House Tax Bill Would be Worst-Case Scenario for Rooftop Solar Stocks

On May 22, the US House of Representatives passed a tax bill which included changes to clean energy tax credits relative to the initial draft. The revised draft would eliminate rooftop solar incentives at the end of this year while accelerating the phaseout of broader renewables incentives.

Why it matters: Ending leased solar systems’ ability to claim tax credits at the end of this year is a draconian scenario that would severely challenge future economics.

• The situation is less dire for utility-scale renewable projects, but the lack of a phase-down of tax credits is an incremental negative. We see relatively more potential for utility-scale projects to offset reduced incentives with higher offtake pricing compared with rooftop projects.
• The market reacted swiftly to the potential policy change, sending rooftop solar stocks down 20%-40% and other solar stocks facing mid-single-digit declines. We view the significant bifurcation in trading between rooftop solar and utility-scale solar equities as justified.

The bottom line: We are maintaining our fair value estimates across our solar coverage, as the tax bill is likely to see further (potentially positive) changes in the Senate prior to becoming law.

• We are raising our Uncertainty Rating for Sunrun to Extreme from Very High, given its pure-play exposure to US residential solar and heavy reliance on incentives. In our view, eliminating incentives at the end of this year would significantly challenge the company’s cash generation.
• If the revised bill were finalized as it is, we would expect to lower our fair value estimates for rooftop solar equities in the 25%-50% range. We would expect Sunrun’s reduction to be at the higher end of the range, while Enphase and SolarEdge would be toward the lower end. The impact on our utility-scale solar valuations would be modest (less than 5%).