Solar companies that build panels, sun trackers and battery storage for large utility projects will provide investors next year with one of the few bright spots in an alternative energy sector that faces a long road to recovery that will take months — if not years. High interest rates crushed renewable energy stocks in 2023 with the Invesco Solar ETF (TAN) , one of the most watched indicators of the sector’s health, losing nearly 28%. The good news is that the renewable energy sector has entered a bottom as rates stabilize, but the bad news is that investors should not expect a broad rebound soon, according to UBS. The Federal Reserve has also signaled it expects to cut rates three times in 2024. The sector has historically faced stubbornly long bottoms averaging 23 months with current trough expected to last through at least the third quarter of 2024 as high rates persist, UBS analyst Jon Windham told clients in a December note. The 2024 presidential election also raises questions about whether Inflation Reduction Act tax credits are in jeopardy if Republicans sweep the White House and Congress. UBS thinks the credits will remain in place regardless of the outcome, but the uncertainty could keep some investors on the sidelines next year as they await clarity. The investment bank sees manufacturers that are exposed to utility-scale solar as winners in a tough environment because they are less sensitive to rates than residential solar and wind. Goldman Sachs analyst Brian Lee called for investors to “stay the course” on utility-scale with demand expected to rise double digits next year. Jefferies’ Dushyant Ailani also noted: “Exposure to utility scale solar provides manufacturer’s with firm backlog, cash flow certainty, and scale vs residential solar.” UBS sees First Solar, Array Technologies , Nextracker and Fluence as poised to surge next year. Utility-scale solar The utility-scale solar and battery markets are expected to grow 12% and 50%, respectively, in 2024, while residential solar and wind are both forecast to contract, according to UBS. Goldman Sachs, for its part, sees 20% growth for utility-scale solar next year. The sector is relatively insulated from higher rates because projects are planned years in advance and there is backlog of orders already in the pipeline, according to UBS. Rates simply remaining stable at the current level would provide clarity to help plan future projects, the firm said. Solar panel manufacturer First Solar will substantially benefit next year from IRA tax credits for producing components domestically, with the company having a manufacturing base in place in the U.S. with plans for expansion, according to UBS and Piper Sandler analysts. The credits are worth about $88 per share of First Solar based on the company’s current manufacturing roadmap, according to UBS. UBS has an overweight rating on First Solar with a stock price target of $250, implying 47% upside from Friday’s close. The company has proved a somewhat reliable investment in 2023. Shares are up nearly 14%, outperforming the solar sector but lagging the broader U.S. stock market. First Solar has also delivered earnings growth quarter over quarter and year over year. Its earnings per share grew 57% in the third quarter compared to the same period in 2023. The company has a sales backlog through 2030 and is sold out through 2026, CFO Alexander Bradley told analysts on the company’s third-quarter earnings call. This provides a reliable pipeline of business, making First Solar less vulnerable to market fluctuations. Tracker and battery companies As utility-scale solar grows next year, the companies that manufacture trackers to direct panels toward the sun and batteries to store the captured energy are also poised to benefit. Like First Solar, Nextracker should benefit from the IRA with its gross margin potentially increasing 300 basis points if it captures half the value of domestic manufacturing tax credits for tracker deployments in the U.S., according to UBS. Nextracker is the leading solar tracker manufacturer in the U.S. and the company is expected to gain increased pricing power due to tight supply of domestically manufactured components for utility-scale solar installations, UBS said. Nextracker had a successful initial public offering in February, raising $638 million by selling 15% more shares than expected. Its stock has risen 70% since then and UBS sees more than 5% upside for the company with a stock price target of $52. Wall Street is overwhelming positive right now on the stock with 82% of analysts rating it a buy. UBS recently cut its price target by $3 for the other major tracker manufacturer, Array Technologies , but the firm still sees more than 70% upside for the company with its revised target of $30. Array could qualify for IRA tax credits in 2024 for domestically manufactured components, which would act as a catalyst for improving its earnings outlook, according to the bank. Wall Street is also positive on Array with two-thirds of analysts saying buy, though the consensus price target is lower than UBS at $25.70. With battery deployments poised to grow 50% next year as storage needs grow, Fluence is well-positioned to be a market leader, according to UBS. The company is forecasting 20% to 40% revenue growth in 2024. Fluence is also expected to cash in on IRA domestic manufacturing tax credits as it ramps up production with the U.S. contract manufacturer AESC, according to UBS. UBS sees 46% upside for Fluence with a stock price target of $37. Fluence’s shares are up about 47% this year, with 68% of Wall Street analysts rating the company as buy or overweight with consensus target of $32.46. Residential solar and wind The residential solar sector is expected to contract 10% next year with its recovery dependent on the Federal Reserve cutting rates, according to UBS. The Fed has signaled three cuts in 2024 as inflation slows, but rates will remain elevated for much of the year as the market does not expect the cutting cycle to begin until March at the earliest. The central bank has also made clear that rate hikes remain on the table if inflation accelerates again. The residential solar market is more sensitive to rates than utility scale, which has large, well-capitalized customers. High rates increased monthly payments for households to finance installations, depressing demand and leaving companies saddled with inventory. The environment for residential will remain tough with demand expected to bottom in the second quarter of 2024. Sunrun and Sunnova , however, could emerge as a relative winners through their stocks are down more than 19% and more than 14% respectively this year, according to analysts. Sunrun has a 60% market share in leasing solar installations, which has proven to be viable option in a “higher for longer interest rate environment,” according to Jeffries. The firm has a buy rating on Sunrun with a price target of $25, suggesting nearly 30% upside from its last close of $19.26. Goldman Sachs views Sunnova as positioned to grow the fastest among residential installers. The company holds a unique competitive position with a diverse portfolio of loan, lease and services offerings. This positions Sunnova to snatch market share from peers who are under pressure, according to the bank. Goldman upgraded Sunnova to buy from neutral with a price target of $17, suggesting more than 10% upside from the last closing price of $15.38. UBS and Piper Sandler are generally cautioning investors to stay away from wind. Onshore installations are expected to contract 5% in 2024, as the sector faces permitting delays and a saturated market in geographically favorable regions, according to UBS. Piper Sandler does not see the sector recovering until 2026: “We expect continued stagnation for onshore domestic wind,” Piper Sandler’s Kashy Harrison wrote in a December note. 2024 election uncertainty In addition to the future trajectory of interest rates, the impact of 2024 presidential election on the Inflation Reduction Act presents the other major point of uncertainty for the renewable energy industry next year. There are two key tax benefits for renewable companies: The IRA credit for manufacturing clean energy components domestically, and a 30% investment credit for new clean energy projects in the U.S., above all solar, that predates the IRA but was extended under the legislation. If President Joe Biden is reelected, he will be able to preserve the status quo on tax credits but likely won’t be able to expand them given the likelihood that Republicans win a Senate majority, according to Piper Sandler. A Donald Trump win and GOP sweep of Congress would make it highly likely that at least some IRA tax credits would be curtailed, according to the firm. Republicans could use the budget reconciliation process, which requires a simple majority vote in the Senate, to alter portions of the IRA. There are $640 billion in subsidies on the table in the budget window from 2026 through 2035, according to Piper Sandler. But the firm views tax benefits largely unrelated to the renewable industry, such as electric vehicle credits, as under the biggest threat from a Trump presidency. The domestic manufacturing tax credit is driving significant investment in Republican districts, which will give the provision sway even if the GOP controls Congress, according to UBS. There has been $73 billion worth of IRA-supported manufacturing announced in Trump counties, according to Piper Sandler. It is unlikely that Republicans will be able to repeal all of the IRA tax provisions, with the GOP likely to have thin majorities if the party does win control of Congress, according to Piper Sandler. Wolfe Research puts the probability a total IRA repeal at 17%. “We expect the key renewable policy support to remain in place with either election outcome, however the scale of the subsidies makes any uncertainty impactful on valuations and likely keeps many investors out of the sector in 2024,” UBS analyst Windham wrote.
