shares are up 56% since the July 27 deal to roll over from the IRA. Enphase Energy is up 34% and SunPower is up 66% during that time. Canadian Solar rose 29%, and Sunrun rose 48%.
Brett Castelli, a Morningstar analyst who covers clean energy, says there are several factors for investors to consider.
First, the act includes a 10-year extension of solar and wind tax credits, he said in a note to clients. Also, the 10-year provision gives clean energy firms enough time to build new capacity, he wrote.
Other incentives previously designed to support new technology were not eligible for tax credits. The two areas that are likely to benefit the most are hydrogen and energy storage.
In addition, the act provides incentives for the domestic production of solar panels and equipment. Providers used to mainly import these materials.
Incentives for Solar Panel Manufacturing
“The provisions in this law significantly increase the incentive to manufacture solar panels and inverters domestically,” Castelli writes.
Hale also said it’s not too late for investors to jump into the green equity pack.
“This is a long-term trend,” Hale said. “For those still considering investing in renewable energy, don’t worry about missing out on the early news.”
According to the Solar Energy Association, the act “contains important incentives that will lead to a renaissance in American solar manufacturing over time.” These words were voiced as part of a white paper published on the group’s website.
In addition, the association further said: “As a direct result of the IRA, we expect significant new investments in domestic solar module, tracker, inverter and rack power over the next 2-3 years, followed by new investments in solar power. Within 3-5 years ingot, wafer and cell capacity”.
For more on tech stocks, analysis and financial markets, follow Brian Deagon on Twitter at @IBD_BDeagon.
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