Amid this withering contraction, at least one clean-energy company is booming. The 380 employees of SolarCity, based in Foster City, Calif., are working all-out on installing solar panels on homes, mostly in the Golden State. Business has doubled since the spring of 2008. The company, which has placed solar panels on 2,000 homes, is trying to fulfill 3,000 orders, and has an eight-month waiting list. Selling a big-ticket item (solar installations can cost $25,000 or more) in the midst of a credit bust, and at a time when the mantra "No projects" echoes in the corporate boardroom and the family room, would seem to be a recipe for disaster. But SolarCity is growing—and not because it has made a breakthrough in the design of solar panels. Rather, last year it developed a new model for selling the units, offering them for lease. Outside investors eager to take advantage of the tax credits and rebates associated with solar installation provide the cash, and homeowners are able to buy the electricity produced at a discount. "Customers pay no money down, and they save money from day one," says CEO Lyndon Rive. "People want to go solar, but they don't like to spend $30,000."

As Rive has discovered, the future of the alternative-energy industry now depends far more on financial engineering than mechanical engineering. Clean-tech trade publications are filled with breathless coverage of new innovations: thin-film solar, advanced batteries, cars powered by hydrogen fuel cells. But money has never been harder to come by, thanks to the struggling capital markets. "The alternative-energy sector is flat on its back," David Crane, CEO of giant energy producer NRG, tells NEWSWEEK. "There's no debt financing available from Wall Street." The Cleantech Group reported that in the first quarter of 2009, total green-energy venture investments fell 50 percent from the first quarter of last year.

Government policy has traditionally played a part in kick-starting the rollout of new technology, whether by providing land and financing for railroads or commissioning the first telegraph line. When the profit motive kicks in, the private sector begins to fund development. Both types of financial innovation will be needed for the fledgling alternative energy to thrive—and there are already signs of creative breakthroughs.

In California, homeowners installing solar panels get a state rebate equal to 20 percent of the cost and a 30 percent tax credit for the cost of installation. But even after such goodies, the $20,000 solar unit still requires significant upfront investment. So, in February, the city of Berkeley, Calif., put a new program into action. Homeowners borrow money from the city to install panels, reap the benefit of government rebates and tax credits, and then pay down the loan to the city through property-tax payments made over 20 years. The debt, like the panels, sticks to the house, not the person. Sell the house and the new owner assumes the liability. Businesses are similarly seeking new types of arrangements. Gerry Heimbuch, vice president of commercial operations at the Solar Center, a five-year-old firm based in Rockaway, N.J., that designs and builds solar-energy installations, says that building owners who plant panels on their roofs will see a return on their investment within five years. But in this climate, that's still too long. The answer: power purchase agreements. A third-party investor pays for the installation of the solar unit and owns it, receives the tax benefits and then sells power to the host building at a reduced price. Essentially, building owners are renting their roof space. Fueled largely by such orders, the Solar Center expects revenues to double in 2009 from $8 million last year.

Industrial-size installations—the type that will truly bring the business to scale—present a different challenge, since they require truly massive capital outlays. "We had a stable last summer of about two dozen large institutional investors who regularly invested in renewable projects," says Adam Umanoff, a partner with Chadbourne & Parke in Los Angeles. "Now you could count them on the fingers of one hand." Some, like Lehman Brothers, disappeared. Commercial banks hibernated under their TARPs. But two items in the just-passed stimulus bill represent innovative financing. Instead of simply claiming a tax credit, companies making investments in projects that start by the end of 2010 can get a 30 percent cash grant. The Department of Energy is also offering loan guarantees for large projects. "We're seeing more term sheets for financing in the last three weeks than we saw in the last three months," says Umanoff. Among the applicants are NRG, which is seeking to develop three large-scale solar installations in California representing an investment of $800 million to $1 billion.

To some degree, the greatest technological innovation in solar energy has already taken place—developing panels that convert sunlight into electricity. But the most powerful photovoltaic array won't solve the industry's current problem. "If they come out with a solar panel that's 2 percent more efficient than the existing one, it won't move the needle," says Rive of Solar City. "You have to make it easier for people to adopt the technology." The future of solar innovation depends on generating another kind of green.

© 2009