Investing in Solar Installers

The Other Side of Solar

Written by Brian Hicks
Posted July 8, 2008 at 8:00PM

It's fair to say that, so far, solar installers have been the red-headed stepchild of the renewable energy investment world.

Their counterparts, module manufacturers and silicon suppliers, have been in a noticeably different boat. And rightly so.

You know the stories by now: First Solar, SunPower, and MEMC Electronic Materials. The list goes on.

And while some are still busy touting those stocks, their explosive potential has long passed. Don't get me wrong, there is still money to be made there—good, safe, clean, green money. Their classification is simply being shifted from 'growth stock' to 'value stock.'

Those are exactly the kind of stocks now covered by Green Chip Stocks—more stable, established green companies, capable of delivering good value over time. The smaller, more speculative plays now reside with the Alternative Energy Speculator.

When it comes to growth stocks in the solar space, I think investing in solar installers is the perfect place to look, given current market and legislative conditions.

Solar Installers and the Investment Tax Credit

As many of you are aware, Congress has failed to extend the investment tax credit (ITC) for solar energy (not to be confused with the production tax credit (PTC) that mostly affects the wind industry and is also at risk of expiring) that expires at the end of this year, despite numerous pieces of legislation aimed at doing so.

These are the two federal ITCs at risk:

  • Residential Solar Tax Credit: A 30% tax credit, created in the Energy Policy Act of 2005, for the purchase of residential solar water heating, photovoltaic equipment, and fuel cell property. Expires after December 31, 2008.

  • Business Solar Tax Credit and Fuel Cell Tax Credit: A 30% business credit, established in the Energy Policy Act of 2005, for the purchase of fuel cell power plants, solar energy property, and fiber-optic property used to illuminate the inside of a structure. After December 31, 2008, the credit reverts to a permanent 10-percent level.

Failure to extend these policies thus far—and worries that they won't be extended by year's end—has led to staunch downward pressure on many solar-related companies and all installers. That's because, without firm tax support, most solar installations simply aren't yet economically feasible for the consumer—even though eleven states are requiring a certain percentage of their power come from solar resources.

And when it comes to commercial and utility scale solar installations, equity providers are in the same boat; they're hesitant to provide capital for new projects because of the long lead times for construction and equipment.

Would you pony up money for a new solar project now that may or may not be finished by the end of the year, given that you're risking getting a guaranteed 30% back? Me neither.

Of course, blatant federal inaction is being overshadowed in many cases by overwhelming support from the collective states. Here's a rough list of programs going on around the country:

  • 26 states with tax credits and deductions for renewable energy (federal policy expires Dec. 31)

  • 29 states with property tax incentives for renewable energy (no federal policy)

  • 21 states with state sales tax exemptions for renewable energy (no federal policy)

  • 38 states with rebate programs for renewable energy (no federal policy)

  • 31 states with loan programs for renewable energy (no federal policy)

  • 24 states with grant programs for renewable energy (no federal policy)

  • 42 states (plus D.C.) with net metering laws (no federal policy)

By the way, three cheers are in order for Arkansas, the only state that has none of the above policies, putting them on the same playing field as the federal government. But I digress.

Even with states picking up some of the legislative slack—California and New Jersey are particularly favorable areas—a lack of funding from the federal side has been enough to temporarily stall the industry.

But it's not all bad. And as green investors, we can leverage the panic to make some nice profits.

Investing in Solar Installers

Take, for example, this line from a recent Sacramento Business Journal article that was published on MSNBC: "When the tax credits expire Dec. 31, small solar power installation companies could be hit the hardest because they depend on new business in their local markets. But even large companies are scrambling to finish as many projects as they can this year."

Those things would be true if the extension was not passed. But I'm willing to bet Congress isn't willing to let that happen—not with the growing popularity of clean energy and the strength of their lobby.

Plus, most Congressmen and Senators—regardless of aisle side—know the extension needs to be passed, but they disagree on how to fund it. Taking money away from Big Oil and Hedge Funds goes against what has become a GOP stump issue, and would offend millions of dollars worth of constituents.

What's more, Congress notoriously waits until the last minute to pass energy- and tax-related policies. Such was the case with a wind power tax credit that was extended on December 18th last year—it was due to expire two weeks later.

And if Congress fails to act, domestic solar companies will be forced to do business elsewhere, like Canada or Europe, where the policy landscape is much more favorable. Driving business out of the country is also a big political no-no.

So here's the deal: The battered state of a few publicly traded solar installers presents us with an excellent buying opportunity.

The shortlist of worthy solar installers begins with Akeena Solar (NASDAQ: AKNS), which, after ascending to over $16 in January, has been on a six month skid. Now below $5, this one is a bargain buy, especially since they just launched their much awaited and revolutionary Andalay Flat Roof Solar Power Systems and are making inroads toward the booming Mediterranean market.

Also worthy of noting is Real Goods Solar (NASDAQ: RSOL), the solar installer spin-off from sustainable lifestyle juggernaut Gaiam (NASDAQ: GAIA). Those guys simply couldn't pick a worse time to IPO, in early May, during some seriously tumultuous times for the market and a period of instability for policy.

Real Goods came to market strong, in the high $8 range, but has never traded higher than that, and has since slipped down to under $6.50. While I don't fully understand why this company is valued higher than Akeena, it is also a reasonable stock to get into before the tax credit gets extended.

But the third solar installer on my list is one I'm very interested in. In fact, I'm more than interested; I've already written the company up and will be recommending it to readers of the Alternative Energy Speculator this week—possibly tomorrow.

Not only is this company operating in the most profitable regions of the U.S., they're also expanding operations to include the Mediterranean market. This company also has proprietary energy management software that has exciting smart grid implications. That software also provides a monthly revenue stream in addition to solar installations.

Best part is, the stock is currently trading under a dollar, so there's minimal downside. Buying in now will offer you the greatest upside before the ITC gets extended and after.

But you have to be a member of the Alternative Energy Speculator to get in on this one. If you do, the subscription fee can more than pay for itself.

Call it like you see it,

nick hodge

Nick