Exactly how much is an extended Investment Tax Credit worth to the solar industry? According to GTM Research, the ITC extension will lead to 25 GW more solar being built over the next five years than without the ITC, and $40 billion in additional investment in the industry. As you can see in the chart below, all segments of the U.S. solar market will take some of that $40 billion windfall.
But the impact of the ITC extension won't be felt evenly throughout the segments of the solar market. And that's something investors need to think about when they look at the benefits.
Residential solar isn't the big winner here
Since the ITC deal was reached, shares of SolarCity (NASDAQ:SCTY.DL) have shot higher, in part because residential solar is often seen as a big beneficiary of the ITC. But according to GTM Research, residential solar would have been the least affected by a reduction in the ITC.
The reason comes down to how the ITC pushes the market toward leases and power purchase agreements that have installers, tax equity investors, debt providers, and homeowners all taking a piece of the value pie (something I go into in more depth here). Without the ITC, the sales structures would likely have simplified, leading to more cash or loan sales, lower margins, and even some parts of the value chain being cut out (tax equity). But the industry wouldn't have collapsed.
Utility-scale solar, on the other hand, is much more price-sensitive and doesn't have the same complex value structure. A falling ITC could have led to developer energy bids increasing 25% or more in 2017 as developers lost a major source of funding from tax equity. Since they're just now starting to beat fossil fuels on cost, it would be like setting the industry back five years. You can see in GTM Research's predictions above that utility-scale solar would collapse by around 80% in 2017 without an ITC extension.
Between 2005 and 2014, First Solar and SunPower built 39% of all the solar installed in the U.S. -- which was mostly utility-scale -- and have done so while improving technology and reporting profits. Now that the ITC has been extended, they'll be able to expand into a growing market and potentially expand gross margins beyond the mid-teens they're expecting in 2016. Without the ITC, they would have been forced to compete for a shrinking market in the U.S. and move their focus to projects overseas.
Ironically, neither company needed the ITC to be extended because of their international exposure, but they'll both take a bigger percentage of the incremental growth caused by the ITC extension than a company like SolarCity. I'm not suggesting the ITC extension isn't good for SolarCity, just that the incremental $40 billion flowing to solar will go disproportionately to companies like First Solar and SunPower.
This rising tide will lift some boats more than others
There's no doubt that an extended ITC will be good for the entire solar industry, but the incremental winners may not be who you think. Residential solar installers wouldn't have taken nearly the hit large-scale project builders would have from the loss of the ITC, so if you're looking for the big winners lately, it's really those building utility-scale solar.