What happened
Leading solar stocks Enphase Energy (ENPH 3.79%), Sunrun (RUN -1.95%) and SunPower (SPWR -3.17%) fell hard on Monday, closing the session down 5.5%, 8.2%, and 7.4%, respectively.
The culprit is not hard to pin down. Over the weekend, Sen. Joe Manchin of West Virginia came out against the Build Back Better Act, likely nullifying its chances of passage, at least in its current form. The bill includes hundreds of billions of dollars in funding to support clean energy initiatives, and some of that was likely to filter down to these companies in the form of manufacturing subsidies or incentives for American customers to install solar power systems.
Oh, and an analyst downgrade of Sunrun didn't help matters, either.
Image source: Getty Images.
So what
The Build Back Better Act, as currently drafted, would direct $555 billion toward clean energy incentives, including boosting the investment tax credit for residential home solar installations from 26% to 30%, and a provision that would keep those incentives in place for 10 years. Other elements, such as the production tax credit, were meant to incentivize larger domestic solar installations.
Enphase produces inverters for solar power systems, Sunrun concentrates mostly on residential installations in California, and SunPower installs solar projects for residential, commercial, industrial, and carport deployments. The prospect that demand will be lower than expected without the Build Back Better Act's incentives likely dented the perceived outlooks of the companies.
On top of that disappointment, analysts at Keybanc downgraded Sunrun from overweight to underweight Monday. And the crux of its argument as to why wasn't even related to Build Back Better, but rather policy uncertainty in California.
Earlier this month, the California Public Utilities Commission proposed slashing net metering incentives and reducing what residents who install solar panels are paid for the electricity they send to the power grid. That could have a chilling effect on solar energy adoption since those payments are a significant part of the cost calculation for California residents.
And remember, this regulatory headwind is coming on top of recognition that interest rates are on course to head higher, which could lower valuations for growth stocks such as these three solar industry players.
Now what
Solar stocks have hit a really rough patch recently. Enphase is now down by 37% from its 52-week high, while SunPower is off by 67%, and Sunrun is down by a whopping 69%. It's a little rich that Keybanc's analysts chose this moment to downgrade Sunrun after it has already declined so much.
On the positive side, solar companies still have exciting growth prospects. So far, just over 3% of U.S. electricity production comes from solar. And these three industry leaders are all currently trading near the low ends of the ranges of price targets put on the stocks by Wall Street analysts.
However, investors should expect more volatility from here, and should also brace for regulatory changes that could drastically alter these companies' business prospects and stock prices -- either positively or negatively. I've tended to shy away from these companies' stocks because they are so dependent on policy decisions outside of their control. However, all three stocks may be worth investigating after their disappointing performances in 2021.
