SolarCity founders and employees ring the opening bell to celebrate the company’s IPO at the NASDAQ Stock Market on Thursday, Dec. 13, 2012 in New York. SolarCity is a leader of distributed clean energy and will trade under SCTY. (Mark Von Holden/AP)

Three of the country’s most prolific installers of residential solar panels are under federal investigation to determine if they inflated the cost of their work to increase the payments they would receive from the government, according to government and industry officials familiar with the probe.

SolarCity, SunRun and Sungevity have received subpoenas from the Treasury Department’s office of inspector general for financial records to justify more than $500 million in federal grants and tax credits the firms tapped for performing work. The probe seeks to determine whether the companies accurately reported the market value of their costs when applying for federal reimbursement, which was calculated at one-third of the costs.

The solar companies received money through the Treasury’s $13 billion program, known as the 1603 program, which used funds from President Obama’s stimulus initiative to offer cash grants to clean-energy developers. The goal was to spur the spread of wind farms, solar panels and other clean power sources nationwide.

SolarCity, SunRun and Sungevity have been by far the largest recipients among companies installing solar panels on homes. Working heavily in the sunny states of California and Arizona, the three firms collected hundreds of millions of dollars in federal cash grants to pick up a share of their costs on thousands of home installations during the past three years.

But the prices some of these industry leaders charged for their work were sometimes far higher than the broader industry’s market rate, according to solar experts and details of the Treasury investigation released in company reports. While firms can install solar panels for roughly $5 per watt of energy and make a comfortable profit, some firms were charging as much as $7 and $8 per watt.

SolarCity spokesman Jonathan Bass said Thursday the company believes its estimates were fair, does not know of any specific representations that are in question and says its costs were often at or below the recommended amount in guidance the Treasury Department provided at the time.

Sungevity and SunRun declined to comment.

The companies could be forced to repay the government millions of dollars if problems are found, as well as face penalties. SolarCity said if the government reduced the project cost estimates on its portfolio by an average of 5 percent, the firm could theoretically lose $17 million of the $341 million it has received or expects to receive through such grants. It could be ordered to repay the government some of those funds.

During the past year, senior administration officials and leaders in the solar industry have been privately discussing concerns that a few major solar companies — along with their financial partners — may be taking improper advantage of the program.

“We want to be good stewards of these incentives,” said Barry Cinnamon, a solar industry expert and former chief executive of Westinghouse Solar. “We don’t want to be perceived as being greedy or pulling the wool over taxpayers’ eyes. If it’s not ethical, then we don’t want companies in the industry taking advantage like this. If it’s lawful and ethical, then everybody should be able to do that.”

In meetings earlier this year, Treasury officials overseeing the 1603 program complained to some solar company applicants about their cost estimates and said it would lead to improperly lucrative subsidies, according to government and industry officials familiar with the conversations. The companies and their lawyers said the cost models were proper and well-established.

The current investigation started with the concerns of the program officials. The Treasury Department then referred information about costs to Inspector General Eric M. Thorson, according to two officials familiar with its origin.

A Treasury spokesman declined to discuss the matter Thursday, citing rules prohibiting public comment in the middle of a sensitive investigation.

Richard Delmar, Thorson’s spokesman, said the office could not confirm which or how many companies are under investigation beyond SolarCity, which has disclosed the information.

“(W)e can generally say that we are carrying out our Inspector General Act-mandated duties to monitor the process by which public funds are distributed, to be sure that they are granted properly and used properly, consistent with applicable law and intended use,” Delmar said. “The 1603 program is a high-impact and high-visibility program involving a significant amount of public funds. Thus it has a high priority in our audit and investigative plans.”

Thorson’s office is working with the Justice Department’s Civil Division in the investigation, looking at “possible misrepresentations” by the firms about costs, according to a SolarCity corporate filing. In preparation for its public stock offering this month, Solar
City disclosed in October that it had received a subpoena from the inspector general’s office in July.

Sungevity’s and SunRun’s role in the inquiry has not been previously reported.

The three solar companies have found financial partners in such major household names such as Google, U.S. Bancorp, Credit Suisse and Citigroup. There is no suggestion that these financial partners engaged in any improprieties. But SolarCity notified investors in a security filing that the IRS is auditing two of the 23 investment funds it created with partner firms to finance its work. SolarCity did not name the partners in the funds but said the audits are focused on whether project costs are based on fair market values.

SolarCity and SunRun have been generous political supporters of Obama. At SolarCity, for example, officials in the company and its two key venture capital firm backers, along with their relatives, donated an estimated $579,000 to Obama in 2008 and 2012, according to campaign reports.

On Tuesday, SolarCity postponed its scheduled public offering as investors balked at the proposed $13 share price. On Wednesday, SolarCity slashed its stock price to $8 and began trading Thursday.

In a securities filing related to the stock offering, the company reported that the Treasury had notified SolarCity it was reducing the rate at which it would be reimbursed for some solar installations and might reduce others. The company said it may have to repay the government and its investors.

The Treasury said that in some California projects, the price
SolarCity could claim would fall by 12 percent, and in some Arizona projects, it would fall by 24 percent, the company reported.

The Treasury’s 1603 program has been lauded as a major boon for creating clean energy power.

As of July, the Treasury estimated it had provided $13 billion in government cash grants to help fund 45,172 energy projects.

Alice Crites contributed to this report.