Back to top Jump to featured resources
Article filed under Energy, Energy Self-Reliant States

Public Solar Often a No-Go With Fed’s Favor for Solar Tax Incentives

| Written by John Farrell | 3 Comments | Updated on Nov 3, 2011 The content that follows was originally published on the Institute for Local Self-Reliance website at http://ilsr.org/public-solar-often-no-go-feds-favor-solar-tax-incentives/

You’re a city manager hoping to cut electricity costs at sewage treatment plant, a school administrator looking to power schools with solar, or a state park official needing an off-grid solar array for a remote ranger station. 

But unlike any private home or business, you can’t get 50% off using the federal tax incentives for solar (a 30% tax credit and ~20% from accelerated depreciation).  That’s because the federal government’s energy policies all use the tax code, and your organization is tax exempt.

What about a public-private partnership?  The private entity puts up some money and gets the tax benefits, and the public entity only has to pay half.  It can work, if you’re lucky, although a good portion of those tax benefits (half, in recent years) pass through to that private entity for their return on investment, not changing the price of your solar array.

But the legal niceties also matter.  One common option is a lease, where the public entity leases the solar panels from the private one.  One big problem: the IRS doesn’t allow the private entity to collect the 30% tax credit if they lease to a public entity. 

The cash grant program in lieu of the tax credit allowed leasing, but it expires in December.  Furthermore, it disallowed depreciation of the solar array, equivalent to 20% off.

Another clever arrangement is a power purchase agreement (PPA), where the third-party owns the solar array and simply sells the power to the school or city.  The third-party can claim both the tax credit and depreciation, but if you live in a state with a regulated utility market (and no retail competition), your utility might slap you with a lawsuit for violating their right to exclusive retail service.

The following chart illustrates the financial challenge for public entities created by using the tax code to support solar. 

Chart of public sector options for solar purchase and federal incentives lost

Even with a lot of legal creativity, the public sector is often stymied in accessing both federal solar incentives.  The result is that private sector solar projects always get a lower cost of solar, because the public sector can only access federal incentives through (costly) partnerships with third parties.

Using the tax code for solar (instead of cash grants, production-based incentives, or CLEAN Contracts) is bad for the solar business, bad for taxpayers and bad for ratepayers.  It’s time to change course, and let the public sector go solar, too.

Tags: / / / / /

About John Farrell

John Farrell directs the Energy Self-Reliant States and Communities program at the Institute for Local Self-Reliance and he focuses on energy policy developments that best expand the benefits of local ownership and dispersed generation of renewable energy. More

Contact John   |   View all articles by John Farrell

  • http://epiphron.tumblr.com/ BCC

    Do your figures account for the lower (tax free) borrowing costs that municipal entities generally have?

    I’m on the board of a municipal utility. When we run the numbers using our borrowing rate vs. the cost of private capital, it largely makes up for the missing Federal tax credit.

    If you factor in the value of local generation (for us, it’s avoided forward capacity costs, avoided transmission costs, avoided substation capacity), we’re actually getting pretty close to wholesale grid parity. Not at $4/W, but at $3-3.50/W. Without any SRECs. So, basically incentive-free.

    Throw in some SRECs, and we are more than ready to go now. Which we are, at the glacial speed of local government.

  • John Farrell

    BCC,

    Thanks for your comments. I wanted to highlight the difference in incentives, but you’re right, borrowing rates can make a significant difference. If you’re willing to share, I’d love to see some real numbers on borrowing costs and the value of local generation. It’s important to be able to help provide municipalities some context.

    I assume you’re out East, with the mention of SRECs?

    Sincerely,
    -John

    jfarrell@ilsr.org

    —

    John Farrell, Senior Researcher
    Institute for Local Self-Reliance | Minneapolis, MN
    Author of energyselfreliantstates.org, a killer distributed generation resource
    http://www.newrules.org/ * Twitter: johnffarrell
    *NEW NUMBER* 612-276-3456 x210

  • BP

    John- Nice analysis. You should however include CREBS bonds which many cities, including Tucson, have used to try and get solar at a reasonable price and overcome the differential you graphically display.