Looming Loss of Federal Incentives Darkens Future of Solar Power Stocks

The reduction or elimination of several federal energy subsidy programs later this year could further dim prospects for solar power stocks – bad news for a sector already in a months-long slump.

The goal of the programs, which include loan guarantees and grants, was to support the early stage growth of renewable energy companies until they became viable enough to attract conventional investors.

But several of the federal programs created as part of the 2009 stimulus package have expiration dates that assumed the economic woes of the recession would have eased by now.

Instead you have a solar power industry worried about what happens after the programs begin to expire – the first as soon as Sept. 30.

"Is the solar industry going to die if we lose these programs? No, but we're going to stall," Roger Efird, managing director of Suntech America, a subsidiary of Suntech Power Holdings Co. Ltd. (NYSE ADR: STP) told USA Today.

Helped by such programs, the solar industry grew 67% last year, but could see that growth flatten as cash-strapped governments both in the United States and Europe begin to cut back.

Solar power stocks don't need any extra headaches. Almost every stock in the sector has dropped significantly in recent months, with several falling more than 20%

In the period since April 1, sector leader First Solar Inc. (Nasdaq: FSLR) fell 19.8%; JA Solar Holdings Co. Ltd (Nasdaq: JASO) 18.6%; Yingli Green Energy Holdings Co. Ltd (NYSE ADR: YGE) 34%; Trina Solar Limited (NYSE ADR: TSL) 26.9% and SunTech 18%.

The solar industry has been under pressure from falling prices, inventory buildups and extension of payment terms. Adoption has been relatively slow, even with government subsidies. According to Morningstar, that lack of demand will continue to weigh down the sector for the remainder of 2011.

Budget Victim

The U.S. government incentive that expires on Sept. 30 is a Department of Energy program called Section 1705. It provides loan guarantees for construction of renewable energy projects. A related program, Section 1703, was created in 2005 and will not expire, although an austere-minded Congress likely will reduce its funding this year.

A Treasury Grant program set to expire Dec. 31 also may get ensnared in Congressional budget battles. The 1603 program provides owners of commercial solar property with a grant worth 30% of their investment.

Republicans focused on trimming the federal budget have both incentive programs in their sights.

"If you take a gun and force taxpayers to hand over their earnings to a solar company, that solar company is going to do very well, but the taxpayers end up getting screwed with nothing to show for it at the end of the day," Rep.Tom McClintock, R-CA, told USA Today. "We've spent billions on technology and research and subsidies, and it's still the most expensive way of generating electricity."

Solar power costs about $0.22 and $0.33 per kilowatt-hour, compared to the U.S. average cost of $0.11 per kilowatt-hour.

Those who believe the programs should continue point to years of subsidies for other energy sectors, including coal, oil and nuclear.

"The incumbents have been favored for many years," Ian Rogoff, executive chairman of HelioPower, an integrated energy development company, told the Las Vegas Sun. "Oil and gas tax benefits have been renewed, which means government support for those industries has been renewed … for the most part, these incentives are just in place to allow these new technologies and new industries to compete effectively, and compete against incumbents."

President Barack Obama and Democratic legislators in general favor continuing the programs to encourage the development of renewable energy and reduce dependence on fossil fuels. But with Republicans calling for trillions of dollars of spending cuts, such programs could easily become budget-balancing fodder.

Creative Financing

Increasingly, it appears that solar companies will have to find a way to survive without government help. In the past year many European nations have begun to reduce their "feed-in" tariffs, which required utilities to pay handsomely for solar power and contributed to the industry's rapid growth in Europe from 2007 to 2010.

Only China, with its rapidly increasing energy needs and over-reliance on such dirty fossil fuels as coal, seems committed to subsidizing solar power.

But all isn't lost for U.S. solar companies looking for other ways to finance their projects.

Last week energy investment firm CleanPath LLC announced it would invest $800 million in photovoltaic projects in North America, partly in response to the expected evaporation of federal funds.

"We have been recognizing that the Treasury Cash Grant may not survive," CleanPath Managing Director John Balbach told Clean Energy Authority.com. "As much as we would like to see theU.S. government support solaras much as the Chinese government, it doesn't look like you can count on that. So we've built a solution that is purely market based, we're financing projects with what is purely available today."

Another option could come in the form of "old energy" companies hedging their futures by investing in solar companies. Earlier this month oil giant Total S.A. (NYSE ADR: TOT) invested $1.3 billion in SunPower Corp. (Nasdaq: SPWRA), giving it a 60% stake.

Ultimately, solar power stocks may have it rough in the short-term, but eventually winners will emerge in an industry that has tremendous potential.

"Despite ourextremely bearish near-term view, the fact remains that solar still has a very promising long-term future," says Morningstar stock analyst Stephen Simko, who thinks investors should look to buy First Solar and Trina Solar as they bottom out. "Eventually, industry fundamentals will improve as balance returns to supply and demand."

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