Solar stocks have seen plenty of ups and downs in recent years. However, they have become increasingly popular with the rising interest in environmental, social and governance (ESG) investing.
The interest in investing in solar energy amplified after the election of President Joe Biden in November 2020. Running on a platform that included green energy initiatives, Biden’s victory signaled that alternative power sources could see a surge in popularity with federal-level support.
Since then, issues ranging from supply constraints to political gridlock have resulted in turmoil for solar stocks. But despite the events impacting solar energy investments now, there are plenty of reasons to keep these green energy companies on your radar.
Why Solar Stocks Matter
The biggest factor that has pushed solar energy into the limelight is climate change. Global temperatures for the past seven years have been the highest on record. These unprecedented changes in temperature come with heat waves, heavy rainfall and other extreme weather that have affected most Americans.
In 2021, 40% of Americans were impacted by a climate disaster and 80% experienced a heat wave that lasted multiple days. As a result, climate change mitigation is a growing concern.
After transportation, which accounted for 29% of emissions in 2019, electricity production was the second-largest source of greenhouse gases that contribute to climate change. The burning of fossil fuels accounts for 62% of U.S. electricity, making green energy sources like solar power appealing alternatives.
According to a study conducted at the Massachusetts Institute of Technology (MIT), solar energy will be a “necessary component of any serious strategy to mitigate climate change.” When the results were released in 2015, solar power accounted for approximately 1% of electricity generation in the U.S. and across the globe.
However, up to 40% of electricity in the U.S. is expected to come from solar resources by 2035. That number could increase to 45% by 2050. And to reach these estimates, solar deployment would need to increase by up to four times its current rate.
In the quest for a zero-carbon electricity grid, the demand for solar power will grow considerably. “Preliminary modeling shows that decarbonizing the entire U.S. energy system could result in as much as 3,200 GWac of solar due to increased electrification of buildings, transportation, and industrial energy and production of clean fuels.” That leaves plenty of room for related companies to boost their profits and stock.
How Does Solar Energy Work?
Solar energy is gathered using three methods. The first is photovoltaic (PV) technologies, which collect energy from sunlight and convert it into electricity. PV modules can last 30 years without extensive maintenance. They’re also relatively versatile, as they can be used in rooftop panels or solar farms.
When it comes to solar panels, Sunrun (NASDAQ:RUN) is an industry leader. The company specializes in residential services, allowing customers to buy or rent panels for their home. It also has a partnership with electric vehicle (EV) manufacturer Tesla (NASDAQ:TSLA) to deploy the latter company’s Powerwalls. Enphase (NASDAQ:ENPH) is also a key player in PV technology for residential and small commercial applications.
One current limitation of this method is that it uses semiconductor materials, which have been experiencing shortages. PV technology is typically made of silicon, but to mitigate supply constraints, some companies manufacture thin-film panels. These PV modules are generally more affordable and easier to make. One such company is First Solar (NASDAQ:FSLR), which makes solar panels that use less energy, water and materials.
Another form of solar energy comes from concentrating solar power (CSP) plants. These “use mirrors to concentrate the sun’s thermal energy to drive a conventional steam turbine to make electricity.” This energy can also be stored to make electricity on an as-needed basis.
The third and final method is solar heating and cooling technology. This process uses a variety of collectors to gather thermal energy for heating purposes. It’s used in residential, commercial and industrial settings to heat water and manage space temperatures.
Solar Stocks Face Short-Term Risks
Solar stocks generally underperformed in 2021. Market-wide movements out of growth stocks and supply chain problems, including semiconductor shortages, have contributed to the downward trend.
One of the biggest news items that has impacted solar stocks is Biden’s Build Back Better agenda. Notably, the plan includes “the largest effort to combat climate change in American history,” according to the White House. That includes investments in alternative energy technologies like solar power.
If Biden’s administration can meet its ambitious climate change mitigation goals, solar stocks will undoubtedly make a comeback. However, the Build Back Better plan has to overcome several obstacles first.
For example, the Build Back Better Act will need to pass muster in Congress. Many Democrats are on board with it, but so far, all Republican members have opposed it. The bill is dependent on Democrats’ razor-thin majority in the Senate to pass, making its future precarious at best.
So far, Democratic Sen. Joe Manchin has been a vocal opponent of the bill. Solar stocks tanked in December when he announced he would not support the Build Back Better Act due to several concerns, including inflation. Since then, talks regarding the bill have been tabled and its future is uncertain.
Solar Energy Has a Bright Future
The political turmoil surrounding alternative energy right now is creating uncertainty in solar stocks. However, it could be a short-term setback amid climate change concerns and the growing popularity of solar energy.
As of December 2019, the Pew Research Center found that 6% of homes in the U.S. already use solar panels for energy. On top of that, 46% of respondents were seriously considering installing panels — up from 40% in 2016.
Solar energy is becoming significantly more affordable and accessible, with panel prices dropping 70% since 2014. It is also an abundant form of energy; the Department of Energy’s Office of Energy Efficiency and Renewable Energy reports that just 22,000 square miles of solar panels could power the entire U.S.
Additionally, a growing number of Americans are worried about climate change. According to a Pew Research Center poll released in 2020, 67% of people felt the U.S. government’s response to climate change was insufficient. More than 50% of respondents believed climate change should be a top priority for presidents and Congress.
Therefore, while the political climate could be inhospitable for solar stocks today, that could change in the coming years. And even if solar power doesn’t get a boost from federal-level initiatives, increasing interest in alternative energy sources can bring these stocks to investors’ attention.
Top Solar Stocks to Watch
On the date of publication, Sydney Sweeney did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Sydney Sweeney is an Assistant Editor at InvestorPlace.