Solar Energy Stocks: All Fired Up

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Some accelerated buying of solar panels by residential and small business customers in anticipation of the possible expiration of the tax credit could be contributing to the stocks' gains as well. The tax credits are considered critical to an industry where the costs of solar and wind power generation are still much higher than the cost of conventional power generation.

Depending on Tax Credits

Generation costs from photovoltaic solar panels are falling at a rate of about 5% to 10% a year, depending on location and economy of scale, says Burger. They've begun to reach parity with peak power costs of conventional power sources in areas with higher utility rates like California and the Northeast, he says. At the same time, general electric utility costs based on conventional fuel sources are rising by 10% to 15% a year due to higher oil, natural gas, and coal prices, as well as the costs of environmental compliance. The renewable tax credits are necessary to help solar and wind power compete on a level playing field with other forms of electric generation, says Burger.

Legislation that would extend the tax credits has been defeated multiple times during the current Congress. The easiest way to get the credits extended would be through a stimulus package that President George W. Bush could sign. That would give fiscal conservatives in Congress cover to justify the unreimbursed spending on renewable energy, says Kevin Book, an energy policy analyst at Friedman Billings Ramsey (FBR). The lame-duck session that follows the November elections might also break down the last barriers to Republicans' political resistance, he adds.

The credits stand a much stronger chance of being reinstated next year, with more than 20 ranking Republican members of Congress slated to retire and the prospect of a larger Democratic majority in both houses. A larger Democratic majority in the Senate would lower the odds of a Republican filibuster, which has killed tax credit legislative numerous times before.

Lack of Long-Range Initiatives

"If Barack Obama wins [the November election], you have this Presidential veto that will go away," says Book at FBR. Passing a tax credit as matter of tax policy under a reconciliation bill, which is protected from a filibuster by requiring only 51 votes, not 60, would also be easier, he says. The Democrats already have 51 votes in the Senate. It's also not clear if John McCain were elected whether he would veto funding for alternative energy programs, he adds.

Even if the credit were to disappear for several months, it wouldn't have a meaningful impact on solar demand in the long run, says Molchanov. "We have excellent solar resources in the U.S. We have increasing power prices, plenty of renewable energy incentives even without the [investment tax credit]."

Book says he doesn't expect to see more than a one-year extension for the tax credits for wind and solar power, because influential Democrats in both houses are already looking at a different framework closer to the European regulatory system. The Europeans tie incentives to a new technology's performance rather than to the nameplate capacity of the generation that developers install.

The biggest hindrance to the growth of the solar industry in the U.S. is the lack of long-range policy initiatives, says Burger. Where Japan's residential solar incentive program lasted 12 years and Germany's feed-in tariff program has had a comparable run, national incentives in the U.S. have been limited to two or three years at a time. Spain's decision to back away from government incentives could result in the U.S. becoming the largest solar installer and manufacturer in the world, if it can develop a longer-term policy. Says Burger: "We've got the sun and the real estate and we potentially have the money, but we haven't had long-term policies in place that would give confidence to the industry to do serious business here."

Bogoslaw is a reporter for BusinessWeek's Investing channel.