COP21 And U.S. ITC Extension: A Great Week For Solar Stocks

The last week turned out to be great for the solar industry on the policy front. On December 12, world leaders signed a landmark climate agreement in Paris, dubbed COP21, which seeks to limit global warming, while potentially boosting the urgency to shift to renewable energy sources. Separately, the United States passed a spending package that included a multi-year extension of the crucial Solar Investment Tax Credit, which was set to decline in 2017. Solar stocks reacted very positively these developments, with the Guggenheim Solar Index, an ETF comprised of solar stocks, rising by over 15% through the week.

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Paris Climate Deal Increases Urgency For Solar Installations

World leaders signed a historic legally binding deal to tackle climate change in Paris on December 12. The agreement, which has been in the making for close to 20 years, sets a goal of keeping global warning to “well below” 2 degrees C while “pursuing efforts” to keep it below 1.5 degrees C above pre-industrial levels. The agreement involves a total of 196 countries. Developed countries have agreed to raise $100 billion per year in climate financing beginning from 2020 to help emerging countries transition their economies to meet the targets. The deal also calls upon these nations to pledge a higher sum from 2025 onwards.

While world leaders still needed to chart out a clear course of action for meeting the targets of the deal, it’s likely to require transitioning away from fossil fuels and investing more into renewable sources of energy. Solar energy was one of the focal points during the Paris talks. The cost of solar energy has significantly closed the gap with coal and natural gas worldwide, and it’s likely that the deal will only accelerate this trend, building greater scale for the solar industry via the improved availability of financing, while potentially penalizing the use of fossil fuels. ^[1]

Solar ITC Extension May Provide A Windfall For U.S. Solar Industry

The U.S. Solar Investment Tax Credit will continue beyond 2016, as an extension was included in an omnibus spending bill passed by the House and Senate late last week. The inclusion – which was somewhat unexpected – came after a compromise between Republicans and Democrats to remove a 40-year long ban on oil exports from the United States. The ITC, which is the primary federal incentive for solar in the U.S., was originally slated to be cut from 30% to 10% for non-residential and third-party-owned residential systems. Under the new legislation, the 30% credit will be extended for another three years, dropping  incrementally to 22% by 2021, while remaining at 10% permanently beginning in 2022.

The extension is a strong positive for solar stocks, since demand from the U.S. – which was actually projected to decline in 2017 – is now expected to continue to grow. For instance, an analysis by GTM Research shows that an additional 25 GW of solar photovoltaic capacity could be installed in the U.S. over the next five years with the tax credit extended, marking a 54% increase over the base case, no-extension scenario. ^[2] The utility solar sector is expected to see the biggest boost, with the ITC extension leading to a 73% increase in deployments through 2020, with power purchased agreements expected to be signed at levels of below 4 cents per kilowatt-hour on a regular basis.

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1. COP21: Solar eyes role in delivering Paris pledges, PV Tech, December 2015 [↩]
2. Investment Tax Credit Extension Would Increase US Solar Installations 54% Through 2020, GTM, December 2015 [↩]