US solar companies would face headwinds under Senate budget plan; storage fairs better

Industry analysts generally see US residential solar companies and manufacturers as clear losers under a Senate committee's text targeting the Inflation Reduction Act's (IRA) clean energy tax credits, with energy storage resources potentially emerging as a surprise winner.

Analysts also highlighted safe-harboring provisions and less restrictive foreign entity of concern provisions in the Senate text that could ease impacts on solar development compared to a sweeping House GOP reconciliation bill passed last month.

Still, the draft text released on June 16 by Republicans on the US Senate Finance Committee would accelerate the phaseout of federal tax credit support for solar technology, which is the largest source of recently added and planned US power generating capacity.

Assuming full Senate passage in the weeks ahead, the two chambers will still need to reconcile their two versions of the party-line GOP legislation. Senate Republicans plan to include a $5 trillion debt ceiling hike in the upper chamber's bill, while the House GOP legislation would raise the debt ceiling by $4 trillion ahead of an impending mid-August deadline.

Safe harbor opportunities for utility-scale solar

Under the Senate Finance Committee's proposal, wind and solar projects that commence construction by the end of 2025 could still receive 100% of the IRA's flagship 45Y or 48E clean electricity production and investment tax credits. Wind and solar projects would only be eligible for 60% of the 45Y or 48E credit values in 2026, dropping to 20% in 2027, with full credit expiration beginning in 2028.

The House GOP bill's more restrictive approach would require all eligible resource types except advanced nuclear generation to begin construction within 60 days of the final reconciliation bill's enactment and be placed into service by the end of 2028.

Those provisions would have an outsized impact on solar and energy storage developers, who are primarily looking to capitalize on the 48E investment credit. The current 48E credit offers a deduction of up to 30% on the basis of qualified property.

The House-passed restrictions on the 48E credit would yield about $172 billion in budget savings, while restrictions on the 45Y credit would achieve an estimated $29 billion, according to the Congressional Budget Office.

However, existing four-year safe harbor provisions embedded in the Senate committee's bill text would allow solar projects that commence construction by the end of 2025 to receive 100% of the 48E credit, provided they enter service by the end of 2029, JP Morgan analysts noted.

"Given safe harbor rules provide four tax years to finish a project following construction start, projects through YE29 can qualify for the full credit, reducing the threat of an incentive cliff for projects delayed beyond expectations," the analysts said in a research note. "We also would expect a significant amount of safe harboring equipment orders to be placed before YE25, directly benefiting companies that would receive such downpayments and indirectly benefiting the remainder of the project's supply chain by assuring project timelines."

David Norton, a partner with Norton Rose Fulbright, added that the Senate committee's safe harbor provisions — if enacted — would still require significant capital outlays from developers.

"It's going to be challenging for smaller, less well-capitalized solar developers, and we may see some consolidation in the solar industry," Norton said in an interview.

Negative outlook for residential solar

The Solar Energy Industries Association argued that the Senate committee's text still presents a grave threat to its members.

"As drafted by the Senate Finance Committee, this proposal would pull the plug on homegrown solar energy and decimate the American manufacturing renaissance," Abigail Ross Hopper, the trade group's president and CEO, said in a statement.

The committee text would limit residential solar deployment by denying the 48E investment credit for leasing arrangements, Bank of America analysts said.

Sunrun Inc., a leading residential solar provider, had lost 40% of its market value by the end of the June 17 session on about seven times average trading volume. Shares of Enphase Energy Inc., another US-based rooftop solar provider, closed 24% lower on the day on more than five times normal trading volume.

Nevertheless, Bank of America analysts noted that the Senate committee text offers some reprieve by allowing residential solar companies to claim the 25D investment tax credit on expenditures made within 180 days of the final bill's enactment.

"This would likely be enough time for residential installers to provide a sunset sales push of systems where there is an expenditure made by the deadline," the analysts said. "This could mean that the industry can develop a backlog of safe harbored projects that are installed past the end of 2025, whereas the place in service rules in the House bill would have limited installations even toward the end of the year due to uncertainty of eligibility."

At the same time, multiple analysts noted that the Senate committee text would disallow credit stacking under the 45X advanced manufacturing production credit starting in 2027.

That would prevent companies like First Solar Inc. from stacking individual production credits for components like solar wafers, cells and modules, Philip Shen, managing director at Roth Capital, noted. Shares of First Solar, which makes thin-film photovoltaic panels and has factories in several US states, were down about 18% at market close, on five times average trading volume.

"We will be following this closely as it seems to contradict GOP priorities of incentivizing domestic manufacturing," Shen said in a research note.

Storage seen as a 'real winner'

Shares of Fluence Energy Inc., which supplies energy storage hardware and software, finished the day up 13%, on about four times average trading volume.

"Storage is the real winner," Jefferies analysts said in a research note. They noted that the Senate committee's bill would allow energy storage resources to qualify for the full 48E investment credit through 2033, along with nuclear, geothermal, and hydropower resources. The 48E credit, along with the 45Y credit, would then begin an annual phasedown by 25 percentage points starting in 2034, with full expiry in 2036.

"Bottom line, we view this as the biggest upside surprise of the Senate committee draft," the Jefferies analysts said.

Multiple analysts flagged the Senate committee's approach to foreign entity of concern (FEOC) provisions that would apply to the 45Y, 48E and 45X credits. The committee text would prohibit specific percentages of "material assistance" from foreign adversaries such as China, a leading global supplier of components and critical minerals used in solar and storage facilities.

For domestically manufactured solar components, a 45X cost ratio threshold of 50% would take effect starting in 2026 and gradually increase to 85% for 2030 and beyond. Eventually, that would mean a maximum of 15% of a qualifying component's cost could be tied to a foreign supplier covered by FEOC provisions.

Nicole Elliott, a partner at Holland & Knight, said the committee's cost-ratio approach is a more workable alternative than the House GOP's broad prohibitions on the use of components, subcomponents and intellectual property from countries like China.

However, the committee text would still present a challenge for taxpayers, Elliott said.

"As you can imagine, there's a lot of work that goes into having taxpayers determine that percentage, and working with their suppliers to get that information is obviously a hurdle," Elliott, a former executive at the US Treasury Department, said in an interview.

How the different House and Senate approaches to phasing out the IRA clean energy tax credits factor into a broader final GOP bill remains to be seen.

"It's important to remember that these tax provisions are inside a much bigger tax title, which is also inside a much bigger bill, and there are a number of things that could become sticking points," Elliott said.