What happened
Shares of solar energy stocks dropped like a rock on Friday after Sen. Joe Manchin of West Virginia said he wouldn't support additional climate change spending.
Shares of First Solar (FSLR 2.17%) fell as much as 14.2% in early trading, Sunrun (RUN 2.19%) fell 14.1%, SunPower (SPWR -8.41%) dropped 11.8%, and Enphase Energy (ENPH 2.69%) fell 11.1%.
So what
The news came out overnight that negotiations among Senate Democrats had broken down and Manchin wouldn't support additional taxes or climate change spending in a new bill. Ironically, the text of the bill and full details hadn't been released, but the industry seemed to think it was likely that solar tax credits could be extended, and even a made in America provision had been supported by First Solar.
Manchin's biggest worry was that increased spending on climate change initiatives would lead to even more inflation at a time when inflation is out of control. Earlier this week, it was reported that the June Consumer Price Index was up 9.1% from a year ago, and the Federal Reserve is quickly raising rates to try to bring inflation down.
Solar energy stocks often move big when subsidies of any sort are proposed or passed, but the reality is that subsidies haven't had a big impact on solar stocks long-term. The driver of their growth has been falling costs for solar equipment and improved efficiency. Those won't change without subsidies.
Now what
The reaction from the market was swift this morning, but long-term I don't think the change in potential policies from Washington D.C. will change the industry's momentum.
Better news may have come from the bond markets where U.S. 10-year government bond rates fell 4 basis points to 2.92%. Solar installations are often financed with debt, and even a small increase in interest rates can effectively increase the cost of electricity from a solar power plant. So, falling rates would be welcome news, especially after the rapid rise in interest rates over the last three months.
Long-term, I don't think today's move is a big deal for the solar industry. Subsidies have come and gone over the last decade and the industry keeps growing.
Along the same lines, solar installers have been dealing with rising inflation pressures, and that's making it difficult to profitably install projects. In a residential solar project the cost of the solar panel is only about 10% of the overall cost, so rising metal, labor, and other input costs can be more impactful than any increase in panel costs.
A quick reaction is understandable for the market, but long-term this is noise for solar energy stocks. The future is still bright, especially for industry leaders.
