Can Bailout Plan Help Battered Solar Stocks?

While the recently passed $700 billion bailout package is primarily targeted as saving the U.S. banking system, a less well publicized provision in the package gives a much needed shot in the arm to the ailing U.S. solar power industry.

Congress Acts To Boost U.S. Solar Demand
As part of last minute set of sweeteners designed to ensure speedy passage of the Emergency Economic Stabilization Act of 2008, Congress approved legislation extending billions of dollars in tax credits for the solar, biodiesel and wind energy industries. For the solar industry, the specific benefit was an extension of a 30% solar tax credit for residential and commercial installations for eight years until 2016, and the elimination of the $2,000 credit cap for residential installations.

The decision to extend and "upcap" the federal tax credits was quickly hailed as a major positive by the Solar Energy Industries Association which predicted that it would help create 440,000 new solar-industry jobs and expand private investment in the industry by $325 billion.

Despite New Incentives, Solar Companies Selloff
Despite all this positive spin by the industry's trade association, shares of most of major U.S. solar power companies where unable to hang onto the one-day positive bounce they experienced following the news of the Act passing Congress, and have continued their southward trajectory. So far this year, shares of companies like First Solar (Nasdaq:FSLR), Evergreen Solar (Nasdaq:ESLR), Suntech Power (NYSE:STP) and Canadian Solar (Nasdaq:CSIQ) have seen their shares lose half to three-quarters of their value from their highs.

European Subsidy Loss Eclipses U.S. Tax Breaks
At the moment, these last minutes government incentives look to be too little and too late to reverse the fortunes of an industry that now faces the prospect of slumping sales in key European markets and declining margins prompted by declining product prices.

Industry watchers on both sides of the Atlantic have lately turned decidedly negative on solar industry fundamentals. European investment bank Lazard Capital Markets now expects solar installations in Spain to drop to 500 megawatts next year from 1,400 megawatts this year as the Spanish government slashes solar electricity subsides by 36% in response to its own U.S. style housing market collapse. American investment dealer Jefferies & Co is now predicting a 15-20% decline in the price of solar modules next year, and just last week, Goldman Sachs dramatically reversed its 'buy' recommendations on First Solar and Sun Power to 'sell' on the view that generous European subsidies have come to a permanent end and a solar product supply glut would soon become a reality.

U.S. Long Term Prospects Enormous
While the short-run prospects look somewhat rocky, the industry's long-term prospects look decidedly sunnier given the U.S.'s enormous untapped solar potential. According to a study by Navigant Consulting in Chicago, the 30 billion square feet of flat roof space in the U.S. could accommodate up to 150,000 megawatts of solar panels. That would meet 25% of total U.S. electricity demand at a cost of about $650 billion.

Right now, the investment required to supply the average California home's electric needs with solar panels, net of state-level grants and the new federal tax credits, is just a little over $12,000. Assuming a 30 year life to the panels, and annual increases in utility supplied power of about 6% (which has been the average rate of increase between 1970 and 2001), that investment would generate an internal rate of return of about 8.9%. That's more than twice what you'd get on a 30-year U.S. Treasury bond right now, and it may be enough to entice more homeowners in the largely untapped California market to take the solar plunge. According to California's biggest electricity utility PG&E (NYSE:PCG), only 25,000 of its five million customers have installed rooftop solar systems to date. (For more on this industry, read Spotlight On The Solar Industry.)

The Bottom Line
In the face of current industry uncertainties and ongoing broader market turbulence, it's likely that the solar stocks could head even lower over the next few months. But, if investors are prepared to look beyond next year's valley, the period beyond could be sunny indeed as the cost equation favoring solar finally prompts a much needed green shift in how Americans power their homes. It strikes me that that would be a much more sensible way to spend about $700 billion.

For further reading, be sure to check out our related articles Clean Or Green Technology Investing and Top 10 Green Industries.