Solarcity Solar Community Image

Image source: SolarCity.

2015 has been a strange year for SolarCity Corporation (NASDAQ:SCTY) after falling 50% and then rallying to post a small gain for the year. Slower than expected growth and higher than expected costs have derailed the stock this fall and added questions for once-bullish investors. But the passing of the ITC was a lifeline that caused the stock to rally once again.

So, what will it take to turn the stock into a long-term winner in 2016?

SCTY Chart

SCTY data by YCharts

The ITC boosts growth
The single biggest boost SolarCity could have gotten was an extension of the solar investment tax credit. The subsidy allows for a 30% tax credit for the value of a solar project and, when combined with accelerated depreciation, can allow for tax equity investments to provide about half of the cost of building a solar project.

Until late Tuesday, the ITC was set to fall to 10% for commercially owned systems in 2017, and 0% for homeowner-owned solar systems. But it appears that Congress is ready to extend the ITC to 2020 with a gradual stepdown to 10% after that. 

This extension could drive SolarCity to move its growth forecast higher as more and more states will be economic for solar in coming years. We won't know the expected impact of an ITC extension for some time, but it can only be good for SolarCity.

Solarcity Copper Ridge School

Image source: SolarCity.

Sales costs come down rapidly
SolarCity's biggest roadblock in 2015 was rising sales costs. It simply took more effort to sell the additional systems needed to hit growth targets than management had hoped, and that caused overall costs to be higher than anticipated.

In 2016, SolarCity could get its mojo back if it can reduce sales costs per watt installed. It will do this in part by focusing on larger systems, like commercial solar and community solar, but also won't push as hard for unprofitable growth.

Long term, getting cost structures in line with the economics is important, and you can't do that if it costs $3,000 or more for each customer you acquire.

SolarCity prepares for a new solar world
As solar energy becomes a larger part of the electric grid, we're seeing solar companies have to adapt to a changing business environment. Rules like net metering, which were once a given for the industry, are now under attack, which will change how solar companies have to sell products. 

We could also see a growing number of states modify net metering rules, which would make solar by itself less attractive, but will also make energy storage and management a more attractive option along with solar panels. This would help make SolarCity an energy company more than a panel installer, something it's been building toward for years.

Long term, I don't think we'll see SolarCity simply serving as a residential solar panel installer, it will become an energy company with a suite of offerings for a variety of customer segments. That transition could reach high gear in 2016. 

Could this be the best year yet? 
There are a lot of unknowns for SolarCity going into 2016, but the company still has a bright future in a growing solar industry. It may need to adapt to market conditions, but it's proven the ability to do that and thrive in the past.

If the ITC is indeed extended, and SolarCity can manage selling costs in the meantime, I think that would be the formula for the stock's best year yet. 

Travis Hoium has no position in any stocks mentioned. 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.