Bad Moon Rising on Solar

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It was a sunny day for solar power when Congress decided to bail out Wall Street. Among the many ornaments hung on what became a Christmas-tree bill -- there were gifts for many industries beyond financial firms in the final bill that passed -- solar industry got its investment tax credit renewed for eight more years.

Let the sunshine in
It's an important piece of legislation for the industry. First, it provides a 30% tax credit for residential and commercial solar installations, and individuals who previously saw their credit capped at $2,000 saw that provision cancelled.

It also eliminated the ITC ban for taxpayers who are required to pay the hated alternative minimum tax, giving more people an opportunity to invest more in solar energy. And it did away with the restrictions on public utility being eligible for the energy credit.

Storm clouds rising
While it's easy to have a sunny disposition about the potential for the solar industry -- many solar stocks, like SunPower (Nasdaq: SPWRA), LDK Solar (NYSE: LDK), and Suntech Power (NYSE: STP), got a nice bounce when the bill passed the Senate -- there are no assurances that the investment tax credit will provide much immediate relief.

Hapoalim Securities analyst Gordon Johnson points out that 50% to 70% of solar projects are financed by debt, and the credit situation in the country hasn't improved to any extent, even with the massive bailout and capital injections the government has made. Thus, there is expected to be little lending available to finance solar projects, at least over the short term.

The eight-year ITC extension is important for unlocking the value inherent in the solar industry, but investors would be wise to use caution when deciding if First Solar (Nasdaq: FSLR) or Evergreen Solar (Nasdaq: ESLR), for example, is a worthwhile investment. There had been plenty of exuberant forecasts driving estimates, but recently Goldman Sachs (NYSE: GS) and Lazard reined in their excesses.

A Foolish umbrella
There's a developing consensus that the U.S. can become a storehouse of demand for solar power, and the ITC is just one component furthering it. Yet with the country's credit woes still uncertain, lending criteria tightening, and supply issues that need to be worked out, what appear to be cheap valuations today may seem dear by next year. And that's a cloud that shouldn't pass over your portfolio.