The political landscape is shifting, and the ripples are being felt in the clean energy sector. With Donald Trump’s return to the White House and Republicans poised to control Congress, investors are grappling with the potential impact on renewable energy policies and investments. The recent market downturn, particularly in solar stocks, reflects this uncertainty.
The Invesco Solar ETF (TAN), a key indicator of the solar sector’s performance, has dropped over 9% in the past week, reaching levels last seen in July 2020. This decline represents a more than 70% fall from its peak in January 2021. Similarly, the Invesco Global Clean Energy ETF (PBD) has tumbled over 5%, hitting its lowest point since April 2020. Individual solar companies haven’t been spared either. Sunnova Energy International Inc. (NOVA) saw its stock plummet by 45% last week, its worst performance since its initial public offering in July 2019. SolarEdge Technologies Inc. (SEDG) followed suit, dropping 23% and reaching an all-time low. First Solar Inc. (FSLR), a major player in the solar panel market, has also been affected, with its valuation dropping to just 10 times forward earnings, its lowest point in four years.
This market turmoil can be traced back to the uncertainty surrounding the future of the Inflation Reduction Act (IRA). This legislation, passed in 2022, has been a game-changer for the renewable energy sector, providing significant tax incentives for solar, wind, and other renewable energy projects. However, Trump’s known skepticism towards green subsidies has cast a shadow over the IRA’s longevity.
Goldman Sachs, a leading financial institution, acknowledged the potential for volatility in the green energy sector due to the uncertain political climate. Brian Singer, a Goldman Sachs analyst, stated, “We expect rhetoric regarding environmental policy and the sustainability of the [Inflation Reduction Act] to be elevated, which could likely lead to continued volatility in stocks in the Green Capex supply chain, particularly pure-play solar/wind stocks.”
The incoming Trump administration is expected to prioritize policies aimed at easing tailpipe emission regulations and increasing resource development on federal land, potentially impacting the renewable energy sector. The future of the IRA remains a key question for investors. While Trump and the GOP have expressed reservations about green subsidies, Goldman Sachs analysts believe that the IRA could survive in some form due to its broad economic impact. Singer highlighted that “the job creation, reshoring, and/or environmental benefits of IRA tax incentives could limit policymakers’ interest in making material incentive revisions.”
The IRA’s solar and wind tax credits have demonstrably benefited various regions across the country, creating jobs and boosting local economies. This economic impact could serve as a deterrent for politicians wary of hurting these local communities.
Despite the uncertainty surrounding the IRA’s fate, Goldman Sachs believes that solar and wind power could remain cost-competitive with natural gas even without IRA support. However, they acknowledge that some renewable firms might see a decline in earnings as they adjust to potential changes in federal support. This slight “Green Premium” could potentially impact the sector’s profitability.
Amidst the political headwinds, there’s a glimmer of hope from the tech sector. Global data center power demand is projected to surge by 165% by 2030. Tech giants like Alphabet Inc. (GOOGL) and Amazon.com Inc. (AMZN) have publicly expressed support for low-carbon energy solutions, potentially mitigating some of the negative impacts from policy changes.
Goldman’s utilities team forecasts a 2.4% CAGR (Compound Annual Growth Rate) in U.S. power demand through 2030, the highest growth rate since the 1990s. This rising demand for energy could benefit renewable energy sources.
Beyond the immediate impact on solar stocks, the current situation is also prompting a shift in the world of ESG (Environmental, Social, and Governance) investing. Goldman Sachs observes a “back-to-basics move in the direction of pragmatism,” suggesting that investors are increasingly focusing on the tangible links between ESG factors and financial performance. This approach could make sustainable investing less vulnerable to political shifts. Asset managers are likely to prioritize investments where there is a clear connection between ESG factors and financial returns.
For investors, the question remains: are solar stocks currently oversold, or is the worst yet to come? Companies like First Solar are trading at their lowest valuations in four years, with price-to-earnings ratios hovering near single-digit levels. This could present an opportunity for long-term gains for those with a high-risk tolerance and belief in the resilience of the green energy sector. However, the decision to invest is ultimately based on individual risk tolerance and confidence in the long-term outlook for renewable energy.
The path forward for the clean energy sector, particularly solar, appears volatile under the new administration. While the economic benefits of renewable energy are undeniable, political shifts and potential changes to the IRA could impact the sector’s growth trajectory. The coming months will be crucial for understanding how this sector will navigate the new political landscape and whether investors will be rewarded for taking a chance on the future of renewable energy.
