Donald Trump Wins! Now what? The fate of the Investment Tax Credit (ITC) program is facing its biggest threat since President Biden signed the Inflation Reduction Act (IRA) into law on August 16, 2022. Or is it? Opinions are mixed…it’s the equity market, solar share prices plunging in one corner, and bank analysts and industry pros in the other (a nerdy Tyson vs Jake Paul face-off).
Let’s quickly review. The ITC program refunds, via a tax credit, solar and battery storage system owners a percentage of the total cost, currently set at 30%. Before the passage of the IRA, the ITC began stepping down in 2022, dropping from 30% to 26%. The IRA restored the ITC to 30% and deferred the step-down until 2032 (a 10-year extension!). The program intends to supplement traditional power production and improve power supply resiliency. Americans' growing need for ever more energy to power more stuff and, therefore, dependency on additional energy has grown exponentially, outpacing traditional production and suppliers' capabilities. Solar satisfies this need by providing clean and cheap power directly at the point of use.
On November 6th, Donald Trump's stump speech, Drill Baby Drill, reverberated through the market. If solar-related or adjacent, Sell Baby Sell. The Solar Smackdown swung into full swing.
Share Price from close Monday 11/4 to close Friday11/8:
Sunrun Inc. (RUN). From $16.91 to $10.23 (-39.50%)
Sunnova Energy (NOVA). From $7.06 to $3.14 (-55.52%)
SolarEdge Technology (SEDG). From $18.87 to $13.53 (-28.30%)
Enphase Energy Inc. (ENPH). From $89.94 to $66.90 (-25.62%)
Trump has signaled that he has the political will and ability to repeal and replace the IRA in all or in part. It would have been improbable with a split government in the Senate and House of Representatives. However, now that it’s clear that the Republican Party will control the Executive and Legislative branches of government, it just may be possible. But is it probable…there are those saying NO!
Analysts and Industry Pros are digging in. Despite all the negative headlines and the populace turning against solar, bank analysts call the sell-off overdone. Several factors make their argument compelling, including:
IRA Success. According to the US Treasury, since 2022, the IRA has attracted over $380 billion of new investments in solar, batteries and energy storage, wind, hydrogen, electric vehicles, and many others, driving an “investment and manufacturing boom in the United States unlike anything seen in decades.” According to the Labor Energy Partnership, the additional planned investments attributed to the IRA will support over 1.5 million good-paying jobs over the next decade.
Power Demand. The world is moving quickly to digitize and automate everything. The technology needed to realize material automation requires massive computing power. For the widespread adoption of AI, we need data centers of the size of football fields that need constant, reliable power. Progress cannot be made with the current energy infrastructure. The increasing energy demand has pushed household prices to rise over 5% yearly. The quickest and easiest way to combat rising prices is through solar development.
Solar/Battery Equipment Costs. Solar and energy storage equipment prices have fallen over 70% since 2004. The drop in solar costs can be attributed to an increase in consumer interest in renewable energy vs traditional electricity as rates continue to rise at an accelerated pace. The growth in interest, along with government support, has made it attractive to invest in research and development. The increase in R&D has resulted in better technology and hardware (solar panels, batteries, and inverters) as well as the build-out of larger and more efficient manufacturing facilities.
Fossil Fuel Relative Control. The traditional fossil fuel company might not share the same level of exuberance to speed up drilling that the Trump administration boasts. The level of drilling is already at an all-time high, and nation average prices at the pump are actually down 8.02% year-over-year (AAA). Current producers are concerned that pressure from the incoming administration to flood the market with additional supply will drive prices to unprofitable levels.
Bank Analyst's price guidance has been tempered but has not followed the equity market into the basement. The professionals at these firms stake their careers on closely analyzing the solar sector as a whole and at the individual company level. They dig deep into historical and projected financial data and management strategies to determine the health of each market participant. Projecting the future can be more art vs science, so often, we see their opinion shift fast with new information. However, it is a powerful data point to consider for investors. Examining the change in price guidance, we can determine that they are not buying into the fossil fuel-only future, solar doomsday scenario.
Average Analyst Price Target (yahoo finance) vs Share Price as close Friday11/8:
Sunrun Inc. (RUN). Average Target Price $20.26 (+98.04% upside)
Sunnova Energy (NOVA). Average Target Price $11.35 (+261.46% upside)
SolarEdge Technology (SEDG). Average Target Price $18.23 (+34.74% upside)
Enphase Energy Inc. (ENPH). Average Target Price $100.81 (+50.69% upside)
As of now, we're in a game of will he or won’t he? With President-elect Donald Trump's long list of day-one agenda items, the IRA might fall to the bottom of the stack.
Disclosure: The author of this article currently holds a position in Sunrun (RUN) and Sunnova Energy (NOVA).
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