Solar Stocks Surge on New IRS Guidelines

U.S. solar stocks rose sharply on Friday after the Internal Revenue Service (IRS) and Treasury Department released new guidance to address the rules that taxpayers must satisfy to qualify for the domestic content bonus credit amounts.

The new regulation is designed to accelerate a reshoring of clean energy supply chains and make the U.S. less dependent on China. If solar cells are produced in the States, domestic solar manufacturers can get tax credits.

The new rules still allow U.S.-based solar producers to source components from abroad. They can get a 30% tax credit if they fulfill certain criteria, in addition to 10% being available for manufacturers that use local products.

“Directly and indirectly, the US will rely on supply from China,” said Pol Lezcano, a senior associate at BloombergNEF. “This guidance may encourage more cell manufacturing to take place in the US, but most of the cells used in US solar projects will continue to come from . . . factories in south-east Asia, most of them owned by Chinese companies.”  

The American Clean Power Association (ACP) welcomed the new regulation, which is described as a “monumental opportunity to continue growing our domestic clean energy supply chain.”

“This guidance will help provide clarity around its eligibility requirements, unlocking billions of dollars of investment in American clean energy manufacturing and its workforce,” it is said in the statement. 

Secretary of the Treasury, Janet Yellen, added that the aim is to boost domestic manufacturing, as well as boost iron and steel industries. 

First Solar Rallies

First Solar (FSLR:US) shares rallied 26% higher to close at the highest level since 2008 on the news. The company is seen as one of the biggest beneficiaries of the Inflation Reduction Act (IRA).

Piper Sandler analyst Kashy Harrison believes the release of the new regulation paves the way for the Arizona-based company to announce a new project “and improves its competitive position (hence the 20%+ move).”

Similarly, Roth MKM analyst Philip Shen said the new development is “a meaningful positive.”

Array Technologies (ARRY:US) is another stock that benefited from the release of the new regulation. 

“It also clears the way for ARRYs bookings to recover (hence the 10%+ move)," Harrison added.

The surge in First Solar stock - up 253.02% in the last 12 months - has been mainly underpinned by the IRA. The company reported net sales of $2.6 billion for the last year, including as much as $1 billion for the fourth quarter.

“We finished 2022 with a record contracted backlog, a significant pipeline of bookings opportunities, and a strong balance sheet placing us in a position to respond to emerging opportunities,” said Mark Widmar, CEO of First Solar.

For this year, the company projects net sales between $3.4 billion and $3.6 billion while operating income is expected in the range of $745 million and $870 million. 

Congress Members Trading Solar Stocks

iShares Global Clean Energy ETF (ICLN:US) is used to track the investment results of an index composed of global equities in the clean energy sector. The ETF is up by approximately 10%, after comparing closing prices on October 14, 2022 to May 15, 2023.

Several Congress members have traded solar stocks in recent months. For instance, Congressman Michael McCaul was aggressively investing in SolarEdge Technologies (SEDG:US) in recent months.

The Congressman started buying SEDG shares in September 2022 and has so far disclosed as many as 16 transactions. The list of trades includes the $50,000 - $100,000 worth purchase on November 15. Other transactions all fall within the $15,000 to $50,000 bracket.

Elsewhere, Congress members were also trading Enphase Energy (ENPH:US) shares, which were up over 40% when comparing closing prices from January to December 2022. However, ENPH stock then retreated to erase nearly all gains from December 2022 to May 2023.

Shares plunged in April after the company reported lower-than-expected revenue in the first quarter. Enphase forecasted its Q1 revenue between $700 million -  $750 million, missing the $762 million consensus.

The weakening investor sentiment in Enphase can also be seen through the reported trades by Congress members. Representatives Ro Khanna and Daniel Goldman were continuously selling Enphase Energy shares. Mr. Goldman was also selling Sunrun (RUN:US) and SunPower (SPWR:US) shares in recent months. 

Conclusion

Solar stocks, most notably First Solar and Array, were seen rallying on Friday after the IRA and Treasury Department updated the guidelines for the eligibility for solar tax credits. Investors interpreted the new rules as bullish for the sector, with analysts describing the update as a “meaningful positive.”

Concerns were mostly focused on whether using China-made solar cells would still make U.S.-based solar manufacturers eligible for the 40% tax credit. The new guidelines also address labor costs, placing an emphasis on domestic manufacturing.

Congress members mostly traded SolarEdge and Enphase shares recently. Shares of the latter plunged in recent months, including in April when the company collapsed on the weaker-than-expected Q2 revenue guidance.