Solar Will Slow on U.S. Tax Credit Extension and That's Good

  • Companies gearing up for `turbo-charged 2016' can now ease off
  • Costs of labor, equipment, marketing, financing will be lower

A U.S. tax break for solar energy set for Congressional approval Friday will slow growth next year by about 24 percent -- and that’s great for the industry.

Developers were expected to install about 11.9 gigawatts of solar panels in the U.S. next year as they raced to qualify for the investment tax credit that was set to expire at the end of 2016. The five-year extension announced late Tuesday will ease the pressure, and installations will now be about 9.1 gigawatts, according to a revised forecast from Bloomberg New Energy Finance.

The extension came as a surprise to the industry and drew cheers from companies that were expecting higher costs in 2016 as they rushed to complete projects. Slowing construction means paying less for labor, equipment, marketing and financing, said Tom Werner, chief executive officer of SunPower Corp.

“A turbo-charged 2016 would have an impact on jobs and make it difficult to plan hiring for the boom-bust cycle,” Werner said in a phone interview. Extending the tax credit “is a great thing. It gives us long-term visibility. Financing will be more economic. Rates will have a lower risk-premium.”

The near-term decline in solar will be more than offset by increased spending over the next several years, according to New Energy Finance. The federal investment tax credit reimburses developers 30 percent of the costs of solar projects, and extending it will drive about $38 billion of investment in solar power through 2021. 

Budget Deal

Congress agreed to renew the credit as part of a broader budget deal that also included a retroactive extension of the production tax credit for wind power that expired at the end of 2014. That’s now expected to lead to an additional $35 billion of wind investments.

With the solar tax credit initially set to expire in a year, the industry was expecting a big decline in 2017, with demand slumping as much as 71 percent. That will now be reversed, with New Energy Finance forecasting installations to climb 5.5 percent.

Avoiding that anticipated slump means developers no longer need to plan for getting through a lean period, said Nathan Serota, a solar analyst at New Energy Finance in New York.

“There was a big focus on cutting costs just to survive the cliff,” Serota said in an interview Thursday. 

Boost Margins

The extension will reduce project financing costs and increase profit margins at solar companies including SolarCity Corp., SunEdison Inc. and First Solar Inc., said Vishal Shah, an analyst at Deutsche Bank AG. Shares in solar companies surged this week on the news.

“Companies such as First Solar were rushing to complete U.S. projects ahead of the deadline,” Shah wrote in a research note Thursday. “We now expect these projects to push out to 2017 and see margins improving.”

Sunrun Inc., a San Francisco-based developer, expects that five years of growth will help educate consumers that solar power is cheaper than what they pay for electricity from the grid and lower customer acquisition costs.

“It will clearly accelerate cost reductions,” Sunrun co-founder and Chairman Edward Fenster said in a phone interview. “I think you’ll see companies invest more” in new markets that don’t make economic sense without the tax credits.

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