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Why Solar Energy Stocks Can Beat the Market Again in 2021

By Travis Hoium - Jan 4, 2021 at 9:48AM

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Solar energy stocks may still have room to run.

Solar energy stocks have had a great year in 2020, despite a global pandemic that slowed sales and installations mid-year. Shares of SunPower ( SPWR 4.43% ), Sunrun ( RUN 4.66% ), Enphase Energy ( ENPH 5.17% ), SolarEdge Technologies ( SEDG 4.76% ), and Canadian Solar ( CSIQ 4.25% ) are just a few of the stocks that have more than doubled this year. 

What's amazing about where the industry sits today is that 2020 wasn't all that good for solar operations. The pandemic made sales and installations more difficult, and very few companies are actually going to grow this year. But there are reasons to think operations will pick up quickly in 2021, and that could keep solar energy stocks rolling in the new year. 

Solar farm on a partly cloudy day.

Image source: Getty Images.

Interest rates should remain low

Most renewable energy projects are dependent on low interest rates to be financially viable. A wind or solar development, for example, requires a large upfront investment and then generates revenue from electricity sales over the course of decades. Lower interest rates mean less revenue is gobbled up by interest payments and, therefore, each project is more valuable. The good news is that rates have been falling over the past year. 

10 Year Treasury Rate Chart

10 Year Treasury Rate data by YCharts

In 2021, the Federal Reserve has indicated that it will keep interest rates extremely low for the foreseeable future because of high unemployment and low inflation. So, I don't see the low-rate trend changing this year. The doesn't mean that rates won't rise slightly, but as long as the 30-year Treasury rate stays below 3%, I think it'll be a tailwind for solar energy projects and, therefore, solar energy stocks. 

Corporate solar is booming

Corporate America has been one of the biggest drivers of solar energy installations over the past decade, and it's not just public relations driving the investment. Companies see solar energy on commercial roofs or deals to buy energy from utility-scale projects as a way to lower costs and have more predictable electricity cost long-term. 

According to the SEIA, corporate investment in solar energy has grown 20 times in the past decade to 8,300 MW in 2019. Leaders in solar deployments are giants like Apple ( AAPL 2.98% ), Amazon ( AMZN 2.00% ), and Walmart ( WMT 0.18% )i. In the past, that's been because they have the ability to finance projects easily. Today, though, smaller companies could play a big role in the industry's growth, even if it's just adding solar to the roof of one commercial building. Companies like SunPower are focused on commercial solar deployments and making them easier to build and finance. I think growing demand in commercial solar will help keep everyone from installers to manufacturers busy in the coming years. 

Storage is finally here

To go along with solar, energy storage is finally financially viable for homeowners, commercial developers, and utility-scale solar projects. Energy storage assets can add value by themselves by bidding charging or discharging services into the grid, or they can add value by moving solar electricity from peak production times to peak demand times. Utilities and regulators have shown that this adjustment will increase what they'll pay for energy from a solar-plus-storage development. 

In the home, solar energy is finally starting to develop a business model. Companies like Tesla ( TSLA 2.45% ), Sunrun, and SunPower are aggregating hundreds of home energy storage systems into what they call virtual power plants and bidding them into electricity markets. These bid into markets like any other power plant, but are located in homes and can be hundreds of points of contact with the grid rather than a single power plant. The best part is that this generates revenue for the energy storage asset owner. 

As business models improve and the cost of energy storage assets falls, solar-plus-storage installations should help grow the industry. As a data point, SunPower has said it's attaching energy storage to about 30% of commercial solar installations right now. And its residential energy storage solution is already being installed in 20 new home communities. Sunrun has said its energy storage attach rate is 100% in Hawaii and 30% in California, which are the early movers in the storage market.

Finances are getting better

To top it off, the solar industry seems to be settling into a more stable and profitable state than it's been in for the past decade. Companies were once trying to vertically integrate, only to be disrupted in one point of the business model, causing losses and poor performance for solar stocks. 

Over the last few years, most companies have moved to specialization, which has had the effect of improving margins for many companies and even providing growth opportunities. I would expect SunPower, Enphase, SolarEdge, and Canadian Solar to all see improved margins and therefore profitability in 2021. If that happens, it could propel solar energy stocks higher once again. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

SunPower Corporation Stock Quote
SunPower Corporation
SPWR
$25.48 (4.43%) $1.08
Apple Inc. Stock Quote
Apple Inc.
AAPL
$170.24 (2.98%) $4.92
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$3,495.73 (2.00%) $68.36
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$139.25 (0.18%) $0.25
Tesla, Inc. Stock Quote
Tesla, Inc.
TSLA
$1,033.73 (2.45%) $24.72
Canadian Solar Inc. Stock Quote
Canadian Solar Inc.
CSIQ
$34.34 (4.25%) $1.40
Enphase Energy, Inc. Stock Quote
Enphase Energy, Inc.
ENPH
$223.96 (5.17%) $11.02
SolarEdge Technologies, Inc. Stock Quote
SolarEdge Technologies, Inc.
SEDG
$322.26 (4.76%) $14.63
Sunrun Inc. Stock Quote
Sunrun Inc.
RUN
$42.23 (4.66%) $1.88

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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