Yesterday, President Obama announced America's first-ever clean power plan, a historic move that will drastically affect our current and future energy economy. Its regulation will reach every single energy stock in existence, and some are more prepared than others. Here's what Obama's Clean Power Plan means for solar stocks.
"No challenge poses a greater threat to our future [...] than a changing climate." These were the leading words from President Obama as he unveiled what he undoubtedly hopes will be a historic moment for the United States. As he put it, America has been setting a lot of records lately -- but not good ones. Extreme temperatures, severe weather, increasing air pollution -- these are all issues the POTUS believes are caused by climate change. And climate change, President Obama definitively notes (and the overwhelming majority of scientists agree), is caused by humans and the carbon we emit.
Globally, the United States' carbon emissions are second only to China's. Our emissions emerge from a motley crew of culprits, but chief among them are power plants -- 32% of our nation's greenhouse gas emissions come from electricity generation.
In a sentence, Obama's clean power plan is an attempt to de-carbonize our energy economy. To do so, the president has set his sights on three main strategies: 1) improve the heat rate of existing coal-fired power plants, 2) switch out coal for natural gas, and 3) ramp up renewable energy generation.
The implementation of the plan will vary by state, allowing each entity to choose which metrics and strategies work best for them (within the confines of a larger mandate, of course). If all goes as planned, power plant carbon pollution in 2030 will be one-third of what it was in 2005 -- solid progress on a problem many think we're already too late to address.
If it isn't obvious by now, Barack is going green. But his new Clean Power Plan is dulled down from its first visionary version, and it's not the overnight green light the solar industry may have been hoping for.
What this plan does do is give solar companies a clear path of continued government support extending well beyond its current investment tax credit. For many solar stock investors, worries of the tax credit's end-of-2016 expiration had already started creeping into investment theses. Solar's historic ramp-up has been due in large part to technological improvements and innovative financing tools, but Uncle Sam's support has often provided the tipping point to keep solar competitive.
As part of his latest plan, the POTUS introduced a new "Clean Energy Incentive Program" that provides financial incentives for solar and wind investments. New regulation also allows for "emissions trading," which is just a fancy way to say dirty states can snag clean power points for purchasing electricity from clean energy sources elsewhere. That means solar doesn't have to be in every state, but every state has the opportunity to invest in solar.
For solar stocks like First Solar (NASDAQ:FSLR) and SolarCity Corporation (NASDAQ:SCTY.DL), this new plan is exactly what they need. First Solar has long argued that its utility-scale solar is cost-competitive with other sources like coal, nuclear, and natural gas (see chart below), but that's not true everywhere.
The Clean Power Plan puts the playing field at a national scale, allowing states and utilities everywhere to take advantage of First Solar's supersized solar products. First Solar can stick to expanding solar projects in states like California, where it holds a comparative advantage, while grabbing demand from across America. And if we've got any hope of dropping carbon emission as far the POTUS plans, we're going to need all the utility-scale solar we can get.
SolarCity Corporation's residential renewable energy isn't left out, either. SolarCity Corporation has been busy expanding its market base, adding homebuilders, renters, and smaller businesses to its customer pool with new innovative products. Renters alone constitute nearly one-third of all Americans, and Obama's new power plan wants to push the solar circuit even further. Its new National Community Solar Partnership syncs perfectly with SolarCity's latest expansion, as both attempt to bring solar energy to the sharing economy via "community solar gardens." Microgrid solutions are already popping up across America, and this latest program will target low- and middle-income households specifically.
These families arguably have the most to gain from cheaper electricity, but they have historically been excluded because of homeownership requirements, unsuitable roofs, or lower credit ratings.
Stock up on solar stocks?
Solar stocks have had their ups and downs. In the same way some investors are eyeing a coal comeback, others believe the solar sector has a long way to go before its risk outweighs its return. In the short term, they may be right. But Obama's Clean Power Plan is another institutional building block that sets solar firmly within reach of every citizen and every state's energy economy. Solar stocks are here to stay, and now is the best time yet for long-term investors to add some sun to their own profit-pulling portfolios.
Justin Loiseau owns shares of SolarCity and enjoys sunny weather. The Motley Fool recommends SolarCity and owns shares of it. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.