Mizuho sees positive outlook for Sunrun's energy storage amid tax credit clarity

A Mizuho research note indicates Sunrun's energy storage business is poised to benefit from investment tax credits extending through 2037, offering a longer runway than solar projects. Energy storage projects starting construction by the end of 2033 will receive 100% of available tax credits, with bonus adders potentially achieving up to 30% ITC subsidies through 2030 for projects with domestic content. The firm also noted that Foreign Entity of Concern (FEOC) requirements are achievable for companies with domestic manufacturing capabilities, creating a positive outlook for Sunrun and other companies like Fluence Energy and Canadian Solar.

Analysis

A recent Mizuho research note highlights a favorable outlook for Sunrun's (RUN) energy storage business, primarily due to the extension of Investment Tax Credits (ITC) through 2037. Energy storage projects commencing construction by the end of 2033 are set to receive 100% of available tax credits, a significantly longer runway compared to solar projects, whose credits begin declining from 100% in 2025 to 0% by 2028. The storage tax credits will phase down more gradually, starting in 2034. Furthermore, bonus adders for domestic content and energy community designations can still allow projects to achieve up to 30% ITC subsidies through 2030, even with base credit reductions. The note also indicated that Foreign Entity of Concern (FEOC) requirements, which restrict the use of Chinese cell/battery systems for investment credits, are deemed "achievable" for companies with domestic content strategies, benefiting firms like Sunrun, Fluence Energy (FLNC), and Canadian Solar (CSIQ). For Canadian Solar, while its Price/Book ratio of 0.27 suggests potential undervaluation and it reported strong Q1 earnings exceeding expectations with robust Q2 guidance, it faces challenges including a 15.7% gross profit margin and significant debt. The company also revised its fiscal year 2025 sales forecast downward due to reduced solar module sales in less profitable markets and U.S. battery sales delays linked to tariff uncertainties. Analyst ratings for Canadian Solar are mixed, with Mizuho and Oppenheimer maintaining Outperform ratings (PTs $17.00 and $23.00 respectively), Jefferies a Buy (PT $13.70), and JPMorgan an Underweight (PT $7.00), reflecting varied perspectives on its strategic shifts and legislative risks.

Key Decisions for Investors

• Investors should consider the extended ITC runway for energy storage as a positive catalyst for companies like Sunrun and Fluence Energy, particularly those able to meet domestic content requirements under FEOC rules.
• For Canadian Solar, the potential undervaluation suggested by its P/B ratio and recent earnings beat should be weighed against its debt levels, lower gross profit margins, revised FY25 sales outlook, and divergent analyst price targets, necessitating careful due diligence on its ability to navigate tariff uncertainties and legislative changes.
• Monitor companies in the renewable sector for their strategies regarding domestic content and FEOC compliance, as these factors are becoming critical differentiators for accessing full ITC benefits, especially in the energy storage segment.