Image source: SunPower.

The solar industry just got arguably its biggest windfall ever with an extension of the investment tax credit, or ITC. A 30% tax credit based on the value of a solar project was supposed to fall to 10% at the beginning of 2017 (0% for homeowners), but the industry will get a few years' reprieve from a potentially disastrous cut.

In a bill moving through Congress right now, the ITC will be extended at 30% through 2019 and then drop to 26% in 2020, 22% in 2021, and 10% thereafter. The reaction from solar stocks was positive, but this could be a truly transformational moment for energy. 

The early winners from the ITC extension
For solar companies, I put the ITC extension's effects into two buckets. There are those who would have been in real trouble if it hadn't been extended, and those who didn't need it extended but will take the windfall that comes with it. 

Image source: SolarCity.

On the "needed the ITC" side, I put Sunrun (NASDAQ:RUN) and SunEdison (OTC:SUNEQ), who both could have been in real trouble without the ITC. Sunrun's problem is that it doesn't have a cost structure that's competitive with other residential solar installers. In the third quarter, SolarCity (NASDAQ:SCTY.DL) had  an all-in cost per watt of $2.84 for solar installations, and Vivint Solar (NYSE:VSLR) had a cost of $3.12 per watt. Sunrun's cost per watt was $3.75.

Even if we only look at the installation cost of Sunrun-built systems (which excludes those built by third parties) the company's cost was $2.35, higher than SolarCity's $1.92 and Vivint Solar's $2.27. The ITC doesn't in and of itself save a company like Sunrun, but it keeps the market from collapsing in 2017 and allows time to build a cost structure that could be more competitive long term. 

SunEdison, on the other hand, has primarily made its money building utility-scale projects. According to GTM Research, utility-scale solar was expected to collapse by at least 80% in 2017 without an ITC extension. That could have left SunEdison without enough demand to service debt and little opportunity for growth. The ITC doesn't save the company from ongoing challenges, but it gives SunEdison a better chance to recover. 

Image source: SolarCity.

Will the old guard finally pick up growth?
The two companies I'm interested to watch over the next five years are First Solar (NASDAQ:FSLR) and SunPower (NASDAQ:SPWR). First Solar expected to report $4.00-$4.50 in earnings in 2016, and SunPower expected EBITDA of $515 million to $565 million next year (SunPower didn't give full-year EPS guidance) and said 2017 would be a good year as well before the ITC extension. For it, the ITC extension is a bonus, but not a necessity.

In theory, both companies should be able to turn up growth in 2016 and beyond with the ITC extension, and they have the balance sheets to do so. 

They tend to fall on the conservative end of the spectrum, which has served them well as markets have gone boom and bust over the past decade. But with some certainty in the U.S. market, it seems like an opportunity to grow module production, system development, and a larger suite of energy solutions. And both companies should be able to leverage already profitable operations to improve margins even further in 2017 and beyond.

This changes energy's long-term trajectory
While solar companies have gotten a lot of the focus for the ITC extension, this will likely become a story about the U.S.'s changing energy future. Solar energy accounts for about 1% of electricity production today, but the extended ITC could spur enough growth to be 5% or more by 2022.

In 2016, GTM Reasearch expects over 15 GW to be installed, and that figure is now expected to grow to 20 GW annually by 2020. To put that into perspective, 1% of electricity consumption in the U.S. is equivalent to about 22 GW of solar installed (assuming a 20% capacity factor). So, the solar industry reaching 5% of U.S. capacity by 2022 isn't out of reach. And most of that capacity would be in a small number of states like California, Arizona, North Carolina, New York, and New Jersey.

This growth in solar energy production and the stress it puts on the grid will produce a need for an energy storage solution that could act as rocket fuel for energy storage growth. Lithium-ion batteries, flow batteries, and even hydrogen could be commonplace in just a few years, driven by the need to balance the grid with all of the solar coming online.

These necessary services at the intersection of renewable energy and the grid may be an unintended consequence of extending the ITC, but they're a very real opportunity for companies and investors who can provide innovative solutions.

The ITC extension changes everything
Before an ITC extension, it was possible that 2017 could be a terrible year for the solar industry. A shrinking market could have led to heightened competition and likely many companies going out of business. But the ITC staying at 30% will likely raise the fortunes of everyone in the industry and lead to tremendous growth.

There will also be unintended consequences that will lead to further innovation like energy storage and energy management. With the continued boom of solar, there will now be a pull for these technologies, not just a subsidized market.

No matter how you slice it, we're in for a lot of growth in solar over the next decade. And that creates a huge opportunity for investors eyeing the future of energy.