Why solar stocks have soared — and why there's trouble ahead for the rally
The sector surged after a key budget bill kept tax credits intact.
But the bill proposes changes that could slow the solar industry's buildout.
Sunshine is beaming down on solar stocks after policymakers saved the clean energy sector from a potentially dire threat, but there are still clouds looming over the sector.
Last week, the industry was relieved after a long-awaited budget bill left most industry credits intact. In the words of JPMorgan, the bill satisfied the "more bullish end" of expectations, sparing the sector-boosting credits from the chopping block.
The May 12 draft bill unleashed a comeback rally for top solar names, which outpaced a broader rally in the week.
First Solar surged nearly 23% between Monday and Friday, while Array Technologies, Nextracker, and Sunrun jumped 27%, 19%, and 26%, respectively. The Invesco Solar ETF jumped more than 10% in the week, about double the gain of the S&P 500.
By all accounts, the proposed legislation is an optimistic outcome amid White House administration opposition to clean energy buildout. It keeps alive tax benefits that have propelled solar's record-breaking buildout in 2024.
But as enthusiastic as solar investors might get, the new bill faces challenges from Republicans looking for deeper spending cuts to fund tax breaks for households and companies.
Credit complexities
Even in its current form, the bill could disrupt industry momentum.
Under the proposal, businesses would be able to take advantage of tax credits only when a solar project starts generating electricity, and this would have to occur by 2029 — after that, credits would start to phase out.
It's a simple but consequential shift from current setup, where credits are unlocked once construction begins.
"If you fail — often for no fault of your own — to be able to bring it online by the deadline, then suddenly your economics have changed," Michael Carr, executive director of the SEMA Coalition, told Business Insider. "And so what we have observed is, with a placed-in-service standard, banks are becoming increasingly unwilling, as far as like three or four years out, to finance these projects."
Also of note are more stringent provisions on "foreign entities of concern," which could effectively block a manufacturer from tax benefits if their project uses equipment, materials, or IP from specific regions outside the US.
The new language targets even sub-components, the type of equipment that American manufacturers exclusively source from places like China.
"My preliminary understanding is that there are probably many, many pieces of equipment that use Chinese IP, because China is the leader in the solar supply chain," Sylvia Leyva Martinez, a principal analyst at Wood Mackenzie, explained to BI.
The industry might not know for years, given that previous guidance has taken a while to come out, Carr said — all amounting to a bout of new uncertainty.
In its note, JPMorgan acknowledged the same drawbacks, but highlighted that one proposal could give domestic manufacturers a leg up. Restrictions against prohibited foreign-entities from qualifying for 45x credits would provide a key advantage to First Solar, and, to a lesser degree, names such as Nextracker, Enphase Energy, and SolarEdge.
Uncertainty heats up
Aside from headwinds related to the tax bill, solar hasn't been spared from the tariff chaos.
Trade whiplash has created the same uncertainty that looms over other industries, complicating business decisions for solar firms. Price hikes could hit the industry, and even last year's supply glut of solar panels might not help.
Meanwhile, industry confidence has chilled amid the Trump administration's energy policies, which focus on uplifting non-renewables and, at times, slashing clean energy initiatives.
But Leyva Martinez thinks the White House has good reason not to target solar, given the sector's crucial role in the artificial intelligence buildout.
"There is an impending boom in demand," she said, citing that both renewables and non-renewables will need to be tapped to meet enormous energy needs. "We'll need to see if that leads to any major policy changes that could potentially — not benefit — but at least not harm."
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