Prepare for the ramp down and expiration of the ITC
A federal subsidy responsible for billions of dollars in industry revenue and thousands of new jobs will begin ramping down at the end of 2019. The Investment Tax Credit (ITC), first enacted as part of the Energy Policy Act of 2005 to incentivize the development of renewables, has helped jumpstart the U.S. solar industry by giving customers a percentage of a project’s cost back against their tax liability.
At its current capacity, the ITC provides a 30% tax cut relative to the cost of installation to all residential, commercial and utility solar projects started in 2019 (as long as they’re in operation by December 31, 2023). If a project is started in 2019, the tax credit eligibility lasts four years; if it’s started in 2020, it lasts three years; and if started in 2021, it lasts two years. The ITC will drop down to 26% in 2020, 22% in 2021 and then expire for residential projects in 2021 and stay at 10% for commercial and utility projects indefinitely. That is unless the tax credit is extended again.
“Both Republican and Democratic leaders have indicated their resolve to finding solutions to our nation’s infrastructure and climate changes. Solar is absolutely part of the answer,” said Dan Whitten, VP of public affairs for SEIA in a press statement. “While I don’t think that laying out our legislative strategy in detail is in the industry’s best interest, I do know, and SEIA is reminding policymakers, that the Investment Tax Credit works, creating hundreds of billions of dollars in private investment and hundreds of thousands of jobs since 2006. Going forward, a tax policy that provides continued stability and investment opportunity for solar is critical. The exact structure of that tax policy can be open for discussion, but one thing we won’t compromise on is equitable treatment for solar energy, as compared with other fuels.”
Fossil fuel companies receive tax deductions, regulatory subsidies and direct spending breaks with no sunset dates. Meanwhile, various credits for alternative energy sources have eventually met their end or were put to a schedule. The Energy Tax Act of 1978 was an attempt to diversify the energy market and was the first time renewable energy sources were extended tax credits. Today’s ITC — which has been renewed multiple times — is still a deciding factor for many solar sales.
“Anything that has what essentially amounts to a 30% discount, that’s extremely helpful,” said Blake Jones, co-founder and co-owner of Namasté Solar. “I think there would still be customers that would go solar without the 30% tax credit, but there’s no doubt that the market would be smaller [without the ITC].”
In order to be renewed in 2015 with bipartisan support, the legislation behind the ITC had to include provisions to allow domestic companies to export oil for the first time in 40 years. And despite an influx of U.S. oil from hydraulic fracturing, 14.76 GW of solar was brought online in 2016 — double the previous year’s numbers. This marked the first year that solar was the most installed form of electricity production — and it happened one year after the ITC was renewed.
Costs continuing to lower
The energy market is no stranger to subsidies, and power producers using fossil fuels have reaped the benefits far longer than solar. Jones said the solar industry would be able to maintain its market share if the ITC were to expire today. The cost of solar continues to drop and interested customers can still install systems at a lower lifetime cost without the tax credit than remaining with a non-renewable energy source.
“I like that it’s stepping down and not just going away immediately all in one go,” he said. “I think the market can continue growing because the cost of solar continues to come down, but there’s no doubt that the market would grow at a faster rate if the tax credit were extended or if the step-down glide path were elongated.”
But whether the ITC is renewed at a capacity higher than 10% — especially for the residential market — is a question of fairness, Jones said.
“I think there are a lot of folks in the solar industry who believe we should be asking for an extension of these tax credits, because oil, gas, nuclear — they haven’t given up any of their subsidies, even though they don’t need them anymore,” Jones said. “So, it’s an interesting debate within the solar industry, and more broadly about what should happen. What’s the best policy to the United States? What’s fair?”
Namasté has experienced disappearing subsidies at a state and local level. The company primarily completes residential installs in Colorado but also works in the commercial and utility markets. Not limiting itself to a single market segment has been part of Namasté’s strategy to stay profitable while adapting to various fading subsidies. But there has always been the federal tax credit to fall back on, and now with the end in sight, companies have to find cost savings elsewhere.
The market uncertainty accompanying the step-down is reflected in the conclusion of a National Renewable Energy Laboratory (NREL) report released in 2016 that studied the impact of tax credit renewals in renewable energy. It says the long-term effects of a renewable tax credit like the ITC are difficult to estimate with unpredictable natural gas prices and the falling cost of solar power.
“Start planning for [no federal tax credits] now. My guess is that the vast majority of companies are already doing that, but start planning for it now,” Jones said. “Start talking about it with your customers, letting them know that this is going to happen. Each company only has a certain amount of capacity to get installed before the end of the year, so customers need to sign up to make sure they reserve a spot.”
Not overcommitting to projects in 2019, keeping an eye on overtime, having installers take vacation time earlier to address the rush they’re going to experience at year’s end — to Jones, these are the types of considerations companies should be making now to save on resources and get the most out of the ITC in its current state.
‘Stand on our own two feet’
Jim Lamon, CEO of DEPCOM Power, acknowledged that the ITC has been pivotal in putting utility solar output years ahead of where it would be without the tax credit. However, he believes the renewables ITC doesn’t need to be reinstated for much longer.
“We’re not a believer of it long-term. We believe that just like other forms of electrical production on the grid that we need to ultimately be unsubsidized. Or we need the same ITC treatment as other forms of production, and those take varying aspects, but certainly less than 30%,” Lamon said. “Now, we wouldn’t push back against a one- or two-year extension, but we just don’t think that it should be in place forever.”
In DEPCOM’s view, utility solar would have happened eventually, and the ITC undoubtedly kickstarted it. The strong beginning of the U.S. utility-scale market in 2008 is due to the ITC’s unveiling two years prior.
Lamon anticipates that component costs will continue to become more economical and module efficiency will continue to improve. DEPCOM has seen cost savings during the ITC’s time due to the industry’s rapid technology improvements and efficient installation techniques—all of which continue to drive the overall cost of solar down, making it a low-cost energy option during peak demand times across the grid
Lamon said that DEPCOM’s energy guarantees reflect the utility solar industry’s proven track record, giving the investment community certainty and resulting in the overall decrease in the cost of project capital.
To prepare for the ITC ramp down, the company remains committed to its low overhead, zero-debt business structure and continued strengthening of the company’s core services: development, support, procurement of American-made equipment, in-house engineering, construction and operation and maintenance of arrays services for its utility solar customers.
“As an industry, we need to stand on our own two feet,” Lamon said “We’re capable of doing that now with this ramp down in place. If [the ITC] went away today, it would hurt, but the industry’s adjusted itself to be ready.”
Any campaigns to re-enact the ITC are expected to happen closer to the fall election season. Although renewables have seen support on both sides of the aisle, the fate of the solar tax credit remains in the hands of legislators.
Article originally appeared in Solar Power World Magazine