2023-12-20 11:55:42 ET
Summary
- 2023 has been tough for the solar industry, but this has not stopped impressive growth despite the challenges. Stocks are down, but business actually looks bright.
- The Invesco Solar ETF is a US-focused view of the solar industry and this impacts the cautious view about solar in 2023, notwithstanding recent plans to dramatically expand renewable investment.
- With a successful COP28, and climate emergencies everywhere, the solar industry is likely to do well in the near future.
- Short-term oversupply, especially with SolarEdge and Enphase has led to a negative outlook that seems to be a short-term hiccup.
- TAN is a US-biased snapshot of the solar industry, but investors looking to hedge their bets with an ETF might look closely at TAN in the near term.
It isn’t hard to conclude that we live in a pretty mad world, with lots of political instability (Ukraine, Gaza), concerns about the rise of China, high interest rates and inflation. All of the above are par-for-the-course, although not often all happening at the same time. The big additional challenge is the rapid development of climate emergencies. 2023 will be the warmest year on record, and with that warmth comes excessive flooding and wildfires. This year the annual global climate conference, COP28, has broken new ground concerning the massive transition underway as the world begins to address exiting fossil fuels in favour of a renewables-based energy and transport system. Here, I consider the above issues to give a high-level view of where I see things going in relation to the solar industry. I use the Invesco Solar ETF (TAN) as the investment focus in this article. I’m not a financial advisor, but my take is that TAN is worth a close look for canny energy investors, notwithstanding (or perhaps in part because of) its poor performance in 2023.
TAN holdings
Given that the solar industry is dominated by China, a solar ETF might be expected to be dominated by Chinese holdings, but that is not the case for TAN. The four leading holdings in TAN, making up 33.4% of TAN stock allocation (Enphase Energy (ENPH) 10.72%, First Solar (FSLR) 9.58%, SolarEdge Technologies (SEDG) 6.56%, and Sunrun (RUN) 6.45%), are NASDAQ-listed and their primary markets are in the US or Europe. There are 41 stocks in TAN, with only limited representation by largely Chinese companies (eg Xinyi Solar Holdings (0968.HK) 3.98%, Jinko Solar (JKS) 2.78%, Canadian Solar (CSIQ) 2.30%).
Four countries have companies with share allocations above 5% in TAN: US (54.68%), Hong Kong (13.71%), China (6.51%), Germany (5.78%).
Of course, the horizon of interest to Seeking Alpha investors is largely the US. Two companies (SolarEdge and Enphase) have a disproportionate impact on the TAN share price and these companies are both highly influenced by the US market. I suggest that solar is about to have a more global impact, and this will affect both SolarEdge and Enphase as they build their markets beyond the US.
What is the situation with solar in 2023?
There is a lot of red ink in solar holdings currently, so a review of solar in 2023 might be expected to be a gloomy affair. This is not the case. The Rocky Mountain Institute ((RMI)) has published an excellent summary of solar developments in 2023. RMI acknowledges the challenges of stressed supply chains, rising interest rates and problems with connecting new renewable power to grids, as being a reason that energy stocks underperformed.
However, the RMI report made clear that 2023 was NOT a setback for the growth of solar. True, it slowed a bit, but impressive gains were still made in 2023. Cost of clean technologies began to decline again (utility scale solar PV down 9%, solar modules down 50%). Global solar growth continued up an S-curve with an astonishing 64% year-on-year growth with an expectation of 413GW of new solar. By contrast, fossil fuel demand plateaued, and it is likely that China’s emissions might peak in 2023. Solar and wind are expected to supply 85% of new electricity demand in 2023.
China is the global renewables powerhouse. In one year, China has installed 240 GW of solar, which is more than that installed in the US over the past 20 years. However, Europe and the US are beginning to play catchup with major Governmental clean energy initiatives. The solar industry now has 2,400 GW of announced manufacturing capacity in the pipeline to 2026 and this puts things on track for 1.5C /net-zero by 2050. This isn’t a done deal yet, but the plans are in place for a massive scale up.
My take is that the very powerful fossil fuel industry is using all of its influence to delay the change that is happening away from fossil fuels to a renewables-based energy and transport system. At the recent COP28, there was a massive increase in the presence of the fossil fuel industry, and it worked very hard to avoid acknowledgement that we have to exit fossil fuel exploitation for energy and transport. Perhaps the recent negative period for the renewables industry reflects this attempt to delay the inevitable. Given the facts I’ve outlined above, it is surprising that solar stocks have had such a tough year.
Will COP28, where a trebling of renewable investment has an agreement, make a difference?
Considering that more than 2,400 fossil fuel lobbyists attended COP28 (up 4x from last year’s COP) and the conference was run by an oil & gas CEO, two astonishing outcomes resulted. For the first time ever (after 28 years), fossil fuels (and the need to reduce them) have been mentioned in the final COP28 summary as follows: “ transitioning away from fossil fuels in energy systems... to achieve net zero by 2050” .
Of more significance to renewable energy investors, the summary was explicit about the dramatic expansion of renewables investment, which 130 countries signed up for. The takeaway in Dr Sultan Al Jaber’s (COP28 President) remarks at the closing plenary involved a “ global goal to triple renewables and double energy efficiency “. Al Jaber made a bold statement: “ We have reframed the conversation around climate finance. We have integrated the real economy into climate action. And we have moved to a new mindset, where solutions to the climate challenge become the drivers of a new economic age.”
Some US investors might ignore this as just more noise about the climate, but the above is central to how I think about investment in solar, wind, batteries and electrification of transport going forward.
What does the market think?
TAN doesn’t get good coverage on Seeking Alpha, with just three authors in the past 90 days. These authors are generally positive (two “buy”, and one “hold”).
I’ve commented previously about Seeking Alpha’s negative Quant ratings as not necessarily an accurate view of where a company with a “strong sell” sits. This is the case with TAN which does have a “strong sell” rating. I get that the stock is down 34.6% year-on-year, but in the past month it is up 14.4%.
TAN’s major holding (Enphase) has a “sell” Quant rating. In the case of Enphase this stock was at $75 in early November, and today it closed at $135.32. Even after an announcement of a substantial cutback yesterday, Enphase stock went up 9.1% today. Enphase is a strong business that is well-positioned to dramatically expand as solar takes off. I don’t see where a “sell” recommendation fits with this stock.
Why is the share price of TAN down 26.6% in 2023?
There is a context to how solar stocks are viewed. Above I’ve given the data collected by RMI for the renewables industry, which shows pretty impressive growth in 2023 for the solar industry. A view about TAN from Jeff Benjamin of etf.com provides a more negative view based on “solar losing its lustre”. Admittedly, Jeff’s article appeared in October 2023, before the outcomes of the COP28 meeting this month. It will be interesting to see whether there will be a change in sentiment, or whether the focus stays on a slowdown of expected expansion in 2023.
Benjamin states that TAN tracks the global solar energy companies, but as I’ve shown above, TAN tracks primarily US-focused companies. A lot of the pessimism comes from missed forecasts by SolarEdge, which have been confirmed by Enphase recently. The slowdown is about yesterday’s news.
Conclusion
In this article, I’ve focused on the big picture because that is where I think investors need to be focused. Simply put, the stars are aligning for a massive expansion of the solar industry all around the world. Signs of green shoots are appearing globally. For example, India-focused ReNew Energy Global ( RNW ), which is a 0.65% holding in TAN, is up 41.3% year on year, with a 10.2% rise in the past month.
My take is that this is a time to take a big view of the changes that are happening as the world begins to decarbonize energy and transport. And don’t be deceived by those who promote nuclear energy as the solution. Simply put, nuclear cannot deliver in the time frame required and its cost structure is prohibitive. The fossil fuel industry works hard to talk down solar PV, wind and batteries, but these are the technologies that can and are making the transition possible in a timely fashion. I think that TAN is a useful vehicle for consideration by investors, should they not wish to pick particular stocks in the solar space.
I am not a financial advisor, but I follow closely the dramatic changes happening as the world begins to decarbonize energy and transport. I hope that my commentary provides useful background as you consider your energy investment portfolio.
For further details see:
TAN: Madness But Signs Of Life