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First Solar, a maker of solar panels for utility-scale power plants with a manufacturing facility in Ohio, will get a tailwind from a production tax credit and benefit indirectly from customers getting a bonus credit for buying U.S.-made products. REUTERS/Megan JelingerMEGAN JELINGER/Reuters

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Clean energy stocks now have a new lease on life.

The sector, which got clobbered after a strong rally in 2020, has regained momentum after U.S. President Joe Biden signed the Inflation Reduction Act (IRA) into law recently. It allocates US$369-billion to fight climate change and to invest in energy security by encouraging domestic manufacturing.

The law includes decade-long tax credits and other incentives for everything from boosting solar, wind and nuclear power, to supporting nascent industries such as hydrogen and energy storage. The goal is to cut U.S. greenhouse-gas emissions by about 40 per cent below 2005 levels by 2030.

We asked three portfolio managers for their top picks in the green energy space.

Jeremy Lin, portfolio manager, Purpose Investments Inc., Toronto

His fund: Purpose Global Climate Opportunities Fund CLMT-T

The pick: First Solar Inc. FSLR-Q

Shares of First Solar, a maker of solar panels for utility-scale power plants, will get a tailwind from a production tax credit and benefit indirectly from customers getting a bonus credit for buying U.S.-made products, Mr. Lin says.

The Tempe, Ariz.-based company should also get a boost from the recently enforced Uyghur Forced Labor Prevention Act, which bans imports of solar panels made with forced labour from China’s Xinjiang region.

First Solar, which has a two-year order backlog, will double its manufacturing capacity in Ohio to six gigawatts by next year, and that will help capture tax credits, he adds. First Solar trades at a premium – almost 19 times enterprise value (EV) to earnings before interest, taxes, depreciation and amortization (EBITDA) – but that’s because of more visibility about its business from the IRA, he says.

Risks include higher financing costs for capacity expansion and competition from Southeast Asian solar-panel makers.

The pick: Cameco Inc. CCO-T

Saskatoon-based uranium producer Cameco will benefit indirectly from a production tax credit offered to existing U.S. nuclear power plants, Mr. Lin says.

This tax break backstops power prices in the low US$40-a-megawatt-hour range, and removes the risk of low rates forcing nuclear plants to shut down operations before their end of life, he notes.

Uranium producers such as Cameco should have the “highest torque” in the supply chain to the growing nuclear-power industry over the next 10 to 15 years. As well, rising uranium demand will also come from Japan’s recent decision to restart more idled nuclear plants.

A plan by Kazakhstan-based uranium mining giant Kazatomprom to boost production by 10 per cent could affect short-term pricing, but it’s not a concern for the longer term, he says. Cameco trades at “1.2 times price to forward net asset value, which is attractive given the historical range of 0.6 to 2.4 times.”

Andrew Simpson, senior vice-president, portfolio manager, head of Mackenzie Betterworld Team, Mackenzie Investments, Toronto

His funds: Mackenzie Betterworld Canadian Equity Fund, Mackenzie Betterworld Global Equity Fund

The pick: Boralex Inc. BLX-T

Renewable-energy producer Boralex should benefit from tax credits under the IRA as it ramps up its U.S. power projects, Mr. Simpson says. The Kingsley Falls, Que.-based firm, which generates power from wind, solar and hydroelectric projects, gets 48 per cent of its revenue from Canada, 42 per cent from France, and 12 per cent from the U.S. Its 2030 revenue target is 45 per cent in the U.S., 40 per cent in Europe and 15 per cent in Canada.

As part of its U.S. expansion, Boralex recently won five solar projects in the state of New York. The 10-year investment tax credit ending in 2034 creates more certainty about the company’s growth, he notes. “We also like that 98 per cent of its cash flows are contracted in agreements over the next 12 years.”

Boralex, which trades at about 12.4 times 2023 estimated EV/EBITDA, has a potential 15-per-cent upside over the next year, he says. Risks include rising construction costs and big changes in power prices.

The pick: Shoals Technologies Group Inc. SHLS-Q

Shoals Technologies, a solar-power parts maker, will profit from more utility-scale projects being built because of tax credits in the IRA, Mr. Simpson says. The Portland, Tenn.-based company provides components to carry electric current from solar panels to an inverter and ultimately to the power grid.

Shoals’s products are attractive for utility-scale solar developers because they make up 6 per cent of the total construction cost of a project, but can reduce installation costs by 13 per cent, he notes.

The company will also benefit indirectly from a tax credit that developers get for using U.S.-made components. A 30-per-cent tax credit for installers of electric-vehicle chargers should also boost demand for Shoals’s electric-charging products, he adds.

A risk is potential new competition, but Shoals is currently the industry leader. Its stock trades at about 15.2 times 2023 estimated EV/EBITDA, which is reasonable because “it is a rapidly growing business,” he says.

Robert Lauzon, managing director, chief investment officer and portfolio manager, Middlefield Capital Corp., Toronto

The fund: Middlefield Sustainable Infrastructure Dividend ETF MINF-T

The pick: Plug Power Inc. PLUG-Q

Plug Power, a maker of hydrogen fuel cells, is pivoting to also become a supplier of green hydrogen from clean-energy sources, Mr. Lauzon says.

The Latham, N.Y.-based firm’s fuel cells have been used in forklifts, but it is now becoming a leader in the hydrogen ecosystem, he says. The growth opportunity comes from selling green hydrogen to customers, such as cement and fertilizer producers, to replace grey hydrogen made from natural gas.

Plug Power will benefit from a US$3-a-kilogram production tax credit to create green hydrogen but may pass on some savings to customers. The risk is that Plug Power, which does not have earnings, fails to execute on growth expectations, he says.

However, the company says that a deal to supply Amazon.com Inc. with green hydrogen to power forklifts or trucks could help it meet its US$3-billion revenue goal by 2025. Plug Power stock could climb to US$35 to US$50 a share in one to two years, he says.

The pick: AES Corp. AES-N

AES, a global utility transitioning to a more clean-energy focus, will benefit from tax credits as it expands in the U.S. market, Mr. Lauzon says. The Arlington, Va.-based company plans to exit coal-fired generation by 2025 so that 75 per cent of its power will come from renewables and 25 per cent from natural gas.

Although 40 per cent of its revenue comes from the U.S. and 50 per cent from Latin America, the U.S. now represents 70 per cent of its development pipeline, he notes. Growth will come from developing wind and solar farms for corporate buyers wanting renewable power.

AES will benefit from an investment tax credit under the IRA but may pass some savings to customers to lower their costs and spur demand, he adds.

The risk to its stock stems from foreign-exchange fluctuations and potential regulatory problems in Latin America. AES stock, he says, trades attractively at nine times 2023 estimated EV/EBITDA, versus 11 times for its peers.

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