Solar Firms Wait on Tax Credit

By MARTIN VAUGHANAugust 27, 2008;

U.S. solar-energy companies that do business primarily in America would suffer most if Congress fails to renew expiring federal tax credits for solar energy.
Wall Street analysts and industry observers say firms such as Akeena Solar, Real Goods Solar Inc., and Solar Power Inc. will be most threatened in the event that tax credits are allowed to expire.
Larger solar firms that have customers outside the U.S., including SunPower and Spain's Abengoa Solar, may see their U.S. projects put on hold. But these firms have the ability to tap global markets to ensure continued growth.
Congress has been deadlocked for months over legislation to extend investment tax credits for new solar-energy projects, which are slated to expire at the end of this year. Lawmakers are expected to mount an 11th-hour effort in September to reach agreement on a tax package for solar and other renewable energy sources before suspending their work, possibly until 2009.
Historically, there's always been a last-minute fight, but the credits typically get extended. Still, there remains a risk.
Brion Tanous, a clean-energy analyst with Merriman Curhan Ford, this month downgraded Akeena Solar to "neutral" from "buy." "Akeena will be one of the companies hit hardest if the tax credit fails to get extended," he said. "The companies that can ride through this are the ones that have a more global presence."
Renewable Mandates
Interest in solar energy as an electricity source has taken off in recent months, from large-scale utility projects to rooftop installations at retail outlets, including Kohl's Corp. department stores and the REI sporting-goods chain. But representatives for Macy's Inc. and REI said any plans to install rooftop solar systems in 2009 will depend upon whether the tax credit is available. REI has installed or plans to install systems on 11 of its U.S. stores this year.
Solar projects have been driven by high prices of coal and natural gas and by renewable energy mandates from California and other states. In the retailers' case, solar power affords a chance to burnish corporate images with the cachet of green technology.
Earlier this month, Pacific Gas & Electric Corp. announced an agreement with SunPower and OptiSolar Inc. to build an 800-megawatt photovoltaic energy plant, the largest project of its kind in the U.S.
Such large-scale electric-power projects wouldn't be economically feasible if not for the 30% federal tax credit. Failure to renew the tax credit by the end of the year would cause some projects to grind to a halt.
Uncertainty surrounding the credit is already affecting purchasing decisions at Abengoa's Gila Bend, Ariz., project, scheduled to be in place by 2012.
Fred Morse, senior adviser for Abengoa's U.S. operations, said permits for the facility won't be finalized before September 2009. But financing has been put on hold until the fate of the tax credit is clearer, and project managers have watched steel prices rise by as much as 70% in the meantime, said Mr. Morse.
"The tax credit is the missing ingredient. When that is passed and extended long enough, we'll have the cash on hand to start purchasing," he said.
Even if the tax credit lapses, such companies as Abengoa can look to ample overseas demand for growth opportunities. Not so with smaller, U.S.-based firms.
'Falling By the Wayside'
Barry Cinnamon, chief executive of Akeena Solar, said in an interview that a slowdown in commercial projects in the second half of 2008 due to uncertainty over the tax credit will stunt growth for his company in 2008.
"As we get closer to the expiration of the credit, the bigger jobs are falling by the wayside," he said.
If Congress fails to renew the tax credit, Akeena and other U.S.-based solar companies will look to residential demand to pick up some of the slack.
"I don't believe [the tax credit's expiration] would have a big impact on our growth. We have and continue to have a robust residential business," said Mr. Cinnamon.
The federal tax credit is less of a factor in the economics of most residential projects than it is in commercial ones. Now capped at $2,000, the tax credit will offset only a fraction of the cost of residential projects, which can cost $40,000 or more. That contrasts with the tax credit available for commercial facilities, which offsets up to 30% of installation costs.
"The thing that's driving the residential business is energy rates" from conventional energy sources, said Julie Blunden, vice president for public policy and corporate communications at SunPower.
As long as prices for coal and other conventional sources remain high, demand for residential installation will grow, independently of what's happening with the federal subsidy, she said.
But solar-energy analyst Mark Bachman of Pacific-Crest Securities notes that other factors -- including shrinking homeowner equity due to the housing slump -- may damp residential demand.
Blocked in the Senate
The House of Representatives passed legislation in May to extend the solar-investment tax credit through 2014. A bill pending in the Senate includes an 8-year extension, through 2016. Both bills would raise the cap on the residential tax credit to $4,000 from $2,000 per year.
The solar tax credits are widely supported, but Senate Republicans have blocked the broader tax bill because they object to Democrats' use of loophole-closers and tax increases to offset the cost of tax incentives for renewable energy and other tax cuts.
The solar tax-credit provision and other tax-cut extensions might make it across the finish line if they are part of a broader deal on energy when Congress returns. Another possibility is that Congress would pass a shorter extension of one year, preventing expiration but effectively punting a decision until the next Congress.
Write to Martin Vaughan at martin.vaughan@dowjones.com