The season of giving delivered a big present to the solar industry. In its latest omnibus spending bill, Congress greatly enhanced the sector's tax credits, not to mention subsidies, for both commercial and residential installations.
In this clip, energy analysts Sean O'Reilly, Tyler Crowe, and Taylor Muckerman discuss these nice gifts, and what might have been behind Congress' largesse.
The full podcast can be listened by clicking here. A full transcript follows the video.
This podcast was recorded on Dec. 17, 2015.
Sean O'Reilly: So, guys, I don't know if you've noticed, but solar's got a little bit of a pop.
Tyler Crowe: Something like that.
Taylor Muckerman: A little bit. As hot as the surface of the sun, those stocks.
O'Reilly: Congress gave them a Christmas present.
Crowe: It's the season of giving.
O'Reilly: They extended the tax credits, God bless us, every one.
Crowe: They gave the oil industry an export lift.
Muckerman: The Republicans had to give something to the Democrats.
O'Reilly: "You get a subsidy! And you get a subsidy!"
O'Reilly: The extension actually went further out than I thought. It goes into the 2020s or something?
Crowe: And even beyond.
Muckerman: Give us the primer.
Crowe: This is the proposed bill that's on the omnibus spending, what's been added. Basically, instead of the investment tax credit at 30%, basically getting chopped for all residential in 2017, and down to 10% of commercial, it's being extended all the way out to 2019 at that 30% rate for both. And then, in 2020, it goes down a few percentage points, 2021, it goes down a little further, and then at 2021, it goes down to 10%.
Muckerman: Which is what it should have done in 2016, right?
Crowe: Right, but that's for both, residential and commercial -- 10% for what appears to be perpetuity. They don't seem to have a real limit on when that 10% subsidy goes down.
O'Reilly: Taylor, did this throw off any Excel spreadsheets for any businesses?
Muckerman: It sure seems so, if you saw SolarCity (NASDAQ:SCTY.DL) sell off about 50% just a few weeks ago, and now it's up 100% back to where it was. So, yeah, some people didn't see this coming. This tax credit cut was looming over everybody's head. Now, they're getting it back for a heck of a lot longer than I think anybody would have expected. It's amazing what they can stuff inside a bill that has to pass Congress before it shuts down.
O'Reilly: Because that was a $1.1 trillion spending bill.
Crowe: It was a big one, yeah. Just give everybody enough to sweeten the pot a little bit to keep it going. But, one of the interesting things, like you were saying, the big sell off in SolarCity, one of the reasons it did have that sell off was, on its most recent earnings, they were talking about scaling back gross and working within their cash flows.
Muckerman: It was actually making a profit, but it sold off.
O'Reilly: Well, they lowered their growth profiles. But it was like, "We're only going to grow at 60% per year, or something."
Crowe: It was kind of an admission that the federal tax credit in 2017 was going to have a pretty large impact, and we're going to try to adjust our business model before it got there. Not driving to the edge of the cliff at 60 mph and then trying to hit the brakes. They were trying to tap it before it actually happened.
O'Reilly: You guys may or may not know the answer to this --
Muckerman: Thanks for the confidence.
O'Reilly: I feel like I'm about to get a "Congress isn't that smart" comment, but did anybody work when picking the year that these would drop to the 10% or 0% that they were going to drop to next year? Just about efficiencies of solar cells and everything, by the end of the decade, we think these will actually be competitive to where we don't need to subsidize them?
Crowe: I really doubt somebody in Congress did that.
Muckerman: Not because they're stupid, but because this is not their avenue of expertise. Solar experts could have predicted that.
Crowe: Yeah, maybe a solar lobbyist would have been able to chirp something in somebody's ear, but I have a hard time thinking members of Congress are looking --
O'Reilly: So they picked these years out of a hat.
Crowe: -- really intensely looking at cost per kilowatts of installation of the solar panel, and saying, "Yeah, if we start to taper at this rate, we'll be good."
O'Reilly: I'm giving them too much credit, I'm sorry.
Muckerman: It was pretty interesting at the Paris conference, and another speech recently, Elon Musk was talking about, if you just took a small corner of Nevada and covered it completely in solar panels, you could power the entire United States.
O'Reilly: What about transmission lines?
Crowe: That's the problem, right?
Muckerman: Yes. If you imagine breaking that up and putting it in four corners of the United States, the same acreage --
O'Reilly: Maine is not a good place to put solar panels.
Muckerman: Well, New Jersey is one of the biggest solar states in the country in terms of growth over the last five to 10 years. So, clearly, somewhere in the Northeast, we could do it. And then, this other article I read said if you just covered the entirety of Spain in solar panels --
O'Reilly: Europe's good to go?
Muckerman: No, you power the entire world.
O'Reilly: Oh. Wow. Spain. Wow.
Muckerman: That's all it takes at the efficiency we're at now, so imagine if we get more efficient.
O'Reilly: Which is, I don't know, at best 23%?
Muckerman: Yeah, something like that.