ESG, Impact stocks, and more specifically, Solar Stocks, had their moment in the sun in 2020, outperforming the S&P 500 by 275% from March lows to year end. But those who think Solar Stocks have burnt out will miss out on an incredible buying opportunity for 2021.
Puns aside, there are three reasons why Solar Stocks are primed for immediate and sustained growth over the coming years.
Let’s take a closer look at all three reasons and two of the best solar stocks which stand to benefit.
What goes up, must come down. And solar stocks shot through the roof in 2021. As I mentioned above, Solar Stocks soundly beat the S&P 500 as investors poured their resources into tech and clean energy.
However, these massive increase in prices led to excessive valuations. Other factors such as such as rising input costs and supply chain issues in steel and semi-conductors also led to the downside pressure of solar stocks.
This pull back will be proven to be short-lived. Solar energy will be crucial part of curtailing climate change as consumers turn to alternative energy sources after extreme weather conditions have already disrupted the power grid (more on that in a minute).
So, while the price pull back in solar stocks is a healthy correction of realigning price and value, it is not reflective of the growing demand for solar energy. In fact, solar installations in the United States grew by 46% in the first quarter alone.
The demand for solar installations has a ton of tail-winds. Cheaper and more efficient technology is making solar energy almost as efficient as fossil fuels. And with government backing the development of solar energy, we could see it overtake fossil fuels as far as the ability to generate power.
President Biden has made clear of his desire to move to renewable resources such as wind and solar, and away from fossil fuels. Moves such as rejoining the Paris Climate Agreement and achieve a net-zero emissions economy by 2050 indicate a positive regulatory environment for the solar sector.
However, both of these moves are more surface-level than tangible and practical. To understand how solar energy will be impacted by government actions, we need to take a close look at the recently agreed upon Infrastructure bill.
Details are sparse on what is in the bill as it is still in negotiations but there is a a key provision in there that will prove to be a building block for further growth of solar energy in the United States.
One of the major roadblocks for the proper and efficient scaling of solar energy has been its land use. Solar energy has about a 100x less power density than fossil fuels. This means that solar power needs at least 10x more land per unit of power to produce the equivalent output.
Land use becomes an issue for solar in high-demand cities such as New York and San Francisco. Because of the land use issue, the United States has had trouble connecting the new supply of solar energy from big cities to areas of the sunny south where land use is in ample supply.
However, there is $73 billion allocated for “power infrastructure, including grid authority.” This money will help accelerate the process by building transmission lines across the country. This is a huge step in solving a land use issue that has been plaguing solar energy scalability for years.
More details will come out as the infrastructure plan rolls out but what is available makes solar investing seem like a sure bet in 2021.
The recent 46% increase in solar installations this year is not a fluke. Extreme weather patterns have increased recently, putting serious stress on the outdated U.S. power grids.
“The unfortunate fact is that our current power system was designed for yesterday’s weather, and now we’re dealing with tomorrow’s weather,” said Jason Burwen, interim CEO at Washington-based trade group Energy Storage Association.
The West Coast is currently experiencing record-breaking heat waves and droughts. This month, grid operators have asked consumers to curb their energy usage. Constant rolling black-outs and total outages have become more frequent in an effort to avoid a total shut down.
The West Coast isn’t the only area of the country dealing with power grid issues. Texas encountered a major power crisis in February that shut of power to millions of people and barely missed a complete catastrophe with their power grid which would have caused a shut down for possibly months.
Asking consumers to turn off their energy, or intentionally shutting down energy in 125 degree heat is obviously not sustainable. And consumers are taking matters into their own hands.
Consumers are looking to create stored energy through solar in order to keep the energy running when the grid is shut down.
The unfortunate fact is that our current power system was designed for yesterday’s weather, and now we’re dealing with tomorrow’s weather,” said Jason Burwen, interim CEO at Washington-based trade group Energy Storage Association. Extreme weather is “pushing past the limits of the existing power system,” he said, adding that it’s put a lot of “households and businesses in a position where they suddenly feel like they need to have more control of their fate.”
Analysts at Goldman Sachs recently noted that residential storage’s rate of adoption has exceeded their expectations. Penetration is significantly below the already small foothold rooftop solar has secured across the U.S., but many view this as indication of a huge growth opportunity ahead.
Goldman estimates that first quarter battery deployments jumped 155% year over year due to greater solar adoption as well as consumers looking for grid reliability. The firm anticipates the market showing massive growth this year, and hitting $1 billion for the first time in 2022.
Two of the best solar stocks which could benefit tremendously from the above tailwinds are SUNRUN (RUN) and SUNOVA (NOVA).
Both of these stocks recently received two BUY ratings from Stephens and Guggnenheim, with both having over a 50% upside from current prices.
Guggenheim said of NOVA, “NOVA should be able to continue to add subscribers as the company moves into new markets. … We think that we are just at the beginning of a major shift, with home resilience, grid services, neighborhood microgrids and additional services driving incremental revenue,” the firm said. Guggenheim’s $51 target is 80% above where it currently priced.
For SUNRUN, Guggenheim issued the following statement, “As the residential solar business grows in size and sophistication, so do the advantages of being big, and RUN is leveraging those advantages. From access to capital markets to procurement to go-to-market strategy, RUN is using its position to drive additional growth and market share gains.”