Can the solar industry live without tax credits?
By Stephanie I. Cohen
Dec 12, 2007 15:38:00 (ET)
NEW YORK (MarketWatch) -- The alternative energy sector expects big things from the Democratic-controlled Congress, namely pumped up government spending and incentives for alternative energy sources.
But the nascent solar industry has hit roadblocks recently in its efforts to lock in long-term government incentives from Democrats, and some market players are wondering if Democrats can deliver on their renewable energy promises.
U.S. federal energy tax policy has a long history of promoting oil and gas development. Now the solar industry, which secured some tax breaks from the Republican-controlled Congress in 2005, wants to extend and expand these incentives. Failure to pass solar incentives could put pressure on the industry and would represent a setback, while passage is expected to rally stocks, according to analysts.
The industry's strategy for securing tax breaks has focused less on the environmental benefits of using non-fossil fuel energy sources to generate electricity and more on job prospects for lawmakers' constituents and rebuilding American's industrial cities.
These tax credits would be beneficial for some of the biggest names in the solar space including California-based solar installer Akeena Solar (AKNS, Trade ) and solar manufacturer SunPower (SPWR, Trade ), First Solar (FSLR, Trade ). China's Suntech (STP, Trade ),Yingli Green Energy Holding Co. (YGE, Trade ), and Ja Solar Holdings Co. (JASO, Trade ) would also benefit, according to analysts.
House Speaker Nancy Pelosi, D-Calif., and Senate Majority Leader Harry Reid, D-Nev., face an uphill battle as they try to push a contentious energy bill through Congress in the coming weeks. They have acknowledged it will be difficult to pass an energy tax package in the Senate, where opposition is significant, and have hinted that tax provisions may have to be moved as a separate package down the road.
Groups like the Solar Energy Industry Association are concerned that business and residential solar tax credits pivotal in growing the domestic solar market in the past two years, and which are set to expire at the end of 2008, may be left dangling if Democrats prove unable to pass a energy bill. The group is calling for an 8-year extension of the exiting solar commercial investment tax credit and a six-year extension and expansion of the residential solar tax credit. These incentives would cost about $900 million over 10 years, according to industry.
Rhone Resch, president of the Solar Energy Industries Association, said the industry has received "firm commitments" from Democratic leaders that tax incentives will be passed by Congress. The group is also pressuring Republicans to support the bill.
Last week Democrats in the House and Senate introduced a new energy bill giving solar groups exactly what they want. The bill would enact an 8-year extension of the 30% investment tax credit for businesses and a 6-year extension of the 30% investment tax credit for residential solar electric while raising the cap on the credit to $4,000. The House passed the bill 235-181, but the Senate defeated a motion to proceed to a vote on the bill. President Bush has threatened to veto the bill in it current form.
Solar industry participants want a major commitment from Democrats.
"The investment that we have to make is significant and it simply cannot be justified unless the incentive program is going to have a funded life that's long enough for us to get a return on investment," said Roger Efird, president of Suntech America, speaking on a November industry conference call. Efird says a 10- to 20-year extension of the credits would be "ideal."
Analysts and industry participants are hopeful that Congress will provide continued support for the burgeoning sector amid concerns over rising oil prices and climate change. But Wall Street is also being cautious in its optimism regarding passage of the bill. "We warn investors not to pin hopes on either the robust subsidies for green and clean power within this bill," according to a Dec. 6 report from Friedman, Billings, Ramsey & Co. Analysts at the firm say they still do not see adequate support in the House or Senate to override a veto threat.
While the solar sector has experienced rapid growth and investor exuberance that has been compared to the internet boom, it is still largely dependent on government subsidies in the U.S. and abroad for its expansion. Resch acknowledged that "right now, solar is a technology primarily driven by policy."
This year, the photovoltaic, or solar electric market, is on track to grow by over 60% in the United States, according to Resch. A November research report from Think Equity Partners expects solar [photovoltaic] demand to grow substantially for at least the next five years, driven by new subsidies.
But solar has a long way to go. "Our worldwide demand forecasts do not have the U.S. becoming a meaningful portion of worldwide solar demand until 2010," according to a report from Collins Stewart.
There are other ways to pass the solar tax provisions if the energy bill is sidelined. One option is to use the agriculture bill being debated in the Senate as an alternative vehicle to move solar tax incentives. Congress could also pass a one-year extension of the solar tax credits beyond its current expiration at the end of 2008, though this approach is not favored by industry.
"By prematurely ending or decreasing incentives, regulatory bodies could chill demand for solar [photovoltaic] products," a report from Signal Hill said.
When Democratic leaders recently mentioned moving an energy policy bill followed by a separate tax package, market participants noted a quick downward reaction among some solar stocks.
Analysts see an energy bill with tax breaks as a major catalyst for the U.S. solar market.
Industry executives are advocating for continued government assistance, saying the sector is still in its infancy regardless of strong growth in recent years.
"Global solar market capitalization is now well over $50 billion at the moment, lofty for a sector that is rapidly commoditizing and that saved the world about four coal plants last year," according to an October report from Thomas Weisel Partners. "We acknowledge that the industry is extremely profitable."
Barry Cinnamon, chief executive officer of Akeena Solar, said his company has been seeing a combined annual growth rate of over 166% since 2001. "I don't see any reason in the world why we and other installation companies cannot continue with that growth rate," he said during a recent industry conference call.
Tom Werner, chief executive officer of SunPower, supports extending credits. SunPower has a market capitalization of $10.5 billion and the company's U.S. business is growing 30% per quarter. The company recently announced that Morgan Stanley has agreed to provide it with up to $190 million in financing for future solar installations.
"SunPower's market capitalization is bigger than the entire industry was as recent as five years ago," the executive boosted on the industry confernece call. To those that would criticize government financial help for the industry, Werner said, "You might note that the fossil fuel industry has continued to derive significant government support despite the fact that they've been incredibly profitable for a heck of a long time."
In exchange for long-term financial support, the solar industry is promising lawmakers something big -- manufacturing jobs in some of the country's more depressed job markets and declining manufacturing centers.
"The U.S would reclaim global leadership in the solar industry," Resch said. Translation: the U.S. would go from being the 4th largest solar manufacturer to being the first in the next decade, bringing well-paying jobs. Extending renewable tax credits would lead to more so-called green collar jobs in places like Michigan, Ohio, Montana, Texas, Oregon, Tennessee New Hampshire and Tennessee, Resch said.
Still, the industry admits it won't disappear if Congress fails to extend these tax credits, but says growth would be concentrated in those states with strong state-level rebate programs and Europe.
"The industry will be focused elsewhere and Americans will be able to read about solar going to retail electric-grid-parity in other countries and we'll be a follower," Werner said. |
