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Daily Intelligence Briefing

Wednesday, May 11, 2022

Identifying Change-Driven Investment Themes


I. Today’s Thematic Investment Idea

A deep dive into a market driver with alpha generating potential.

The Daily Intelligence Briefing is published by McAlinden Research Partners. The report is provided to Hedge Connection blog readers once per week for free. Below is just one of the five sections that delivers Change-Driven Investment Themes everyday.

Solar Industry at a Standstill on New Tariff Threat, But New Trade Restrictions Remain Far From Certain

Summary: US solar power generation is breaking through all time highs, but projections for a rapid expansion of new installations in the year ahead are being derailed by a petition to the Commerce Department, filed earlier this year, demanding an expansion of tariffs on imported solar panels. Essentially, a single company has created so much uncertainty regarding new trade restrictions on solar panels from Southeast Asia that the US solar industry has been temporarily paralyzed.

Solar stocks have largely sold off in the wake of this petition, but many signals indicate concerns around the investigation may be overcooked. Not only would the expansion of tariffs be destructive for the Biden administration’s own climate policy, many lawmakers on both sides of the aisle fervently oppose such a measure, no evidence has yet been uncovered to support alleged violation of current sanctions and pressure is rising on the Commerce Department to wrap up their solar panel probe.

Related ETF: Invesco Solar ETF (TAN)

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For the first time in history, the US generated 20% of its monthly electricity usage from wind and solar power, according to new data released today from global energy think tank Ember. That’s a 250% increase in wind and solar utility since 2015 when the US generated just 5.7% of its electricity from those two sources.

MRP previously highlighted lofty projections for this year’s solar rollout back in March. Of the 85 gigawatts (GW) of new generating capacity expected to be added to the US power grid from 2022 to 2023, utility-scale solar accounts for 41 GW (48%) of the planned capacity in the United States during the next two years, according to data reported in the Energy Information Administration’s (EIA) Preliminary Monthly Electric Generator Inventory. That new capacity will build on top of the 24 GW of utility-scale solar photovoltaic (PV) capacity added to the US power grid between 2020 and 2021, double the new gas capacity added over that same period. The EIA expects that trend that will likely continue over the next two years as the demand for solar power continues to grow.

However, that forecast is now faces a major threat from a US Commerce Department probe, launched in March, into whether four countries in Southeast Asia that supply about 80% of US solar panels and parts (Cambodia, Malaysia, Thailand and Vietnam) are using components from China that should be subject to US tariffs. Southeast Asia is a particularly critical market for solar panel and component manufacturing, as Malaysia and Vietnam are now the top two exporters of these products to the US. A decade ago, China supplied a majority of the US’s solar hardware, but saw that share whittled away to less than 1% by heavy tariffs.

Those kinds of tariffs may be expanded this year if California-based Auxin Solar’s petition with the Commerce Department succeeds. This proposal is not popular among legislators and most in the US solar business. Many have even raised questions about how legitimate Auxin’s business is with just 30 employees involved in the assembly of panels, $10 million in annual revenue, and capacity to make just 150 megawatts of panels per year – less than what a single, large-scale utility project would typically require. Overall, US solar panel assembly capacity was less than 8.5 GW last year, just over a third of total US capacity added in 2021. The Wall Street Journal notes that a group of 22 US senators sent a letter to President Biden this month, calling for the end of the investigation and stating the probe is causing “massive disruption in the solar industry”.

There is no way to know for sure at this stage, but we can definitely see some signals that new tariffs are far from a certainty. First, the implementation of these tariffs would completely derail the Biden administration’s own climate agenda and their fight against climate change. Moreover, there are very few options to avoid Chinese components at some point in solar panel supply chain, given the country’s dominance in the production of key solar cell components like polysilicon.

In a decade’s time, Solar Power World reports China’s share of polysilicon production has ballooned from 30% to more than 80% of all global capacity. In wafer, solar cell and module production, the Chinese industry has already reached such or still higher market shares. It would be unreasonable for any climate-focused government to become so restrictive on solar panel manufacturing when the largest share of new electric grid capacity is coming from solar energy.

The Commerce Department has been mostly neutral in their description of the probe thus far, but it seems US Commerce Secretary Gina Raimondo may sympathize with lawmakers opposing the potential implementation of tariffs. When pressed by Senator Jacky Rosen (D-NV) in an April hearing on where the probe stands and how quickly it could be wrapped up, Raimondo replied that her “hands are very tied here”. Additionally, UtilityDive notes that the Department of Commerce already denied a similar petition in 2021 from American Solar Manufacturers Against Chinese Circumvention, which requested a review of a number of Chinese companies working in Malaysia, Thailand and Vietnam.

Still, a month’s-long halt on imports from the four southeast Asian countries could cause lasting reverberations through multibillion-dollar solar industry. A survey in late April by the Solar Energy Industries Association, a non-profit trade association, found 318 solar projects in the US had already been delayed or canceled in the wake of uncertainty caused by the investigation.

Per Rystad, as much as 17.5 GW of planned 2022 additions are in doubt. The energy consultancy previously expected the US to install 27 GW of utility-scale, residential, commercial and industrial solar this year.


MRP added LONG Solar to our list of themes on June 18, 2021, due to our expectation that the technology’s rising cost competitiveness and the global renewable energy transition would continue to boost solar installations. Solar companies have been a victim of supply chain struggles and rising interest rates, yet both of which appear to have less of an impact on the industry as some investors previously anticipated.

Russia’s invasion of Ukraine and the ensuing geopolitical fallout has added a new element to the shift away from oil and gas and toward renewables. Solar stocks have largely given up gains they made in the wake of Russia’s invasion, but a potential rejection of Auxin Solar’s petition for new tariffs could help to reverse that decline.

Since the initiation of this theme, the Invesco Solar ETF (TAN) has slipped -27%, underperforming the S&P 500 decline of -4% over that same period.


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