Will Solar Energy Plummet if the Investment Tax Credit Fades Away?

Date: 17 Nov 2015 | posted in: Energy, Media Coverage | 0 Facebooktwitterredditmail

Wall Street Journal, November 15, 2015

What’s going to happen when a huge incentive to invest in solar power shrinks or vanishes?

At the end of next year, the 30% investment tax credit for solar and other renewable power is set to expire for residential systems and plunge to 10% for commercial installations. Boosters are calling for Congress to extend the credit in its current form.

The tax-credit crunch is looming at a time when solar is on the rise. Solar installations increased 30% last year, thanks partly to cheaper photovoltaic panels. Solar proponents note that the solar industry employs more than twice as many U.S. workers as coal mining and has added jobs 20 times faster than the rest of the economy.

Many supporters say the abrupt end date of the 30% credit represents a “cliff” for the industry. Without the current incentive, they argue, installation of solar-power systems will plummet, and thousands of jobs in the industry will be lost as a result.

Others, however, argue that the cliff isn’t as steep as it appears, and that solar will continue to grow even without the 30% credit—albeit not as quickly as before.

Amit Ronen, director of the GW Solar Institute and a professor at the Trachtenberg School of Public Policy at George Washington University, argues that the end of the 30% credit will send solar off a cliff. John Farrell, director of the Democratic Energy initiative at the Institute for Local Self-Reliance, says the impact of the tax credit is overstated and the solar market will continue to rise.


NO: Grim Forecasts Overstate the Drop For Several Reasons
By John Farrell

The approaching expiration of the 30% federal tax credit for solar energy has created talk of a cliff that will put a hard end to solar’s recent and rapid growth.

In fact, the abrupt fall may remove several barriers and allow the solar market to continue its rise.

I don’t have a problem with subsidizing solar power, a socially useful activity. But it’s clear that solar can survive—and thrive—without the investment tax credit for consumers and a lessened one for commercially owned systems. A study from Bloomberg estimates that the loss of the tax credit will cause solar capacity to only quadruple, instead of quintuple, by 2022—still a substantial increase. Our own analysis reinforces this assessment: In 22 states, at least one gigawatt of solar (and often much more) could be installed at a comparable cost to retail electricity prices by 2017, tax credit not included.

So why are the grimmer predictions about the future of solar incorrect? For starters, the cliff that people talk about is smaller than it appears. Most folks with solar on their rooftop used a third-party lease or power-purchase contract. That third party took on much of the financial risk and the responsibility for redeeming the 30% tax credit. These financial middlemen have absorbed nearly half of the tax credit, and as a result, solar developers and customers have received an effective discount of 15% instead of 30%. So the current incentive isn’t as big as it looks, and the effect of losing the incentive won’t be as severe as many think.

Another factor behind the dire predictions: There’s been a surge in development to secure the tax credit by the end of 2016, artificially inflating the 2016 numbers with projects that otherwise would have been completed in 2017. That means that the percentage decline after 2016 looks worse than it actually is. Meanwhile, some sources that are making downbeat predictions have consistently underestimated the development of solar and other renewable energy.

What loss of certainty?

Pessimists also say that businesses and investors demand the certainty that the credit provides. But one could argue that the change in the tax credit at the end of 2016 is certainty—it has been in statute since 2008.

What’s more, the change to the tax credit will open up new options for financing. Solar energy’s low risk and steady returns are attracting new investors whose profit expectations are much lower than those of Wall Street financiers. One company has already offered the first solar securitization, packaging its solar leases into vehicles for institutional investors.

If the change in the tax credit opens the door to more sizable, low-margin investors that offer a discounted cost of debt and equity for solar projects, we estimate that the net cost of solar would rise just 2.5% with the loss of the tax credit.

New ways to finance

The change to the credit may also drive prospective solar clients, with decent credit, from leasing to lower-cost self-financing. With less paperwork to file, the relatively lower costs and higher returns of ownership become more evident.

A November 2014 pro forma analysis by the National Renewable Energy Laboratory suggests that self-financing lowers the cost of solar by 23% for residential customers and 87% for commercial customers.

It’s easy to assume that losing the federal tax credit is nothing but a 30% cut in the growth potential for solar energy. But this ignores several countervailing forces, from the middlemen’s current cut to falling costs to the advent of low-cost financing. Even though coal and gas retain subsidies like heavily socialized pollution costs, solar doesn’t need the federal tax incentive to compete. Instead, the market provides several ways to glide over the solar tax cliff.

Read the full story here.

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John Farrell

John Farrell directs the Energy Democracy initiative at the Institute for Local Self-Reliance and he develops tools that allow communities to take charge of their energy future, and pursue the maximum economic benefits of the transition to 100% renewable power.