Clouds Continue to Gather 'Round Solar

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Remember those investment tax credits the solar industry needed to keep consumer demand inflated? Well, it didn't take long after passage for at least one company to change its own policy for profit's sake.

Xcel Energy (NYSE: XEL  ) is a Midwest public utility that has encouraged customers in Colorado to use solar energy by offering a renewable-energy credit. In the wake of the new investment tax credit bill that was signed into law, however, Xcel has cut its Solar Rewards program rebates by 40%, undermining part of the reason the investment-tax-credit bill was passed.

Among the many parts of the tax credit, Congress eliminated the $2,000 tax credit cap on residential solar systems, replacing it with a tax credit of as much as 30% of the total cost of the system. Xcel seems to be using that as a reason to reduce the rebates it offers to customers.

In its letter to the Colorado Public Utilities Commission, Xcel said that because the customers are receiving a greater benefit from the new law, the utility can cut its rebate program, and consumers would not see their overall costs increase by much. Some could argue that it's using the federal tax credit to boost its own earnings.

There are many other problems with the hopes being pinned on the investment tax credits. While Suntech Power (NYSE: STP  ) , for example, had specifically bound future investments to the passage of the credits, there may be few other opportunities for companies to take advantage of them.

Debt financing accounts for large portions of how facilities are built, but the credit freeze, despite massive infusions of cash into the system, means there might be little funding available to get solar plants going. Even huge conglomerates such as General Electric (NYSE: GE  ) are bailing on the clean-energy sector for the time being, because they are unable to price projects appropriately.

With most banks operating at a loss this year, they won't be able to take advantage of the tax credits, and they might not be inclined (or able) to finance projects for a while. That would put them at odds with companies such as SunPower (Nasdaq: SPWRA  ) , which expect the tax credits to help their results next year.

Worse, Lehmann Brothers had become the primary underwriter and lender for many solar-energy companies. With its collapse, many companies may find themselves in trouble, too. Evergreen Solar (Nasdaq: ESLR  ) is one example. It loaned Lehman nearly 31 million shares of its stock to raise $375 million, and at least one analyst thinks it may not be able to recover those shares.

Moreover, the industry may soon face pricing pressures; spot prices for solar cells could fall, and keep falling. Though vendors contend that prices are firm, they may come under pressure if a discounting atmosphere prevails.

While many solar companies feel optimistic about the benefits of the tax credit, they may face cloudy days ahead. Xcel's actions could set a precedent for other utilities to follow. As the credit crisis continues to force people to look for ways to save, including lowering their thermostats -- which would lead to lower utility income -- the incentive to make up any lower revenue by reducing rebates may prove tempting indeed. 

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Fool contributor Rich Duprey has no financial position in any of the stocks mentioned in this article. You can see his holdings. The Motley Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 30, 2008, at 5:49 PM, pj1 wrote:

    Other than the concern about credit for financing new plant build out - this article appears to be over inflating the issues.

    Regarding plant build outs, one should evaluate each Solar company on a case by case basis to see what their current financing situation looks like...

    For those able to build/produce -- there are YEARS and Billions of $'s of orders on backlog. Those prices are already negotiated.

    The Tax Credits will only feed the demand.

    And, as for energy prices overall, China "dropped" its growth to 8 or 9%. That's still alot of energy consumption for a billion plus people.

    This article is off the mark.

  • Report this Comment On October 30, 2008, at 6:58 PM, VikingSven wrote:

    May, could, might... Speculation is fine but back it up with at least some facts. Fact is that rebates are primarily from state and federal programs, not utilities. Those rebates and incentives are on the whole being increased DRAMATICALLY in the US, not decreased. Combine the 30% uncapped tax credit with the measures taking place in the states and you've got a recipe for much higher demand.

  • Report this Comment On October 31, 2008, at 9:54 AM, gebby9 wrote:

    key word here is might. the demand for solar is so great and the economics so favorable that the growth will continue despite economic dislocations created by the financial crisis. a solar installation loan is probably the most secure loan the banks could make.

  • Report this Comment On November 03, 2008, at 1:55 AM, cgilreath wrote:

    Wow – you guys really don’t understand the Solar market – but that does not stop the Motley Fool.

    First banks are not the only providers of project finance for solar and today they are the last source anyone would turn to. With a lot of capital needing to be put to work the desire is to find places with little capital risk. This is driving a lot of capital into solar project finance. Don’t judge this by the MMA’s or SPP’s of the world their model is a middle man. Real project finance is going direct to the integrators and the project owners. European opportunities with the existing feeding tariffs (even after the reductions in Spain) are providing significant yields (8% to 14% unlevered) these become 20 year annuities backed by the government.

    Even better in the US is tier shaving - it is what creates grid parity that a reality today and this drives market viability. Tier shaving got a major boost from the ITC and it is on it way to delivering a record year in solar installs – forget what Excel is doing.

    Finally – you guys all act like solar is all about silicon producers and Panel manufactures – wrong again – these guys are the commodities that will get slammed. Declines in panel prices improve the economics for a host of others in the food chain including integrators and I am not talking about the inept Akeenas of the world.

    Panels sold for $2.90 w 3 years ago vs. $3.5 last year and they can be produced for less today then they could 3 years ago – so there is plenty of room for cost to go down. Meanwhile the cost of home and commercial energy has increased by 6% a year on average for the past 20 years. In 5 years you have greatly increased the ITC affect.

    Further if you are one of those people who think electrical contractors and construction companies are going to be the Solar integrators at the end of the day – you are wrong again. Love to explain why but don’t have time this go round.

  • Report this Comment On November 04, 2008, at 1:36 AM, DBGMVETTE wrote:

    Your dog won't hunt. Costs are coming down. Earlier it was the cost of raw materials, now it's the credit crunch. Well if we have a need for energy, plants will be built and they will find the financing.

    You seem to print a picture of -0- sum energy projects for the near future for all fuels. Last time i checked it took financing for coal plants, nuclear, or whatever fuel you might be using. Does that mean we will not be able to meet our energy needs from whatever source due to financing. To me it means the money will go where it is best placed and the tax credits will help solar in that competition.

    Also, no one seems to be mentioning that once the solar grid is established in the right way you don't have to refuel it every second with and unknow cost of always more expensive fuel every minute it operates. Lets see someone build a clean coal plant or nuclear as fast as solar and without the necessary financing.

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