Texas Electricity

   Green Energy Boom In Bailout Bill

Green energy providers will reap an immediate benefit from the raft of new incentives in Washington's financial rescue package. Better late than never.

John Berger, chief executive of Standard Renewable Energy, was holding his breath this week. "If it passes, this would complete the mainstreaming of solar energy in the U.S.," says Berger, who generates 85% of Standard's $20 million in annual revenues from solar installations. He figures the new tax credits could quintuple his solar business in a year.

The old set of federal incentives for energy investments in wind, solar, biomass and geothermal expire at the end of this year. The industry thought Congress was about to pass the bill back in May but squabbling over how to pay for the estimated $17 billion cost over eight years derailed negotiations. Both the House and Senate recently passed similar versions of new green energy incentives but hadn't agreed on a final version.

The eruption of bipartisan ire over the failed financial bailout bill Monday cast doubt over the green energy industry that Congress would be able to pass anything until after next year's presidential inauguration. If it didn't pass? "The U.S. is just crossing the threshold to commercial viability," says Ezra Green, chief executive of Clear Skies Solar. "But if this bill doesn't go through, it's the end of solar power installation in America."

Orders for solar power systems had already slowed, with customers in a wait-and-see mode. "We started seeing orders drop off four months ago," says Rhone Resch, president of the Solar Energy Industries Association. "Many installations take more than three months from planning to completion." Resch spent the first half of the week lobbying Congress not to let the energy incentives languish. He encouraged the 750 solar-related companies he represents to call their representatives and push for inclusion of renewable energy legislation in the bailout bill.

Solar power, far less economically viable than wind turbines, had the most to gain from the bill. The expiring incentives allowed homeowners to claim an investment tax credit for 30% of the cost of a new solar installation, but capped it at $2,000. The new law, written into the financial rescue bill, extends the 30% credit for eight years and, more importantly, eliminates the cap. That means that on a $27,000 residential solar system of 3.2 kw, a homeowner could take nearly $9,000 off his taxes the first year.

In a market with average electric rates of 11 cents per kwh that would reduce the payback on a solar system from 12 years to seven years. (By contrast, for wind power the bill merely extends by one year the existing 2 cents per kwh production tax credit.)

The new incentives will be a shot in the arm to companies like Akeena Solar (nasdaq: AKNS - news - people ), one of the largest residential solar panel installers, which cut 10% of its staff this year. Others have been seeking business outside the U.S., in countries with more generous incentives like Greece, Spain and India, where Clear Skies Solar has a $20 million installation in the works.

In Greece, a nationwide incentive pays the buyer of a solar system a rebate of 40% off the top. Then, over 20 years, the owner is guaranteed payment of 40 euro cents per kwh generated and put into the power grid. This makes for a three-year payback. Resch says that even if the new credits were passed today, solar panels in the U.S. will be in tight supply. Because of U.S. uncertainty, panel manufacturers have been sending panels overseas to more solar-friendly countries. "If you're a small American installer you're not going to be able to get enough product."

That's good for manufacturers like Suntech (nyse: STP - news - people ). The Chinese panel maker is a favorite stock of John Maloney, portfolio manager at M&R Capital Management. Off 60% from its 52-week highs, Suntech trades at a price-earnings ratio of 26. Maloney sees worldwide sales and earnings growing faster than 20% a year.
Part of the rationale for big government-sponsored rebates on what is an otherwise uneconomic source of power is the strategic benefit of distributing small-scale power generation across the landscape rather than focusing it in a hulking coal or nuclear plant.

All of Standard Renewable's green energy solar installations on Galveston Island withstood Hurricane Ike, and they were some of the only power generators up and running in the days afterward. Ike knocked out power to 93% of Centerpoint Energy's (nyse: CNP - news - people ) 2.2 million customers around Houston. More than two weeks after the storm, some customers are still without power, and repairs will cost as much as $500 million. It's been a harsh reality for the city that bills itself as the energy capital of the world. Berger says he's already getting interest from Houstonians looking to add solar power when they repair hurricane damage to the roof.

Houston's oil execs might not appreciate that much of the funding of the bailout bill's green energy provisions will come through raising taxes on oil and gas production. Logic says that higher taxes on oil companies mean fewer incentives to find more oil. Maybe that's good.
In a recent report, Robert Pollin at the University of Massachusetts figures that investing $100 billion in green energy over two years would create 2 million new jobs, many of them in the hard-hit construction and manufacturing sectors. This, Pollin figures, would be four times more jobs than would be created if the same investment was made in the oil industry.

Still, the bailout bill gives fossil fuel its due. There's $2.55 billion in new federal spending on clean coal projects, with a stated priority toward funding on how to sequester carbon emissions from power plants by injecting carbon dioxide deep underground. The bill states that for every metric ton of carbon dioxide sequestered permanently underground, the Feds will pay $20. The payout will be $10 per ton for carbon dioxide injected into oil fields to help push up more oil. "It helps close the [financing] gap," says Donald Hodel, former secretary of energy in the Reagan administration. Hodel's Summit Power Group aims to build the first low-emissions coal-gasification power plant in oil-rich west Texas.

Without incentives, solar remains no-go. According to Department of Energy researchers, factoring in capital costs, one kwh of power generated by a new solar installation costs on the order of 25 cents, even with existing incentives. The all-in costs for one kwh from new coal or natural gas-fired plants is less than 7 cents. Green energy might create a lot of jobs and keep the refrigerator on after a hurricane, but creating value remains another challenge altogether.

Christopher Helman, Jesse Bogan http://www.forbes.com/2008/10/02/green-energy-taxes-biz-energy-cx_ch_1002energy08_taxes.html

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