Solar's Outlook Gets a Bit Sunnier

While many question whether the federal government will have any cash to dole out to nurture this young industry over the next few years, the favorable tax treatment should be more than ample to help sustain high growth rates. (However, my fellow columnist Kevin Kelleher recently noted that access to capital will be crucial for these firms if they are to fund their capacity expansion plans.)

In addition, hurdles still remain for solar, and the industry would not even be worth discussing were it not for those tax credits. We'll need to see a sharp increase in the energy conversion rate of photo-voltaic cells to enable this industry to stand on its own without government support.

The energy conversion rate is the percentage of all the solar power absorbed that is converted into energy. That figure currently ranges from roughly 8% to 23%, according to my colleague Bob Faulkner.

A few scientists have talked about getting to 30% or even 40%. Many others scoff at that prediction and assume we'll see only modest gains. But if we can get to 30% efficiency, then solar is likely to prove cost-effective on its own, assuming oil stays north of $70 per barrel.

The other hurdle regards consumer spending. Even with tax credits, upfront installation costs can run into the tens of thousands of dollars. Although the return on that investment makes it worthwhile over the long term, cash-strapped consumers could hold off. And if current capacity expansion plans are enacted, then the possibility of an oversupply of solar panels could lead to profit-sapping price cuts.

Last night's tax legislation is a clear boon for the industry, but investors also need to closely monitor these technological and consumer headwinds.

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David Sterman has been an equity analyst and financial journalist for 15 years, most recently serving as Director of Research at Jesup & Lamont Securities.