Solar Energy: Help Is on the Way

by: John Gilluly

Yesterday the Senate passed an 8 year $18B extension of the 30% investment tax credit [ITC]. Sources close to the discussions in the Senate had seen a shift away from the large House of Representatives omnibus bill (now in debate) to a smaller ($) one specifically addressing the solar and wind industry in the United States.

By stripping the ITC out of the larger and more costly HR bill, the Senate was able to pass the bill before it adjourns. It has the support of the majority and minority leaders in the Senate and the Administration has signaled its willingness to sign it. It remains only for the House to pass it.

One hurdle remains here – there is not a full offset (as yet) for the financing of the ITC, and the House of Representatives is adamant that all bills must show how they will be funded. This may have been what caused the sudden drop in the solar stocks in the last hour of trading yesterday.

There is political advantage for both parties in agreeing to this bill, especially those senators and congressmen up for re-election. They are aware of the American public's desire for some kind of renewables bill before the ITC expires this year, and now (at least) the Senate can say they’ve done it.

This smaller bill grants the investment tax credit the solar industry needs to sustain its commercial development going forward, and will be a building block in the more comprehensive alternative energy plans of the upcoming Administration.

It also will jump start the employment in green collar jobs that has been held hostage by the lack of an ITC renewal.

During the last week there has been significant stock appreciation (+50%) in several American solar installation companies – Akeena (AKNS), World Water and Solar [WWAT], Sunpower (NASDAQ:SPWR), Evergreen Solar (ESLR) and Real Goods Solar (RSOL) – companies that would be the primary beneficiaries of an ITC credit. The volume has expanded exponentially as funds moved into the sector in anticipation of the ITC passage and an increase in commercial activity.

This is welcome news for the battered solar sector. Huge bets were made against the sector by hedge funds in 2008.

Evolution Solar made the following comments on September 19, 2008:

Upon review of the Regulation SHO Threshold List, only 69 of many thousand "Other OTC" traded securities have SHO Threshold Fails to Deliver, which suggest substantial naked short selling in those issues. Evolution Solar Corporation is one of the 69 companies on the list, which confirms that the continued manipulative downward bias on our stock recently is most likely the result of illegal shorting.

Other illegally shorted solar companies on this SHO Threshold List are Akeena Solar, Ascent Solar Technologies (NASDAQ:ASTI), Solar Fun Power Holdings (SOLF), Sunrise Solar [SSLR], and SunPower Corp, all of which have seen substantial price declines.

Evolution Solar Corp. is hopeful that the SEC's action and new rules requiring hard T+3 close-out requirements beginning immediately will curb this manipulative short selling activity in its shares and others.

None of this is news to investors in solar and wind energy who have watched their stocks become decimated.

It is also incorrect - as some have implied - that passage of the ITC would only benefit large commercial projects (First Solar (NASDAQ:FSLR), SPWR, WWAT) and not residential installers like Akeena and Real Solar. Not so. All state mandates heretofore have included ample funding for residential solar installations for families, small businesses, and non-profits to reduce their monthly electricity costs.

Rather than offer a surcharge per watt as is done in Europe (spawning an enormous 'solar farm' industry), the American strategy is to fund reductions of up to 100% (but not more) of a customer's total monthly electric costs. The policy is one of abatement. Savings go directly to the bottom line for consumers of electricity - especially during peak times in the sun belt.

Which leads me to Akeena, a solar installation company that is expanding across the United States. The following notes are quoted (with permission) from Paul Moore, a technology specialist at Xcelerated Profits Report.

Legislation can make or break a company by eliminating or creating profits overnight. Akeena Solar has been a victim of Washington gridlock that has caused one of its lines of business to come to a standstill. However, as rapidly as profits disappeared, they are likely to reappear offering investors a unique opportunity to get in on the ground floor of the trend toward mass adoption of renewable energy in the United States.

Akeena Solar is the largest independent, public solar installer in the United States and had been seeing growth in excess of 80% until the June quarter showed an extreme drop off in demand. Revenue from commercial installations dropped to $1.4 million from $7.3 million in a single quarter. What caused the substantial drop off? Concerns over the expiration of the Solar Investment Tax Credit at the end of December 2008.

The expiration of the investment tax credit would (have) reduced subsidies from 30% to 10% for commercial businesses making current projects unprofitable. Companies may be interested in conserving electricity but the bottom line is that without the tax credit, the cost per kilowatt hour from a solar installation is greater than the per kilowatt cost from a utility. Since commercial installations require more lead time for a feasibility study and engineering assessment in addition to additional installation labor, demand dropped off well in advance of the subsidy expiring at the end of the year.

Despite the drop off in revenue from commercial installations, the residential business remains healthy and grew by nearly 20% sequentially in the second quarter to $5.7 million from $4.6 million. Historically residential has represented 80% of revenue for Akeena but as commercial installations increased in the back half of 2007 residential dropped to 40%. So in a sense, what we’ve seen is the build up and drop off of a business that is incremental to the business of smaller installations.

…We’re left with a healthy consumer business and a commercial business that has all but stalled until the investment tax credit is extended. We believe this represents the downside scenario for the stock.

Traditionally, Akeena received over 90% of its revenue from California but has now expanded into several additional states and California’s contribution has dropped to 70%. While the incentives offered by CA make installations in that region the most attractive, other states are embracing the technology with New York and Connecticut beginning to show traction as well.

Akeena believes it is on track to provide installed power at a cost of $0.12 per kwh in 2010. If this goal can be met, Akeena will be offering power below grid parity in each of these regions (according to the April 2008 statistics from the Department of Energy). As the gap between installed cost per watt and grid parity closes, demand in the new markets is expected to increase on a steep growth curve similar to California’s.

Cheaper panels will also contribute to the adoption rate of solar electricity in the United States. Due to the subsidy structure in Europe, demand has exceeded supply as people rush to complete projects before subsidies in Germany and Spain are reduced at the end of the year. …As each panel manufacturer increases supply to gain market share and tariffs are reduced, the panel cost per watt will drop substantially, making solar energy even more price competitive with fossil fuel generated power.

Over the last two years, Akeena has taken its installation methodology and packaged it in a package called Andalay. The Andalay panels reduce the number of parts and standardize the electrical connections to reduce installation time while increasing reliability. Because of the increased reliability, Andalay panels are slightly higher-priced and higher margin than third party panels.

Additionally Andalay has been licensed to Suntech to be marketed in Europe and will be open to other manufacturers in the future. Andalay represents a wild card as panel supply rises and the market for panels becomes commoditized. If the company is effective in using Andalay as a differentiator, it will continue to increase as a percentage of the installs (beyond the 48% today) and provide a lift to gross margins. In this case, it will also represent a very high margin licensing revenue stream. At the very least, it is a marketing tool the company can use to gain an advantage as it expands into new geographies.

As the US continues to face high electricity rates and an increasingly difficult job market, the Solar Investment Tax Credit which (should) dramatically effect Akeena’s revenue and profitability outlook.

Disclosures: John Gilluly has long positions in AKNS and ESLR.