Solar Stocks Outshine Oil and Gas Benchmarks After Climate Credit Cuts

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Last month, U.S. President Donald Trump signed into law 'One Big Beautiful Bill Act', rolling back many clean energy credits enacted by former President Joe Biden under the Inflation Reduction Act (IRA) of 2022. As widely expected, OBBBA is far from beautiful for various industries within the solar and wind energy sectors. However, the solar sector has continued to defy bearish expectations one month after OBBBA was passed, thanks in large part to robust U.S. and global solar demand as well as specific provisions within the OBBBA that favor solar manufacturing in the United States. The solar sector's favorite benchmark, Invesco Solar ETF (NYSEARCA:TAN), has outperformed its oil and gas peers, returning 10.9% in the year-to-date compared by -0.7% return by the oil and gas benchmark, the Energy Select Sector SPDR Fund (NYSEARCA:XLE), and 8.6% gain by the S&P 500.
OBBBA favors solar manufacturing through provisions that incentivize domestic production and streamline the tax credit process, while also setting deadlines for construction and placement in service of solar projects. Specifically, it maintains and clarifies the tax credits for solar projects under Sections 48E and 45Y, while also phasing them out for wind and solar projects placed in service after December 31, 2027, unless construction began within 12 months of the Act's enactment.
First Solar (NASDAQ:FSLR) is one of the companies heavily favored by OBBBA. UBS recently reiterated its Buy rating and hiked its price target on FSLR to $275 from $255, good for nearly 50% upside, saying the company will receive a significant boost to the bottomline from OBBBA credits. According to UBS, the present value of 45X tax credits for the company is worth $75 per share, while the company is expected to grow net cash to $25 per share by the second quarter of 2026. UBS says its PT is conservative, pointing out that it did not factor in extra earnings when First Solar's finishing factory comes online. First Solar's 3.5 GW per year manufacturing facility in Louisiana is expected to be commissioned in the second half of 2025. This facility is part of First Solar's broader strategy to scale its American manufacturing footprint to over 10 gigawatts (GW) by 2025, according to Made in Alabama. The Louisiana factory, along with a new facility in Alabama, are key components of this expansion.
FSLR shares have been on a tear over the past week after the company posted Q2 earnings that exceeded Wall Street estimates, driven by surging solar module sales to third parties. According to First Solar's CEO Mark Widmar, the company is more favored by OBBBA than it was by Biden's IRA credits.
Israel-based SolarEdge (NASDAQ:SEDG) beat top- and bottom-line estimates on Thursday, with revenue of $289.4M (+9.0% Y/Y) beating by $14.91M while non-GAAP EPS of -$0.81 beat by $0.03. The company shipped 247 MWh of batteries for solar applications and 1,194 MW of inverters during the quarter. SolarEdge issued upbeat guidance, saying it expects revenues in the range of $315 million to $355 million, well above the Wall Street consensus at $304.33M; Non-GAAP gross margin of 15% to 19%, including ~2% in tariff impact while Non-GAAP operating expenses are expected to come in at $85 million to $90 million. Regarding regulatory changes under OBBBA, SolarEdge CEO Shuki Nir said the company's multi-year strategy of onshoring manufacturing to the U.S. will help it preserve 45X advanced manufacturing credits over the next 7 years.
Meanwhile, some residential solar companies are also defying bearish projections. California-based residential solar company Sunrun (NASDAQ:RUN) surged nearly 30% on Thursday after posting strong second quarter earnings driven by robust cost efficiencies as well as a record 70% storage attachment rate. Sunrun installed a record 392 MWh of storage capacity during the quarter, good for a 48% Y/Y increase while solar capacity installations clocked in at 227 MW, up 18% Y/Y. Meanwhile, subscriber additions grew 15%, bringing the company's total subscribers to 941,701 as of June 30.
For the full year, Sunrun has projected aggregate subscriber value growth of 14% to $5.7B-$6 and upped its guidance for contracted net value creation to $1B-$1.3B from $650M-$850M.
"Our actions to drive cost efficiencies and value optimization resulted in the strongest Upfront Net Subscriber Value the company has ever reported, expanding our margins by seventeen percentage points compared to the prior year," CFO Danny Abajian said.
Susquehanna maintained its Positive rating on RUN and raised its price target to $13 from $12, noting that the company is well positioned to capitalize on the ongoing shift towards third-party ownership offerings, a market where it commands a 33% share. The Wall Street analysts expect Sunrun to grow installation volumes despite the looming phase out of residential clean energy tax credits. Residential solar companies are expected to be negatively impacted by the One Big Beautiful Bill Act (OBBBA). Specifically, the elimination of the Section 25D tax credit for residential solar systems after 2025 will significantly reduce the affordability of solar for homeowners, potentially leading to a slowdown in near-term growth.
By Alex Kimani for Oilprice.com
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