Solar Puts on a Brave Front for ITC End

One of the best incentives for solar in the world is soon to end. If you haven’t got solar on your roof by December 31, 2016, it will cost you 30% more.

Whether you buy or borrow from the bank and own your solar array – or whether you lease your solar or contract to buy its energy; the end of the 30% Investment Tax Credit (ITC) means your solar suddenly shoots up in price on the last day of 2016.

The 30% tax credit currently provides the policy incentive that has been driving record-breaking investment in solar projects in the United States since it was passed in 2006, and even more so, once it was extended for 8 years, in 2008.

The ITC takes six years to receive fully, beginning once a solar project has been completed.

Each of the six following years, the investor can take 15 percent of the full amount of the tax credit (6 x 15% = 100% of the 30 percent tax credit). But the last solar projects to qualify will have to be completed by the end of 2016.

The solar industry has to beware of frightening investors of course, so they are putting on a brave front.

“Overall we’re very optimistic about PV’s ability to compete in the long-term,” says Borrego CEO, Mike Hall. “The good news is that prices have come down so far so fast, that we are relatively close to unsubsidised grid parity in some markets.”

He adds that factors outside of the PV system cost curve will also have a tremendous effect on competitiveness after the expiration of the ITC: the price of natural gas, movements in state and federal regulations regarding carbon and renewable energy, changes to net metering regulations, and interest rate movements.

“It seems unwise to assume that the ITC will be extended,” says Ben Higgins, Director of Government Affairs for Mainstream Energy Corp.

“As such, we have essentially a four-year deadline, until the end of 2016, to continue driving costs down, optimising our business structures, and defending the other foundational policies which are so important to solar’s growth. Solar can’t be an emerging industry forever, and 2017 may put our promises of cost reduction and ‘grid parity’ to the ultimate test.”

“If the ITC does expire, it won’t mean the end of the US solar market,” says Marc Roper, VP of Sales and Marketing at Tioga Energy. “Installed PV costs continue to fall, electricity rates continue to rise —  so we expect the value proposition for grid connected PV would survive the expiration of the 30% ITC.”

The same congress as the one we have now will be our only shot at extending the ITC.

In case you hadn’t noticed; this is not the solar-friendly congress of 2008, when the ITC was extended until 2016. Due to gerrymandering, the House is considered to be virtually impossible to change until after the 2020 census. And legislation is passed by the House – not by whoever is President.

This congress will be in session until the date that the ITC abruptly ends on December 31st, 2016.

Yet some appear to hope for a last-minute reprieve.

Upsolar’s Chief Technology Officer, Stephane Dufrenne is optimistic. “Many are predicting – with good reason – that the ITC will be extended,” she considers.

“Although this credit extension will likely be lower than the current 30% rate, the new figure should still serve as a strong financial incentive when paired with a continued decline in module and balance of systems costs.”

Roper points out that by reducing the value of the tax credit, the credit becomes less important to the economics of a project, so that risk associated with tax benefit recapture goes down, which he thinks should result in new pools of project capital entering the market to invest in solar projects.

Looking at the issue from the solar finance side, Clean Path’s Tom Price agrees with Roper. He estimates that the solar industry is going to be able to manage without the ITC quite well. Clean Path is currently providing capital, credit and expertise for about a gigawatt of solar projects.

Wouldn’t replacing a tax credit worth 30% require something like a 30% improvement?

This would be quite a tall order for any industry, let alone one in its infancy.

Actually, it wouldn’t be that draconian, according to Clean Path. Price says that replacing the ITC will amount to making a surprisingly small change.

“If you change the interest rate by a point or two – that a project has to pay for its debt – and if you change the performance degradation positively by a quarter of a percent then you can compensate for the loss of the investment tax credit,” says Price. “And that’s because, over time, those slightly lower costs, and that slightly increased performance, more than make up for the 30 percent upfront.”

“It’s quite a startling number when you realise that,” he adds.

Until now, the finance industry has been loaning money based on an assumption of the risks associated with a nascent industry. But he strongly believes that as more projects come online and begin performing as expected, perceived risk will decline, and bank rates will come down.

“The whole industry is predicated on the six-year investment tax credit return period of time, but those projects are only just now starting to work,” he points out and references Warren Buffett’s recent foray into solar project ownership as an example of solar’s increasingly mainstream appeal.

He believes that as more U.S. banks realise that solar projects with PPAs are very low risk projects, “the likely interest charged for money for a project will decline. It’s basically like buying a CD, but one that’s producing energy.”

They are buying something “that is going to make money, month in and month out, year after year, and the more stable the investment, the lower the financing rates, so we won’t need to pay as much money.”

Price believes that as the banking industry gets more comfortable with the new industry that is solar, they’ll be comfortable saying ‘you know, I don’t need a high return. I’m happy with 7%, and I know its stable; it’s not speculative.’

Image Credit:Elliot Brown at Flickr under a Creative Commons License

  • by Understand Solar
  • |
  • October 4, 2015