Why Are Solar Stocks Beaming?

A global plan for taking on climate issues that have been wrought by fossil fuel use has given solar energy stocks a lift.

Last week in Paris, 195 countries signed onto an agreement to rapidly reduce greenhouse gas emissions in an effort to keep global warming beneath 1.5 degrees Celsius.

As a result, stocks like Solar City Corp SCTY, First Solar, Inc. FSLR and SunEdison Inc SUNE received a boost as investors saw an emerging mindset that could continue to benefit renewable energy companies, according to a Credit Suisse report cited by Investors Business Daily.

“While it is highly speculative to translate the agreement specifics into implications for the solar industry,” Credit Suisse wrote, “as the agreement is technology agnostic and country-level plans could manifest themselves in varying ways, we would estimate that if countries indeed reach the targets to lower (greenhouse gas) emissions (greater than) 20%, at least an incremental 1,600 GWs (approximately) of solar capacity could be built to reach 10% electricity generation from solar, representing an investment of (about) $2.3 trillion over the next 10 to 20 years.”

Other solar investments also rallied. The Cleantech Everywhere motif, which has a one-third weighting in shares of solar energy companies (including Solar City and First Solar), has climbed 13% in the past month. In that same time, the S&P 500 has fallen 4%.

Over the past 12 months, the motif has increased 2%; the S&P 500 is down 3.1%.

Meanwhile, oil prices continued to fall, with crude falling under $40 a barrel.

These near-term swings betting on the respective long-term prospects for fossil and renewable fuels are no coincidence. As a Morgan Stanley report explained, “There is little doubt that the Paris Agreement creates a long-term challenge to the business model of many of Europe’s integrated oil companies. On top of oversupplied oil, gas and LNG markets, resilient non-OPEC production, and OPEC production that appears unconstrained in the short term, this is likely to weigh further on oil and gas equities for now.”

Putting it even more bluntly, a separate Credit Suisse analyst note declared: “the clear result (of the Paris Agreement) is that the energy balance will shift over time from fossil fuel sources to a mix of nuclear and renewables — solar and wind power.”

As if that wasn’t a big enough development for solar energy stocks, the industry also benefited last week from a dose of federal spending politics, as lawmakers proposed extending important renewable energy tax credits in exchange for lifting the decades-old ban on exporting American crude oil.

For the solar industry, the proposed extension was better than many executives and analysts had expected, the New York Times reported. For example, the investment tax credit for solar projects, which was to fall to 10% at the end of 2016, is to stay at 30% until 2019, then gradually decline to 10% by 2022.

In another gain, projects will be required only to begin construction, rather than operation, as is the case now, to qualify for the credit.

The effect, the Times said, will be to make large, commercial-scale projects more viable, like the roughly two gigawatts’ worth scheduled to come online in Texas for 2017.

According to Guggenheim’s DC strategy-watcher Chris Krueger, the big winners here are companies with large capital expense budgets: First Solar, Sunedison, SolarCity and Sunrun Inc RUN.

Longer term, the solar sector has continued to offer the proposition of a volatile trading environment. But one could allow renewable energy investors some increased optimism after the week they just had.

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