It's inescapable that politics and investing sometimes collide. In renewable energy, it seems like it's a battle that never ends. Subsidies are attacked no matter how fast they're eliminated, failed companies are demonized, and even successful companies get dragged through the mud every once in a while.
But policy is a big key to the future for renewable energy, and for solar companies in particular, the laws passed in Washington, D.C., could make a huge difference in whether the clean energy revolution takes another decade to stand on its own or gets a jump-start from some simple rule changes. Here are three to watch in the next year.
The infamous ITC
The Investment Tax Credit, or ITC, is by far the most important subsidy for the solar industry today. It provides for a 30% tax credit to the owner of a solar system, effectively lowering the cost to install solar by 40% or more (the credit is on the value of the system, not the cost of the system when it's installed). But the ITC is set to decline to 10% for commercially owned systems, and to be eliminated for homeowner-owned systems, in 2017. This could devastate the solar industry in the short term.
Many want to see the ITC extended, but I think that's highly unlikely given the explosive growth in the industry today. Instead, I think the industry should look for a gradual step-down of the ITC and a broadening of who can use it and how. Currently, it's more economical for most homeowners to lease a solar system from a third party, who can sell the tax benefits to tax equity partners, than it is to buy the system and own it outright, simply because most homeowners can't effectively use the ITC.
If the industry could get the tax credit extended with a gradual step-down and expanded to be more usable for homeowners and businesses, maybe in the form of a cash grant or a multiyear credit, it could broaden the ways to finance solar energy. That would be good for solar energy overall.
In the energy industry, most well-established assets are in what's known as master limited partnerships, or MLPs. Under an MLP, the company itself avoids paying taxes because it's a pass-through entity. This allows income to be taxed at the owner's, or shareholder's, tax rate. This avoids the double taxation most corporations face at the corporate and personal level.
But MLPs are limited to certain parts of the energy and materials space, and that doesn't include solar energy. The solar energy industry would like to change that with what's called the MLP Parity Act. This would simply allow solar energy companies to be taxed in a similar way to other energy MLPs. It seems reasonable enough given the fact that pipelines, oil wells, coal mines, and other energy assets can use MLPs, but not everyone in Washington, D.C., sees it that way.
Cap and trade
One policy that's getting traction lately is cap and trade. In essence, cap and trade would allow clean energy sources to sell credits to dirty ones in locations where clean energy may not be economical. For solar projects, it could create another revenue stream on top of selling electrons to customers.
Cap and trade may be a long shot, but it could do more than any other scheme to make fossil fuels more expensive and solar cheaper where there's abundant sun.
Ironically, cap and trade could also do a lot to advance energy storage as well. If it becomes more economical to build solar where there's a lot of sun, it could overwhelm the grid with solar energy during the day and leave a void at night. This would create an opportunity for energy storage, whether it's through lithium-ion batteries, flow batteries, or hydrogen. It may be an unintended consequence, but energy storage would be a big beneficiary of building more solar where there's already a lot of it.
Policy matters in solar energy
These may seem like wild things to think about as investors, but policy matters a lot in the solar industry. Nevada's residential solar industry died almost overnight after policies didn't go its way, and the boom-and-bust cycle has happened over and over around the world.
I think the industry needs to look for a level playing field with fossil fuels and long-term plans that will make investment easier and less costly. I would love to see cap and trade, but realistically, an MLP parity act and a gradual step-down in the ITC seem more likely. If the solar industry were to win both of these battles, solar stocks could be the biggest energy winners of the next decade.
Travis Hoium owns shares of SunPower. The Motley Fool owns shares of and recommends SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.