Morningstar

Solar Stocks: Treasury Guidance Is Broadly Consistent with Our Expectations but Better than Feared

Collage-style illustration showing an abstract windmill on the left and a solar panel photograph.

On Aug. 15, the US Treasury released highly awaited new guidance on beginning construction requirements for renewable energy projects to qualify for tax credits. Shares of solar equities rose between 10% and 30%, as the news was broadly better than feared.

Why it matters: Beginning project construction is a common way US renewable developers have historically extended the timeline of tax credit expiration (currently year-end 2027 for solar).

  • On the surface, the requirements to begin construction are now more restrictive as the new rules require a project to show “physical work of a significant nature” and eliminate the ability to spend 5% of a project’s cost to qualify.
  • However, the new rules apply to solar projects on which construction starts on or after Sept. 2, giving the industry a short, but meaningful, window to qualify investments under the more lenient prior rules. In addition, the new requirements do not apply to projects less than 1.5 megawatts, leaving residential solar unaffected.

The bottom line: We view the new guidance as essentially giving most solar projects until 2030 to complete construction, given the four-year safe harbor period. In addition, it eliminated the worst-case scenario of potential retroactive changes that would have caused significant industry upheaval.

  • Broadly, our fair value estimates assumed a scenario that would allow most projects until 2030 to complete construction, consistent with the new guidance. As such, we are leaving our fair value estimates for most of our solar coverage, including First Solar, Enphase, Nextracker, SolarEdge, and Shoals, unchanged
  • We are raising our fair value estimate for Sunrun to $12 per share from $9, as the new guidance provides a line of sight to continued positive cash generation over the medium term. First Solar remains our relative favorite pick within our solar coverage, but shares now trade in 3-star territory following recent outperformance.

Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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