The Changing Political Climate's Impact On The Solar Industry

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Includes: CSIQ, FSLR, SPWR, TSL, TSLA, VSLR
by: Simple Investment Ideas

Summary

The shifting U.S. political climate in favor of the Republicans will have a negative impact on solar policies moving forward.

The global political environment is becoming increasingly more favorable for solar, especially in light of the historical APEC summit climate deal between the U.S. and China.

While the solar industry as a whole will benefit from the increasingly solar friendly global politics, leading solar companies will have the most to gain.

Solar technology has grown leaps and bounds since its inception, and continues to improve at an exponential rate. Over the past decade, solar has grown from a virtual non-factor in the energy arena to account for approximately 1% of total energy generation. While 1% still does not seem like much, solar's growth is exponential in nature, which means that its current 1% figure should compound to a much higher figure faster than most people realize.

Notice U.S. Solar's Exponential Adoption in Conjunction with its Price Drop

Source: Greentechmedia

The enormous implications of solar taking over the electricity industry, which would effectively mean the displacement the huge fossil fuels industry, has made the issue of solar power extremely contentious on the political arena. Despite the fact that 80-90% of Americans strongly support solar, there are seemingly endless political battles over even the most sensible climate policies.

Much of the arguments in the favor of solar come from fears of intensifying climate change and pollution. Despite the overwhelming scientific evidence confirming the existence of man made climate change, and the detrimental effects of pollution caused by the burning of fossil fuels, one has to wonder why there is even such ferocious political debate in the first place. The simple answer is that the fossil fuels industry is so well funded that it could easily influence politics through its vast sums of money, as fossil fuels have control over a $2 trillion a year industry. The fact that the vast profits from the fossil fuels industry could be used in the political arena is not lost upon fossil fuel proponents.

The U.S. Political Scene's Effect on the Solar Industry

The news of Republicans wresting control of the Senate from Democrats has not been well received by the solar industry. This means that the Republicans, who are notoriously adverse to the solar industry, will have greater control over the shaping of solar politics in the near-term future. This implies that crucial solar policies will have a smaller chance of getting approved/renewed. Even large foreign based companies that have business in the U.S., such as Trina Solar (NYSE:TSL) or Yingli (YSL), will be affected by the United State's changing political climate.

A perfect example of a policy in peril is the solar Investment Tax Credit (ITC), which has been absolutely crucial to the growth of solar in the past decade. The ITC as we know it today(which allows for a 30% tax credit for solar users) will be set to expire at the end of 2016, and any hopes of its renewal beyond that date have been drastically lowered with Republican control of the Senate. The renewal of the ITC has been perhaps one of the largest concerns of the solar industry, as there are huge negative consequences for the industry if it does not get renewed.

Large utility-scale solar companies such as First Solar (NASDAQ:FSLR), SunPower (NASDAQ:SPWR), etc, are already facing the prospects of potentially having to cancel project because they will not be able to finish them by the ITC deadline. Already there have been project cancellation throughout the country, not only in photovoltaics, but also in the solar thermal sphere. The current ITC is so impactful that residential solar companies such as SolarCity (SCTY) or Vivint Solar (NYSE:VSLR) have even modeled their entire cost-structures around it. It is clear that the solar ITC has been and still is crucial to solar's overall growth, so anything that hurts its chances of renewal will have huge negative consequences for the solar industry.

While there are many other policies or regulations that are likely to meet fierce resistance with a Republican controlled Senate, such as carbon taxes or carbon emissions limits, the ITC is by far the most important for the solar industry. U.S. companies and foreign companies will all be negatively affected if the Republicans manage to successfully end this crucial tax credit.

Global Political Climate

Despite the increasingly unfavorable U.S. political climate for solar, the global political climate has taken many positive steps towards embracing solar. Countries are becoming increasingly more aware of the dire environmental consequences if carbon emissions are left unchecked.

The most surprising turn of events on the global stage was when U.S. President Barack Obama and Chinese President Xi Jinping recently agreed to an unprecedented climate deal at the APEC summit. This historic climate deal is extremely significant as China(the country with the largest carbon footprint) has always been reluctant to agreeing with such deals, in fears that such deals might slow down its economic growth. In addition to the deals impact on carbon emission in the U.S. and China, it has also been a huge catalyst for other countries to curb their carbon emissions.

The climate deal entails that China would reach it peak emissions by 2030, and that the U.S. reduces its emissions 28% by 2025. This climate deal has huge positive implications for the global solar industry. On the U.S. side, this deal doubles the rate of its previous reduction, which would mean that the solar industry would play a much bigger role in the future. Even more significantly on China's side, the deal means that by 2030, around 20% of the country's energy would be from clean energy sources like solar. Perhaps most significantly, this deal will also encourage other countries to reduce their carbon emissions, as the U.S., and more recently China, have a leadership position on the global stage. Nearly every single solar company could gain from this deal, even those that are based outside of the U.S. and China, such as Canadian Solar (NASDAQ:CSIQ).

While the U.S. political scene for solar has been more pessimistic since the Republicans had taken over the Senate, there have been a number of solar-friendly occurrences on the global stage, even aside from the APEC climate deal. For instance, Pope Francis, a leader to billions of Christians worldwide, has broken tradition and started preaching the downside of climate change. No Pope before him had discussed such a controversial topic for political reasons, so Pope Francis' decision to fight against climate change has been pleasantly surprising for the solar industry. 2014 has been a banner year for the global mobilization against climate change, and the solar industry stands to gain immensely from this increased awareness.

Conclusion

Despite the fact that solar only accounts for 1% of total global energy generation, proponents of solar are still doing a great job of pushing the solar agenda. The reason why solar lobbyists have huge political clout relative to their 1% number is that they have the vast majority of ordinary citizens' support. The conspiracy that the primary desire for most solar advocates is somehow monetary in nature is inherently ridiculous, as much more money can be made by pushing the fossil fuels agenda. Fossil fuels make over the vast majority of energy generation, so if there are any political machinations taking place, it is likely to be overwhelmingly on the fossil fuels side. In fact, the evidence supports this in that despite the fact that a vast majority of scientists agree on man made climate change, the issue is still split in Congress and the Senate.

Taken as a whole, the overall political climate for solar seems to be improving. While the U.S. political environment for solar has grown dimmer in the near-term, the overall global political trend is unmistakably one that is increasingly embracing solar. In fact, we may even see the Republican Party slowly start to accept solar, once solar lobbyists gain more political clout. Solar companies, especially industry leaders like First Solar, SunPower, SolarCity, Trina Solar, etc., have much to gain from this changing political environment. The solar industry as a whole is undervalued in light of the increasing political importance being placed upon climate change, and the underappreciated exponential nature of solar technology.

Disclosure: The author is long SCTY.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.