Why Residential Solar Stocks Popped in December

By Markets Fool.com

What: Residential solar stocks had probably their best month ever in December, with stocks jumping across the board. SolarCity was up 77.4%, Sunrun jumped 77%, and Vivint Solar rose 18.2%.

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So what: The biggest news for the month was the extension of the solar investment tax credit. This subsidy is a 30% tax credit based on the value of solar systems, which solar companies package with accelerated depreciation and sell to tax equity investors to fund solar systems. This tax equity alone can be over half of the money needed to pay for solar systems, so the extension was a big deal for solar companies.

The other thing this will do is make it more economical for customers to take leases rather than solar loans. It can be difficult for homeowners to use tax credits as efficiently as solar companies can, making lease prices more attractive than figuring out the tax benefits for yourself. But if the tax credit had fallen to 10% for commercially owned systems and 0% for homeowners, it would have been logical to choose loans, which would be more valuable for homeowners because they would get all of the cost saving of going solar. Now they split it with tax equity and installers.

The end of 2015 was such a big deal for this subsidy because it was likely the last time it could realistically be passed before the election. So, getting the deal done was a big deal for all solar companies, which is why investors bid shares higher in December.

Image source: SolarCity.

Now what: While the ITC extension was a positive for solar companies, it doesn't affect all solar companies the same. Residential solar installers, for example, will likely keep selling leases and power purchase agreements, as they've been doing for years. If you love that business model, that's great news, but if you question the value created by this financial engineering -- as short-sellers started to do in 2015 -- this will make residential solar companies an even bigger target.

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The ITC extension is an incremental positive for solar installers, no doubt. But I also think it will continue to mask long-term challenges like the reliability of 20-year contracts and the risk associated with net metering. I think companies building larger-scale projects with differentiated products are in a better position long term. SolarCity is the only one of these companies moving in that direction, and that'll be a strength for the company heading into 2016, ITC or not.

The article Why Residential Solar Stocks Popped in December originally appeared on Fool.com.

Travis Hoium has no position in any stocks mentioned. The Motley Fool owns shares of and recommends SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.