With Donald Trump now president-elect and Republicans likely to control Congress, clean energy stocks are taking a beating.
The Invesco Solar ETF
Renewables have also been rattled. The Invesco Global Clean Energy ETF
Sunnova Energy International Inc.
First Solar Inc.
Is this a buying opportunity at depressed valuations, or is the worst yet to come?
Trump's Anti-Green Policy Stance
"We expect rhetoric regarding environmental policy and the sustainability of the [Inflation Reduction Act] to be elevated, which could likely lead to continued volatility in stocks in the Green Capex supply chain, particularly pure-play solar/wind stocks," Goldman Sachs analyst Brian Singer explained in a note Friday.
Expect the incoming Trump administration to prioritize easing tailpipe emission regulations and increase resource development on federal land.
One of the biggest questions for investors is the future of the Inflation Reduction Act (IRA), which has provided significant tax incentives for solar, wind, and other renewable energy projects.
While Trump and the GOP have expressed skepticism about green subsidies, Goldman Sachs analysts still indicated the IRA could survive in some form due to its broad economic impact.
Goldman Sachs' Singer highlighted that "the job creation, reshoring, and/or environmental benefits of IRA tax incentives could limit policymakers' interest in making material incentive revisions." Despite Republican opposition, the IRA's solar and wind tax credits have been economically beneficial across various regions, creating a sticking point for politicians wary of hurting local economies.
Potential scenarios for the IRA under Trump include:
- Full Repeal: This would be the most drastic outcome, likely causing significant disruption in the green energy sector.
- Reversion to Pre-IRA Incentives: In this scenario, incentives would roll back to pre-IRA levels, which could still allow some projects to proceed, albeit at a higher cost.
- Early Termination: A more moderate approach, setting an earlier end date for current incentives.
Goldman Sachs' analysis suggests that even without IRA support, solar and wind power could remain cost-competitive with natural gas, though with a slight "Green Premium."
This means the green sector may stay resilient, but some renewable firms could see a dip in earnings as they adjust to potential shifts in federal support.
A Bright Spot: Big Tech And Rising Power Demand
Global data center power demand is expected to skyrocket by 165% by 2030.
Tech giants like Alphabet Inc.
Goldman's utilities team projects a 2.4% CAGR in U.S. power demand through 2030, the highest growth rate since the 1990s.
Despite potential policy turbulence, there's a shift underway in the world of ESG investing. "We have observed a back-to-basics move in the direction of pragmatism," says Goldman Sachs, noting that investors are increasingly focused on "materiality-driven links to fundamentals and performance."
This approach could make sustainable investing less vulnerable to political shifts. Asset managers may seek clearer connections between ESG factors and financial returns.
Should You Buy the Dip in Solar Stocks?
For investors, the question is whether solar stocks are oversold or if more pain lies ahead.
Companies like First Solar are trading at four-year low valuations and almost single-digit price-to-earnings. Some traders might see an opportunity for long-term gains.
The decision boils down to one's risk tolerance and belief in the resilience of the green energy theme.
Buy now, and you might secure a piece of a sector that's critical to the future. Wait, and you may miss out on a potential recovery rally-assuming Trump's policies don't squeeze renewables into oblivion.
Yet, one thing seems assured: The path forward for this sector will likely be volatile under the new administration.
