In downturn, solar industry sees bright days ahead

Posted by Martin LaMonica

SAN DIEGO--People in the solar industry are hopeful that the sun is a good place to put money these days.

To be sure, the financial crunch is rippling through even the fast-growing solar business: With falling house prices and general belt-tightening, consumers may be more reluctant to purchase solar panels, even if they want renewable electricity. And less available capital makes it difficult to finance large-scale projects, like corporate rooftop arrays or solar power plants.

But even with the gloomy economic outlook, the mood at this week's Solar Power International 2008 conference was decidedly upbeat.

The solar industry scored a major policy win, getting an eight-year extension to federal tax credits that tacked on more generous terms for homeowners.

And in a volatile investment environment, solar looks solid, purely from a financial point of view, many executives argued.

"I think there's a flight to quality and we believe there's a flight to solar because of that," said Tom Werner, the CEO of California-based solar panel manufacturer and installer SunPower. He noted that big solar projects over the past three or four years have created a track record of delivering expected financial returns.

"Now having said that...the credit markets are different and more measured. Banks are studying things more--the risk profiles and the balance sheets of companies," Werner said.

Long meetings with bankers
Discussion of the impact of the credit crisis and an economic slowdown at the conference alternated between "glass half full" and "glass half empty" perspectives.

The returns on solar projects for utilities and corporations have the advantage of being predictable and thus low-risk, said Bill Gross, CEO of a tech incubator called Idealab, which has spawned two solar companies targeting utilities--Energy Innovations and eSolar.

New technologies are bringing the cost of solar electricity closer to fossil fuel generation. And policies that encourage clean-energy production improve the financial return on big projects.

"It's so tight trying to beat the price of fossil fuel electricity. If you can cut the price at all with totally green energy, that's awesome," Gross said.

Sempra Energy, which builds and operates natural gas power plants, plans to invest billions in solar power plants in the coming years and expects to get about the same 10 percent return on the capital it typically gets, said Michael Allman, president and CEO of Sempra Generation. Because of the credit crunch, other firms may have a harder time than Sempra launching large projects, he said.

Matt Cheney, CEO of solar financing firm MMA Renewable Ventures, said solar company executives should expect to have long meetings with financial analysts and bankers as they seek to clamp down on risk and get better terms.

Click on the image to launch a photo gallery of products and solar installations from this week's Solar Power International conference.

(Credit: Martin LaMonica/CNET News)

"Historically, with respect to an impact, a shock like we've just experienced...takes about four years for things to settle down to the point where we can access capital at a rate that we were getting just six months ago," Cheney said during a CEO panel at the conference.

Other executives were more sanguine about the commercial market, noting that many funds set up to invest in renewable energy projects already have the money to invest.

Large deals are still "financeable" because the government incentives are generous and the demand strong, said Steven Chan, chief strategy officer at solar cell and panel manufacturer Suntech Power. Financiers, however, are likely to shift terms around.

A recession in the general economy can put a damper on solar in another way. If corporations see their tax bills drop because of falling earnings, they are less likely to purchase a rooftop solar array because they won't have the "tax appetite" to benefit from government incentives.

For solar companies themselves, the financial turmoil can stall plans to expand. Raising money on the stock market to build a new manufacturing facility, for example, is likely to be delayed as there are few initial public offerings.

Residential looks strong
For consumers, meanwhile, solar power looks more attractive than ever.

That's helped by the recently changed federal policy that gives homeowners a 30 percent tax credit on solar electric panels. Before, that credit was capped at $2,000.

"Without that cap, an average suburban home system could probably get a $9,000 tax credit on a system that might cost $30,000," Chan said. "It's real money now. The economics have gotten a whole lot better for the residential homeowner."

Significantly, the tax credits, which go into effect next year, were extended for eight years, a relatively long period for people to take advantage of them. Also, because solar cell efficiency continues to improve, homeowners can purchase more productive panels for about the same price, Chan said.

For a business that caters to environmentally minded consumers, talk at the Solar Power International conference was laced with hard-boiled financial terms like "tax equity investors" and "internal rate of return."

(Credit: Martin LaMonica/CNET News)

Shifting to an economically driven business is a very deliberate attempt to scale up solar adoption rapidly in the next five years, according to Julia Hamm, the executive director of the Solar Energy Industry Association.

Technology enhancements are helping bring the price of rooftop solar panels closer to the retail electricity rate, or "grid parity."

To lower the upfront cost barrier, start-ups like SolarCity and SunRun are offering financing options, such as leases, for consumers and small businesses. A handful of utilities, too, are getting into solar as well, a move that could make it more accessible.

All the numbers talk, though, is not to say that the environmental attributes of solar energy are insignificant. On the contrary, the existing federal and state policies place a value on renewable energy, executives said. The industry is lobbying for more policy initiatives, such as plans to modernize and bulk up the electricity grid.

Sempra Generation's Allman said that policies like a renewable portfolio standard, which mandates a certain percentage of renewable electricity generation, act as a market signal.

"Nobody would sign up for solar power today without the environmental attributes it offers. It's just too expensive," he said. "I think of it as two separate markets--one for brown power and one for green power."

Today's economic and political environment favors a push toward energy independence and environmental protection. For that reason, most solar company executives are bullish when they take a long-term view.

What's still unknown for solar--or other industries--is how badly the bruising from the current financial crisis will be.

"The price of electricity is determined in large part by the cost of capital," said Michael Ahearn, CEO of First Solar, which is recognized as having the cheapest solar panels. "We're in a temporary state where there is no real market functioning. The question is, where does the market reset?" he said during a panel.

Martin LaMonica is a senior writer for CNET's Green Tech blog. He started at CNET News in 2002, covering IT and Web development. Before that, he was executive editor at IT publication InfoWorld. E-mail Martin.

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