Solar energy stocks have had an outstanding run in 2020, which may come as a surprise to investors, given the pandemic and all of the disruptions that have come with it. Enphase Energy (ENPH -2.17%), SolarEdge Technologies (SEDG -4.18%), SunPower (SPWR -13.37%), and Sunrun (RUN -2.94%) have led the charge and have all more than doubled, while JinkoSolar Holding (JKS -1.29%), Canadian Solar (CSIQ -1.87%), and First Solar (FSLR 1.53%) have all beaten the market.
Solar companies haven't had a tremendous growth year by most measures, but they've outperformed expectations, and investors have a very bullish eye on the future of the industry. As 2020 comes to a close, it's worth looking at how we got here and what 2021 has in store.
Politics rules the year
If you can point to one thing that's driven solar stocks higher this year, it's the political winds changing. In summer, when it became likely that President-elect Biden would win the White House, investors speculated that positive policy changes would follow. And a Democrat sweep of Congress could potentially bring a Green New Deal. The sweep hasn't happened (and it's still possible), but Biden's win is already seen as a big victory for the solar industry for the following reasons:
- Extended tax credits: There's hope among investors and solar advocates that the solar tax credit that's been so important to the industry will be extended. Currently, the investment tax credit is 26% of a project's value, but that's due to drop to 22% next year, and 10% for commercial and utility-scale projects and nothing for residential projects in 2022. There's already been reports that an extension could be included in a stimulus package by the end of the year.
- Tariff reduction: The biggest direct impact President Trump had on the solar industry was implementing tariffs on solar panel imports in 2018. Tariffs are due to expire in 2022, but a continued Trump presidency would have put that expiration into question. Biden is seen as more friendly to the industry, which likely means fewer tariffs and lower costs for solar installations in coming years.
- Policy changes are coming: The rubber really meets the road on the policy level, where regulators at the state and federal level decide what energy assets are installed or how they're allowed into electricity markets. Biden is sure to be more friendly to the solar industry than Trump, who tried to push coal in his first few years in office. We don't know exactly what those policies will look like, and most will be left to regulators. But a Biden Administration will surely open the door to more solar energy, and that's seen as a great thing by investors.
Politics has been an uphill battle for the solar industry over the last four years. After growing at a compoud rate of 64% between 2006 and 2016 to peak at 15.1 GW installed that year. Since then, the U.S. solar industry has contracted, installing 11.0 GW in 2017, 10.7 GW in 2018, and 13.4 GW in 2019. But the headwinds that caused that decline in installations could become tailwinds over the next four. And that hope is helping solar energy stocks right now.
Image source: Getty Images.
Low interest rates
The elephant in the room for solar energy is always interest rates. The vast majority of the cost associated with a solar power plant is incurred before the plant is operational and generating revenue over the decades. Projects are valued based on their projected cash flows, which means that low-interest rates make a project more valuable, and high-interest rates lower the asset's value. Put another way, the lower interest rates are, the lower developers can bid for solar electricity into competitive markets.
Everywhere you look, interest rates are down in 2020, and that should help companies across the solar industry. But looking ahead, there aren't many places for rates to go but up, so this tailwind could become a headwind in coming years.
10-Year Treasury Rate data by YCharts.
Solar energy is winning on cost
The cost of solar energy has fallen dramatically in the last decade, and now projects are bid into the market at under $0.02 per kilowatt-hour on a regular basis. Costs vary by location and local costs, but it's clear today that solar energy is lower in cost than any new fossil fuel plant, and that's driving adoption rates around the world.
What's exciting about this long term is that solar energy is just the start. Adding batteries to solar power plants big and small is becoming more cost-effective, and companies like SunPower, Sunrun, Enphase, and SolarEdge are building products that will make solar and energy storage cost-effective for consumers and businesses. That's a truly disruptive development and opens up a trillion-dollar energy market for the industry.
Have solar energy stocks run too far?
Solar stocks look expensive by most traditional metrics, like price to earnings or price to sales. But keep in mind that the industry is entering a multitrillion-dollar energy market and has incredible potential for growth. The stocks I mentioned are leading the industry, and as a result they may have a lot more growth ahead.
