Buried deep in the tax package being shoved through Congress is a much-needed stimulus for the solar industry. It is an extension to the 1603 Program, a grant program for "green energy" projects started during the original stimulus package. The program includes everything from solar and wind to geothermal.

The idea is to take the tax credit that investors received for renewable projects and convert it to a cash grant, effectively lowering the cost to develop a project. But there are some interesting side effects of this program that make it palatable to both sides of the aisle.

  • Grants are only made to completed and successfully functioning installations. Government dollars are not being spent on failed projects.
  • The program is a money-maker for the government because investors in the projects pay higher taxes thanks to specific depreciation requirements.
  • The investment stimulates jobs domestically, even if the panels are produced overseas.

If Section 1603 passes, there should be a flood of investment in U.S. solar projects during 2011. The usual suspects will benefit, like U.S.-based First Solar (Nasdaq: FSLR) and Sunpower (Nasdaq: SPWRA), but so will Chinese manufacturers. Yingli Green Energy (NYSE: YGE) and Trina Solar (NYSE: TSL) are both expanding in the U.S. market as developers install their low-cost panels.

And don't forget about those providing equipment to solar developers. Less than half of a solar project's cost is the panel, so a lot of money is spent on aluminum, inverters, and other infrastructure to build solar farms. Advanced Energy Industries (Nasdaq: AEIS) is a great way to invest in this with a strong position in the PV inverter market. Sales of its inverter products increased 160% sequentially last quarter.

The Foolish bottom line
A few weeks ago, I said Wall Street was wrong about solar, and one of my reasons was that we never know where demand will come from, but it always seems to show up. It looks like the U.S. could be a bigger piece than we anticipated, and if developers can ramp up quickly, there may not be a glut of solar panels in 2011 after all.

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Fool contributor Travis Hoium owns shares of First Solar and Sunpower. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

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