How a Single Tax Credit Dominates U.S. Solar

February 24, 2016, 4:00 PM UTC
Photograph by Tim Rue — Bloomberg/Getty Images

Over the last few weeks some of the largest solar panel makers and solar project developers in the U.S. have announced their quarterly and annual earnings. While various companies beat or disappointed the Street, one thing was clear: the oversized influence that a single federal tax credit has on the solar industry’s future prospects in the United States.

The credit, which was recently extended, has now altered the course of many solar companies’ outlooks for 2016 and beyond, and much of this news was recently revealed over the past few weeks, about two months after the extension. The schizophrenic nature of the credit has forced solar companies to remain flexible and nimble compared to many manufacturing-focused companies of this size.

For years, the solar industry has relied on a substantial federal subsidy called the Investment Tax Credit, which enables companies to reduce income taxes by 30% of the cost of a solar project. The credit has been a crucial tool that has boosted the amount of solar projects built nationwide. It has also been particularly useful in previous years when the cost of solar was far higher than it is right now.

But for much of 2015, U.S. solar companies were operating their businesses with the assumption that the tax credit would expire at the end of 2016. Large solar panel projects installed in the deserts of California or Nevada take years to develop, and companies building them need to plan these projects years in advance.

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The tax credit, as it was originally designed, was meant to help clean energy companies when costs were high, and it was created to ramp down along with the falling price of clean energy. For the past few years, many solar companies have been dreading 2017, where the plumb subsidy was set to drop off a cliff.

However, at the end of 2015, in a jolly holiday present, the tax credit was extended to 2019 at 30% and will now be reduced to 10% by 2022. The solar industry, which has developed a pretty powerful lobbying industry through the Solar Energy Industry Association, cheered the extension of the credit, and shares of solar companies shot up dramatically in the hours after the bill was passed.

This wasn’t the first time that the prospects of the solar industry has hinged on the on-again, off-again credit. The subsidy was first created out of the Energy Policy Act of 2005 and was originally applied just to 2006 and 2007. In the eleventh hour at the end of 2006, the credit was extended by another year. Then towards the end of 2008, the credit was extended another eight years. Months ago it was just extended again by five years.

The unusual credit has created a cycle in which solar companies operate in a boom-and-bust cycle. Companies race to plan and install solar projects in time to take advantage of the credit, and then plan far fewer projects in the wake of the anticipated loss of the credit.

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Last year, 2016 was being looked at as a potentially boom year for solar companies, while 2017 was eyed as year to batten down the hatches. Simultaneously, solar companies had to calculate how they’d operate if the credit was extended and be prepared to take that route if Washington D.C. dealt that hand.

Now that the credit has once again been extended, solar companies now are showing less of a frenzy to get projects done in 2016 along with a brighter longer term outlook for the U.S. market in 2017 and beyond.

Researchers at GTM Research predicted the extension of the ITC would increase solar installations in the U.S. by 54% through 2020, and deliver another 25 gigawatts of additional solar capacity over the next five years. That’s enough solar power for over four million average American homes.

In First Solar’s (FSLR) earnings call on Tuesday afternoon, the company revealed that it will now push a handful of its solar projects originally scheduled to be built in 2016 back to 2017. First Solar CEO Jim Hughes said on an earnings call, “More than anything else [the extension] removes the over hang of uncertainty.”

A SolarCity Installation As Earnings Figures Are Released
A SolarCity employee carries a solar panel being installed on the roof of a home in the Eagle Rock neighborhood of Los Angeles, Calif. in May 2014. Photograph by Patrick T. Fallon — Bloomberg/Getty Images
Photograph by Patrick T. Fallon — Bloomberg/Getty Images

Last week, SunPower (SPWR) CEO Tom Werner said in the company’s earnings that the extension of the credit enabled the company to be more thoughtful about its projects now that the “artificial motivation of the ITC cliff” has been removed. Beyond 2016, Werner commented, “We believe that the ITC extension and our increased investment in the U.S. market will drive significantly higher EBITDA [earnings before interest, taxes, depreciation and amoritization]”.

SolarCity (SCTY), which held earnings two weeks ago, said it had slowed investment in buying leads for new solar customers towards the end of 2015 because of the potential disappearance of the credit. But now in the wake of the extension, the company would start ramping up that investment again. SolarCity CEO Lyndon Rive described the extension as “a big one for the industry,” which he expects will deliver “good growth in 2017 and beyond.”

A couple months ago, the leaders of these companies were stuck in limbo trying to predict what policy makers would do. Days before the credit was extended, SunPower’s Werner told Fortune that if the ITC wasn’t extended, SunPower would focus more aggressively on international markets starting in 2017.

Werner noted, “Being nimble and flexing between markets is really critical. Spain, Italy, the U.K., Germany came and went. Japan’s come and gone twice. Flexing between markets is key.” He explained further, “I’ve been in energy for 13 years, and you learn that energy is a policy-driven industry.”

SolarCity’s Lyndon Rive told Fortune last year that while he thought the ITC would probably be extended before the end of the year, the company had to operate on the assumption that it wouldn’t be extended. Such is the life of a solar executive.

As the solar industry becomes more mainstream and its costs become more competitive with fossil fuels, the credit will become less crucial. Some in the solar industry welcome the removal of the credit to show that solar can indeed beat out other forms of power generation on economics alone. Eventually the solar industry will operate without it, and it will be then when the industry knows it truly “made it.”

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