What happened
Solar energy stocks jumped big on Monday after President Biden authorized the Defense Production Act to increase domestic solar product production and also announced that there will be a 24-month suspension of some solar import duties to help solar installers.
The bounce in stock prices was widespread. Installer Sunrun (RUN -2.43%) jumped as much as 15.3% in trading today and closed up 5.9%. Equipment supplier Enphase Energy (ENPH -5.56%) popped 9.7%, Array Technologies (ARRY 2.43%) popped 25.8%, FTC Solar (FTCI 8.59%) jumped 33.8%, and Shoals Technologies Group (SHLS 0.35%) was up 26.8% at its high. The stocks ended the day up 5.4%, 18.8%, 31.5%, and 26.8%, respectively.
Image source: Getty Images.
So what
Tariffs and duties for solar modules and cells from Cambodia, Malaysia, Thailand, and Vietnam will be lifted for 24 months in order to allow the U.S. manufacturing industry to catch up, according to the administration. These tariffs were put in place during the Trump administration but they haven't done much to spur domestic production; rather they've given incentives for manufacturers to move operations to other parts of Asia or move through multiple countries on their way to the U.S.
The ultimate goal of this reduction in tariffs is to give time for manufacturers to build more capacity in the U.S., which has been a hard sell. According to the White House, they hope to increase domestic solar manufacturing capacity from 7.5 gigawatts to 22.5 gigawatts by 2024. This will be completed partly by First Solar (FSLR -1.46%) which is already building 3.3 gigawatts of additional capacity in Ohio with operations expected to start in 2023.
What these numbers don't show is that most U.S. solar capacity is just assembling solar panels, not producing the critical input components. That's still done primarily in Asia, and it'll be difficult to justify the added cost to move them to the U.S. It's unclear, at this point, how this will be executed outside of the government buying solar panels directly from manufacturers.
Now what
Investors are seeing this announcement as a sign that the administration is going to use all of the power it can to increase U.S. solar production and manufacturing. That should be bullish for the industry long-term.
What I think is notable here is that utility-scale suppliers and developers have seen the biggest valuation jumps today. That's because the utility space is the most price-sensitive, and even a penny or two in lower costs per watt can mean the difference between operating profitability and not. So, this should be even more bullish for those companies than residential installers.
Like many policy decisions, I think this is more incremental than revolutionary for the solar industry. This could lead to more sales and manufacturing, but it's not likely to be a game-changer because of the fundamental cost difference in operating in the U.S. and Asia. The same dynamic takes place in the chipmaking industry where the U.S. has been losing market share for decades, and long-term I don't see that changing in the U.S. for the solar industry, either.
