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Government incentives and a rich pool of investors will make this a good year for solar projects, but one big question lingers — what will happen in 2012?

“There’s a tremendous pool of capital out there … a deep and liquid capital market for renewable projects,” solar developer Recurrent Energy’s CEO Arno Harris told VentureBeat recently. “The rub is that we’ve got some policy issues that may make it difficult to tap those markets.”

Last year, the Treasury investment tax credit grant program credited with spurring numerous wind and solar projects was granted a one-year reprieve after nearly being allowed to expire. Advocates breathed a sigh of relief when it was renewed, but the expiration date — this December — is just around the corner, leaving some developers racing to beat the deadline and showcasing how closely renewable energy and investment is tied to government support.

Even now, analysts and industry watchers worry about government incentive pullbacks in Europe. At the height of European subsidies, Germany came to represent about half of the world’s photovoltaic demand. But there was a solar boom-and-bust in Spain credited to overly generous government support, and there’s another one forecast for the Czech Republic. Germany is instituting cutbacks, and the U.K. is reportedly considering them too.

The industry has looked to demand from the U.S. and Italy to make up for the projected European shortfall, while top U.S. panel maker First Solar is looking to developing markets like India. The U.S. 30 percent investment tax credit for renewable projects is still in place, and the Treasury grant program — in effect at least for the rest of this year — makes those funds available faster and in cash. There’s also a “bonus depreciation” program of sorts that is expected to be enticing to investors.

“Large corporations that invest in solar projects in 2011 can effectively own a long-term revenue-generating asset with little or no permanent capital invested. This, coupled with the ITC (investment tax credit) cash grant extension, should catalyze a resurgence in the U.S. solar market in 2011,” says Ted Sullivan, Lux Research analyst.

So far over the past few months, the U.S. has seemed to be doing well. It’s attracting investment from companies that want to buy up demand, such as SolarCity’s purchase of groSolar on the East Coast, OCI’s purchase of solar developer Cornerstone and Chinese player LDK picking up a $33 million majority stake in Solar Power, Inc. In a statement about the purchase, OCI chief executive Kirk Shilling called North America “the most promising emerging solar market in the world where we expect solar capacity to grow five-fold over the next several years.”

“U.S. demand is more and more valuable given that the ITC cash grant was renewed, and subsidy cuts are hurting the markets in Europe – Germany in particular. The east coast installers are small operations with respectable pipelines, and most of the California-based players that we’ve spoken with are looking to expand there,” says Lux analyst Matthew Feinstein.

For developers like Silverado Power and Recurrent Energy, a top solar developer snapped up by Sharp last year for $305 million, any struggles felt by those trying to finance solar plants aren’t due to the availability of capital. In fact, many institutional investors are looking to invest tens of millions into projects, according to Reuters. The question of whether the Treasury grant program will be renewed, though, still hangs in the balance.

“Our business wouldn’t be destroyed if it didn’t happen,” Harris says, noting that many of Recurrent’s projects are in Canada. “But it would be a big disappointment. The U.S. is a big portion of our development pipeline.”

Solar financing and investment also hinges on the tax equity market, which calls for organizations — large companies, institutional investors, utilities — who have profits and thus a large tax bill they can offset by investing in a solar project. Solar leasing firm SunRun, for example, has raised hundreds of millions in tax equity from U.S. Bancorp and PG&E. The process of financing solar via tax equity is long and complex, though, and solar advocates have argued for other, more straightforward ways to entice investors and financing.

When the Treasury grant program looked in danger of dying last year, analysts said the tax equity market wouldn’t be enough to cover the shortfall of financing needed. Still, Nathaniel Bullard of Bloomberg New Energy Finance notes that the tax equity market is coming back — and indeed, appetite from institutional investors is returning as well. Wells Fargo committed $100 million to GCL’s solar projects last year, and SolarCity raised a $40 million fund from Citi.

For now, while the market is still chock full of incentives, developers are rushing to take advantage and kick off projects.

“As the year wears on, don’t be surprised to see projects taper off as the grant renewal comes into question yet again,” Feinstein says.

The effect and longevity of government subsidies is also a question hanging over the renewables IPO market this year. But one thing is clear — it’s an important part of renewable development, and represents an opportunity for policymakers.

“I think the industry has come so far in the past five years. We’re right at the point where the U.S. can play what its rightful role is,” Harris says. “We are the largest energy market. We should be the world’s largest renewable energy market.”

[Top image via U.S. Air Force, bottom image via Wikipedia Commons]

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