OnSolar - Simple Solar Solutions

Highlights: Solar Tax Credits Extended Avoid solar industry’s historic feast/famine cycle and enable long-term investment Spur solar market growth by securing project financials and opening up residential & public utility sectors Provide core driver to U.S. economy’s rebound by making solar power a viable solution to multiple national challenges

The solar industry can breathe a bit easier now that Congress has passed a series of critical renewable energy tax credits. Included as part of the Economic Stabilization Act of 2008, the congressional bill includes these key, solar-related measures:

1. An 8-year extension of the 30% investment tax credit (ITC) for both residential and commercial solar installations.
2. Removal of the $2,000 residential cap on the ITC starting in 2009.
3. Ability to claim solar investment tax credits when filing tax returns using the alternative minimum tax (AMT) method.
4. Permit public utilities to also claim the solar ITC.

I’d like to highlight three likely outcomes, among many, that these incentives could bring about.

SOLAR POWER INDUSTRY

First, because of the eight-year extension of the investment tax credits, the U.S. solar industry now has an opportunity to break from the feast/famine cycle it has traditionally experienced. Tax credits have been the driving force for solar power demand, but their inconsistency has limited the U.S. market’s ability for any significant growth over the past 30 years. Without consistent demand, solar companies’ growth has been stunted. These new incentives, however, will provide the predictability needed for the U.S. solar companies to invest in long-term strategic investments in manufacturing, distribution, installation, and services (financial and operational). Ultimately, these investments with enable the solar industry to become more cost competitive with the incumbent energy companies of today.

In addition to predictability for the solar power industry, the removal of the $2,000 residential cap presents a game-changer (to use current political lingo) to the industry. The industry players and products of today are geared towards large commercial deals where project economics are possible because of the financial instruments–namely, Power Purchase Agreements or PPAs–available. The changing financial picture for the residential sector, though, will spur a new set of financial products and/or operational business models that will be needed to service smaller, more fragmented installations. While some companies are operationally ready for this market expansion, the opportunity for new entrants has just become vastly more attractive.

SOLAR POWER MARKET

The second, more obvious outcome is the impact these incentives will have on U.S. market demand. The recently-passed tax incentives are more lucrative than ever, and the market demand in coming years will most certainly reflect this. The 30% ITC ensures that solar power projects continue to remain financially viable while solar power continues its downward trend towards grid cost parity. This means, at the very least, that the grid-tied solar power market should continue the unprecedented 45% year-over-year growth it has recently experienced.

To date, the ITC has largely been geared toward and benefited the commercial sector. Not any longer. The legislative bill’s (a) removal of the $2,000 residential cap and (b) inclusion of public utilities for ITC eligibility are sure to change the market landscape. For example, instead of receiving a $2,000 tax credit for a 2 kW residential system that costs about $21,000, the homeowner can now claim nearly $7,000. With electricity prices rising at alarming rates in key areas of the country, solar power is now a viable option under the “home improvement” category of family budgets.

Likewise, demand growth from public utilities is certain to be a key driver now that they can benefit from the ITC. Important here is to note that public utilities in nearly all U.S. states are being mandated by state law to begin producing electricity from renewable sources. The milestones dictating how much renewable electricity must be produced and by when are specified in legislation called Renewable Portfolio Standards (RPS). To satisfy these RPS mandates, a range of renewable energies can be employed; however, with public utility eligibility to claim the ITC, solar power has become a much more attractive option.

U.S. ECONOMY

Finally, this new tax credit legislation not only provides a positive outlook for the solar industry itself, but represents a core component to the rebuilding of the U.S. economy. The presidential campaigns have spoken at length about the ability of renewable energy to re-power American homes and business, as well as help re-tool American factories and jobs. This public awareness and national vision is critical to driving a reinvigorated U.S. economy. This vision, however, is all for nought unless financially viable solutions exist that people and businesses can invest in…

The extension of the solar tax credits discussed make this possible.