How A Tax Credit Extension Could Impact The U.S. Solar Industry

There’s a good chance that the U.S. Solar Investment Tax Credit will continue beyond 2016, as a five-year extension was included in an omnibus spending bill agreed upon by Congressional leaders on Tuesday, December 15. ^[1] The House and Senate are likely to vote on the package shortly. The ITC, which is the primary federal incentive for solar in the U.S., was originally slated to be cut from 30% to 10% for non-residential and third-party-owned residential systems, and to zero for host-owned residential systems by the end of 2016. In this note, we take a look at the potential implications that an extension could have on the solar market and First Solar (NASDAQ:FSLR) – the largest U.S. Solar equipment manufacturer.

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An Extension Will Give The Industry A Boost

An extension of the ITC could be a strong positive for solar-linked equities in the near term. For instance, an analysis by GTM Research shows that an additional 25 GW of solar photovoltaic capacity would be installed in the U.S. over the next five years if the tax credit is extended, marking a 54% increase over the base case, no-extension scenario. ^[2] Moreover, GTM predicts that the utility solar sector would see the biggest boost, with the ITC extension leading to a 73% increase in deployments through 2020, with PPAs being signed at levels of under 4 cents per kilowatt-hour on a regular basis. U.S. commercial solar installations could also see an incremental 51% increase over the no-extension scenario.

First Solar, the largest U.S. solar panel manufacturer, has significant exposure to the utility-scale market, and could be a big beneficiary of an extension. Our current $63 price estimate for First Solar – which discounts the possibility of an ITC extension – assumes that the firm’s systems revenues will drop from about $2.4 billion in 2016 to around $2 billion in 2017, and then subsequently growing to about $2.7 billion by 2022. Our current model also forecasts margins declining to about 35% by 2022 from current levels of over 40%, owing to pricing pressure. However, if the ITC extension is passed, there could be a meaningful change to our forecasts and price estimate. For instance, if systems revenues grow to above $2.5 billion in 2017 and over $3 billion by 2022, with margins declining to 38% in 2022 (versus our current 35% estimate), this could result in a 10% upside to our current price estimate. This would imply a valuation of about $70 per share.

U.S. Solar’s Long-Term Growth Doesn’t Hinge On ITC

The ITC has been instrumental in boosting photovoltaic installations among individuals and businesses, and the U.S. solar market had been preparing for a sharp decline in 2017 installations given the original “ITC cliff.” That said, we believe that growth will continue over the long term irrespective of legislative outcomes. The U.S. solar industry has reached a degree of maturity, with low panel prices (down by over 60% in the last 5 years), improving energy yields, falling installation costs and the availability of low-cost financing. These developments have improved the economics of solar significantly. Per estimates from the U.S. Energy Secretary, electricity from rooftop solar installations could soon fall to as low as 6 cents per kilowatt-hour in some states, making solar increasingly competitive with fossil fuel-based power generation sources.

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More Trefis Research

1. IHS: Global solar industry saved from 2017 cliff-edge as U.S. set to extend solar ITC, SolarServer, December 2015 [↩]
2. Investment Tax Credit Extension Would Increase US Solar Installations 54% Through 2020, GTM, December 2015 [↩]