Nc Renewable Energy Tax Credit – In 16 months, the solar industry will face the end of the line for the 30% federal tax credit. The investment tax credit will be reduced to 10% for businesses and zero for residential solar users. Some call it “sun reef”.
There might be something wrong with this cloud of tax credit expirations, but it’s still a bad idea.
The 30% discount on solar through your tax deal has been in place for almost 10 years, following an eight-year extension in 2008. It has been a key tool. This made solar power more competitive against conventional power generation, but by encouraging solar adoption, hardware costs were reduced and installer experience was increased (also reducing costs). The chart below shows how much the tax credit reduced the price of solar in 2008 compared to 2015.
But using tax credits has always had its drawbacks. Many potential solar owners were ineligible because they didn’t have enough tax liability (40% of Americans still don’t have enough annual tax liability to absorb it in one year), including cities, counties and nonprofits. Even profitable companies often had insufficient tax liability and sought “tax capital” partners such as Wall Street banks, which were always looking for ways to offset the huge taxes that came from profits.
Of course, these tax partners paid something. They would put equity into a solar project in exchange for tax incentives, but the required after-tax return of 9% or more increased the cost of the project. In the end, up to 50 cents of every dollar of tax incentives (30% credit and depreciation) was absorbed not by the solar project itself, but by a Wall Street partner.
Additionally, since the complexity of accessing tax incentives has led many to contract with third parties to own their rooftop solar panels, this can increase the cost of solar energy. First, the tax credit is based on the price of the system, which gives developers who can take advantage of the tax credit an incentive to raise the price of the system. There is some evidence that — using tricks with the tax code — solar manufacturers and banks have done just that. Second, because obtaining competitive bids for solar power can be complex and time-consuming, the third party competes more with existing sharing than other developers. As such, they can keep prices low enough to give electricity customers a better deal than utilities and make a profit on the difference. The diagram below shows how a solar power purchase agreement saves the customer money compared to buying from the utility, but that much of the savings is claimed by the supplier (we assume electricity prices rise by 3% per year and PPA prices rise by 2% per year) .
Despite the dark side, articles in the energy business press have noted the potential impact of losing the federal tax credit, from making solar more competitive to killing niche markets in states outside of California and New York. The chart below shows how the loss of the tax credit, all else being equal, makes solar less competitive relative to electricity prices in many states.
If nothing else changes, the loss of the tax credit could significantly dampen solar growth in 2017.
One of the biggest problems is sudden change. Solar incentives are a thing of the past. Few utilities still offer solar rebates or incentive payments, and many state programs have also been discontinued. California’s solar initiative is an example of how to do this transparently and predictably. His incentives decreased as the market accelerated (see chart below).
Another problem is regional differences in solar resources. Hawaii, New York, and Arizona no longer need solar tax incentives to compete with grid electricity prices (see GTM 2017 chart above), but many other states do. The tax credit could expire for residents of these “solar competitor states,” a number that will continue to grow as the cost of solar power continues to decline.
Although the termination method is undesirable, the impact could have some short-term benefits for the solar industry. First, it can make it much more efficient. According to former SunEdison CEO Jigar Shah’s comments, “10 percent of [solar] providers will be 3-5 [times] volume in 2016-17 and the remaining 90 percent of players will go out of business in 2017 because I just can’t use the software and tools to be more efficient.”
In addition, the elimination of intermediary tax liens could offset most, if not all, of the value of the tax credit. Camilo Patrignani, CEO of Greenwood Energy, waved his claim in early 2015:
“After the ITC, it could be easier for solar developers to bring in debt financing for a project and increase returns for investors. The ITC attracts investors by reducing project costs and adding tax benefits, but complicates the deal by adding a tax investor to the equation. As solar costs drop, projects can be packaged into simplified traditional investments – debt and equity backed by assets and long-term returns.”
There is evidence to support this. The National Renewable Energy Laboratory published a study in 2015 showing that power purchase agreement (PPA) financing terms that combine third-party ownership and tax fairness mean higher prices. For residential customers, a 20-year PPA (third-party solar power purchase) is 23% more expensive than a loan due to equity partner repayment requirements, even though both have similar monthly payments.
For commercial customers, the difference is even more pronounced. A 20-year power purchase has an 87% price premium over a 10-year loan despite comparable annual payments.
There are of course many other factors. Many buyers may prefer third party ownership. Companies buying from a third party favor companies for which the transaction is “unbalanced.” Inverter replacement and other (unlikely) maintenance will also be carried out by a third party (although replacement costs are included in the 10-year model). Ultimately, a third-party agreement means that the solar buyer may not have sufficient tax liability to absorb the 30% tax credit (although it is possible that a buyer at this income level may not have the credit capacity to secure a third-party agreement).
Many other factors support ownership. Interest rates used for loans are influenced by the customer’s FICO score. Customers with good credit could get loans with interest rates up to 2% lower, and customers with bad credit would have interest rates 2% higher. This would change the cost estimate by 2-3¢ per kilowatt-hour in either direction (although this alone is not enough to change the result). Many solar loans allow for deductible interest, which would lower their cost. Ownership also brings long-term benefits, as the lifespan of a solar array is likely to be 30 years rather than 20 years, and a person financing solar with a loan will have an additional 10 years of “free” energy, reducing their annual average cost by about 18%.
Crowdfunding, or institutional investors, holds great promise for low-cost solar financing. The former represent individuals who understand the complexities of solar but are unable to invest through traditional channels. New federal and state laws have attempted to remove barriers to crowdfunding clean energy (and other businesses), but crowdfunding as an investment (as opposed to donation models like Kickstarter) has been slow to develop.
Institutional investors, such as pension funds or college endowments, have large portfolios that seek diversified but stable returns. The problem with getting these potentially cheap investors is that they are not interested in returns based on tax incentives or small investments. They want to invest in solar “securities”: multi-million dollar pools of solar loans and leases with a similar risk profile. This also developed slowly. So far, third-party financier SolarCity has the only home solar asset that has been securitized.
“Consolidated solar securitizations have largely been delayed due to a lack of standardized documentation and difficulties in analyzing the creditworthiness of a diverse group of developers,” the sources said.
Additionally, the focus on tax equity financing to take advantage of the federal tax credit has diverted attention away from cheap financing from solar equity investors.
Let’s look at the tension between cheap financing and tax incentives through the lens of a 5 kilowatt home solar project. This residential project in Tucson, AZ can be installed for $3.40 per watt. With 10-year debt/equity financing at 10% cost of debt/equity to access the 30% federal tax credit, the cost of solar electricity is 11.8¢ per kilowatt hour. With the tax break, but with 5% financing for 20 years (lower monthly payments chosen), the cost of solar is only 2.5% higher, at 12.1¢.
Additionally, if the availability of cheap long-term financing (and the lack of tax credit issues) allows more residential and commercial electricity customers to install solar as their own owners instead of using third-party setups, the slightly higher cost will be more than offset. savings in the elimination of intermediaries. Here is an update of the graph comparing ownership to PPA from earlier, now populated with cost data from
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