Are Solar Tax Credits Safe if Trump Wins?

Analysts at Wells Fargo view fears of a selloff in the solar sector due to a potential Trump presidency and Republican sweep as overblown. While there’s a chance some Inflation Reduction Act (IRA) tax credits could be repealed, it’s more likely they will not.

In a note dated Monday, Wells Fargo examined the potential impact of a Trump presidency and a Republican sweep on the solar sector, addressing concerns about the future of solar tax credits.

The Inflation Reduction Act (IRA) has provided significant incentives for the solar industry through 45X advanced manufacturing credits and investment tax credits (ITCs). While fears of repeal under a Trump administration persist, Wells Fargo suggests the situation may not be as dire as some expect.

Solar Tax Credits under scrutiny

The IRA offers two key tax credits for the solar industry: the 45X advanced manufacturing credit and ITCs. The 45X credits aim to bring solar equipment production back to the U.S. (reshoring) and have widespread support across political parties, likely due to the creation of jobs in many states.

Conversely, ITCs offer a base discount of 30% on solar installations, with an additional 10% for using American-made equipment and other potential benefits. However, ITCs might face future changes or elimination compared to 45X credits.

The argument for maintaining tax subsidies

Despite Trump and VP nominee JD Vance’s vocal support for fossil fuels and opposition to renewable subsidies, Wells Fargo notes a more nuanced stance for solar. Eliminating ITCs while maintaining 45X credits would undermine the bipartisan goal of attracting manufacturing to the U.S. Without ITCs, there would be insufficient demand to attract future investment, widening China’s lead over the U.S. in solar—a scenario counter to Trump’s objectives.

Repealing ITCs would stall reshoring efforts

Wells Fargo highlights that eliminating ITCs could reverse companies’ plans to build new U.S. solar manufacturing plants, undermining reshoring initiatives. As most new solar plants are being built in red states, this serves as another reason why a Trump administration might proceed cautiously on solar tax credits. Significant lobbying efforts by the solar industry against the repeal of ITCs are anticipated to prevent solar manufacturing job losses.

FSLR as a buying opportunity

Even if solar ITCs are repealed, Wells Fargo maintains an overweight rating for First Solar, Inc. (NASDAQ:), seeing the current selloff as an overreaction. Analysts believe the market is pricing in an overly conservative outcome for FSLR, estimating that FSLR’s current stock price discounts an ASP for new bookings in 2027+ at approximately $0.25 per watt, compared to $0.31 per watt as of Q1 2024. Wells Fargo expects FSLR ASPs to remain above $0.30/w.

Impact of potential policy changes

Negative events such as the elimination of domestic content ITC and base 30% ITC could reduce FSLR’s ASP by $0.06 per watt and $0.05 per watt, respectively. Conversely, positive events like the imposition of AD/CVD duties at 15-30% or increased tariffs on Chinese solar imports to 60% could positively impact ASP by $0.05-0.09 per watt and $0.04 per watt, respectively. Reduced competition from Chinese solar companies could further benefit FSLR.

Analysts say that the fate of solar tax credits under a potential Trump presidency is uncertain but not necessarily bleak. While the repeal of ITCs could slow the pace of solar development in the U.S., many companies and utilities with decarbonization mandates are likely to continue their solar projects under higher PPAs to offset the impact of lower tax credits.