Now Is The Time To Believe In Solar Energy

On May 9th the California Energy Commission approved a proposal to require most new homes built after January 1st, 2020 will be required to have solar panels installed on them. The new regulations will undoubtedly be a boom for an industry that had a rough time in 2017, the first-year installations declined.

The new ruling piggy-backs on a 2013 requirement that all new homes be “solar-ready.” The solar-ready rule indicated that new homes be built with a certain amount of roof space so that a future homeowner had the option to add solar panels at a later date.

The most recent rule will no longer give homeowners or builders the option to forgo the upfront cost of solar panels, which some estimate will be high as $30,000 per home. The most persuasive arguments against the new rule are just that, the additional costs of the home. California is by most measures already in a housing crisis regarding costs; many believe this will only compound the problem.

But, that also leads to some excellent investment opportunities. The solar panel industry is going to see a massive, built-in installation base. In 2017 California saw over 53,000 single family homes built and most would agree that number needs to be higher in a state with an ever-growing population.

On a very conservative basis, that number will grow to 55,000 in 2020. It is currently estimated that only about 600,000 homes in California currently have solar panels. So, to think that number of easily more than double in a few years when all new homes are required to have solar power, it's clear the investment opportunity in solar is huge. And remember, this is just California we are talking about, other states such as Arizona and Florida, (parts of Miami already have) also could pass similar regulations.

So, how do you cash in on this opportunity?

First and foremost, would be with the Invesco Solar ETF (TAN). TAN tracks an index of solar energy companies, giving investors a very focused investment option. TAN does not invest in the broad “renewable energy” sector, just companies directly involved in solar energy. Furthermore, the fund adjusts its exposure to the “pure-play” solar companies and cuts back on those who are “non-pure-play.” This leads to the fund owning a very small, concentrated portfolio, which can be risky, but also much more profitable if the industry does well.

Another less concentrated and therefore less risky play would be iShares Global Clean Energy ETF (ICLN). ICLN has 30 stocks, but they are all companies that are in the “clean energy” industry, not just solar. So, you will find clean bio-fuel companies, wind, and hydroelectric companies, as well as solar energy firms. ICLN holds companies that both produce energy from clean means as well as the companies that produce the technology for energy to be made cleanly.

The First Trust NASDAQ Clean Energy Edge Green Energy Index Fund (QCLN) is another option, but again this fund invests in more than just solar. QCLN has 39 positions made up of manufacturers, developers, distributors, and installer of any of the following sub-sectors; advanced materials which enable the clean energy or reduce the need for fossil fuels, energy intelligence, energy storage, and conversion or renewable electricity generation. One downside of this fund is that its holdings may not all fall under what each individual investor may consider “clean-energy company.” Thus, you should review the holdings before buying the fund simply based on the name.

Another broad clean energy ETF is the VanEck Vectors Global Alternative Energy ETF (GEX) which owns companies who earn at least 50% of their revenue from the renewable energy industry. Since owns companies which only must have 50% of the revenue from renewable energy, again some investors may not consider the fund very “clean or green.” But, for those looking to get a play on the solar industry, Tesla (TSLA) and First Solar (FSLR) are two of its top five holdings, and each represents at least 8% of the fund net assets.

Lastly, the Global X YieldCo Index ETF (YLCO) is an interesting play which focuses on small renewable energy firms which have income producing operations. Most of the companies YLCO holds have been spun off by a parent company, and most of them produce power from renewable sources like wind and solar. Furthermore, these firms kick out lots of cash to shareholders. Thus YLCO has a yield of 4.71%. While only charging 0.65%. YLCO’s holdings may be loss producing business’s long-term due to the nature of their operations so you may not want to buy and hold the fund blindly, but it could be a solid “green” yield for the time being. (It also, should be noted that its unlikely this ETF in its current state, will not likely see a big boost from the new rules in California. For that to happen, it would need to possibly change its investing guidelines. Regardless, this is a “clean energy ETF” which owns firms producing electricity using solar panels.)

The biggest risk to any of these ETFs is that the industry outgrows itself and we see a large number of solar energy companies fail once competition heats up. Another risk would be that the regulation in California is changed in some way and the potential wave of business coming towards the solar energy industry is diverted. There certainly could be more risks, but at this time those are the two that seem most likely to cause issues.

Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513

Disclosure: This contributor held long positions in Tesla at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.