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In mid-December, Christmas came early for an anxious solar industry when Congress passed a five-year extension of the investment tax credit (ITC). Solar companies in the country - and around the world, really - rejoiced, as a key incentive was saved from a premature plunge in value.

The subsidy provides a tax credit covering 30% of a solar project’s eligible costs; however, without December’s legislative fix, the credit would have dropped straight down to 10% for businesses’ projects (under Section 48 of the Internal Revenue Code) and to 0% for homeowners’ projects (under Section 25D) placed in service after this year.

The extension serves as a gradual phase-down, keeping the ITC at 30% through the end of 2019 then slightly lowering it to 26% in 2020 and 22% in 2021 before permanently decreasing it to 10% for businesses and 0% for homeowners.

Under the legislation, project owners also can still cash in on the bigger credit if their projects commence construction prior to 2022 and are in service before 2024.

Suzanne Merkelson, public affairs manager at California-based SolarCity, reiterates what the entire solar industry already knows: The ITC allows companies to offer their products at cheaper rates, thus making solar more attractive.

“Anytime you’re reducing the price of something, it’s more economical for consumers,” says Merkelson. “It opens up the product to a larger portion of the market.

“The extension gives us and the industry overall time to breathe, as well as time to reduce costs even more - although they have been reduced tremendously over the years,” she adds. “It also gives us business certainty for long-term planning. We know exactly what to expect with the draw-down of the ITC, and with this extension, we’ll see more competition, which is really good for an industry at our growing stage. The more competition, the better. It just means the sector will be stronger for the long term.”

If the ITC had nose-dived in 2017, Merkelson says, “It would have been pretty problematic and could have eliminated large portions of the industry.”

David Burton, a partner at law firm Akin Gump Strauss Hauer & Feld, agrees and calls the extension “huge.”

“Solar is still in its infancy and needs the 30 percent credit, and this gives the industry the time to really grow up and stand on its own two feet,” he states, adding “solar would have suffered and would not have reached its full potential” without the extension.

Burton also notes that although the Section 25D tax credit for homeowners will eventually hit 0%, “few homeowners take the credit because many residential solar companies push the ‘no money out of pocket’ leases and power purchase agreements.” Therefore, that “smaller issue gets overshadowed by its hulking sibling, the Section 48 credit” for businesses.

Dale Vander Woude, executive vice president of capital markets at California-based residential solar developer OneRoof Energy Inc., is thankful for the extra time the ITC extension offers.

“In the long run, we hope the market gets to the stage where it doesn’t need the ITC to function, but today, given the economics of various items, it is still necessary,” he says. “It is something we have to continue to arrange for and take care of. We really like knowing the government gave us the runway to be able to manage the business until it’s on a grid-parity basis, and that’s kind of what the goal is.”

A report from research firm IHS also suggests that the extension gives solar developers a chance to “calm down.”

“Early-stage projects that faced the challenge to complete development and break ground, in order to reach completion prior to the previous deadline at the end of 2016, are now relaxing their schedules, as they do not need to enter construction before 2019 to benefit from the 30 percent credit,” according to the report.

Utilities, which are increasingly developing their own solar projects, welcome the extension, as well.

For example, New Jersey-based Public Service Electric and Gas Co. (PSE&G) currently has about 115 MW of its own solar connected to the grid and plans to have a total of 125 MW by year’s end. Under its Solar 4 All program, the utility has been focusing on developing large-scale projects on landfills and brownfields in the state.

According to Todd Hranicka, the utility’s director of solar energy, “Solar is coming and is going to be a portion of the U.S.’ future, so it is common sense to have the organization that operates the grid to be involved in the renewable energy.”

Hranicka says the ITC for the utility’s Solar 4 All projects flows back to its ratepayers, and he points out that, because PSE&G is a regulated utility, the New Jersey Board of Public Utilities (BPU) has to sign off on PSE&G’s initiatives.

“The ITC extension is positive in terms of making solar more available for the U.S., certainly for New Jersey,” he remarks. “I think having that 30 percent ITC, which we can put back into the Solar 4 All program and lower the overall cost to ratepayers, makes it a better program.”

Currently, PSE&G has approval to develop only a predetermined number of megawatts of solar, so Hranicka says he is not sure about the utility’s future plans for additional solar projects quite yet. However, he adds, “We’re hopeful we will be able to expand our program and build more landfill/brownfield solar, and certainly, having the ITC would make that a more attractive proposition to the BPU.”

He concludes, “The ITC extension is a positive development for our utility solar program: That is the long and short of it.”

Dominion Virginia Power is another utility with a strong focus on solar; last year, the company announced plans to add 400 MW of solar energy in Virginia by 2020. Bonita Billingsley Harris, spokesperson for Dominion Virginia Power, says that although that commitment was not contingent on the ITC’s extension, “the benefits of the ITC extension will be reflected in the cost of solar energy, and that will be passed along to our customers.”

 

Ticking clock

The extension may have given the U.S. solar industry time to breathe. However, there’s no denying that without more government action, the ITC for businesses will drop down to 10% once the extension period is over. As mentioned earlier, the ITC helps lower costs - will that 10% be enough?

“I don’t have a crystal ball. I hope it will be,” states Burton. “But that will depend on a couple of things. For example, we’ve seen solar equipment costs come down sharply. That needs to continue.”

This isn’t to say the solar sector has to pick up its current pace: “The industry is innovating as fast as it can,” explains Burton. “This just gives it more time to do more improvements, but I don’t think it needed any wake-up call regarding efficiency. It’s already pushing forward.” He expects the extension will lead to technological improvements because manufacturers and others will be motivated to invest in the solar space.

“I think the industry is just going to keep doing what it’s doing: growing more,” adds Merkelson. “The industry is interested in planning for growth rather than just trying to stay alive.”

Hranicka says, “If you talk to those in the research and development (R&D) and procurement portion of the industry, they say there are significant opportunities for solar cost reductions over the next five years. With that continued decrease, the product will be much more cost-competitive.” Hranicka calls for more investment in R&D and a focus on lowering soft costs, “which drive up the price of solar.”

“I think solar costs are much better,” comments Vander Woude. “Not fully at grid parity yet, but ever closer to it.”

“There are places in the U.S. where you could get things done without the ITC, but in the vast majority of markets, transactions would become uneconomic overnight, so you’d be faced with the problem of having to raise prices for consumers as the only way to maintain an economic level, which would drive volumes down,” he explains. “What this extension means for us is that we’re able to continue growing at the same velocity, which allows us to continue driving down costs.”

The ITC is important, yes, but the subsidy is just one piece of a much larger puzzle.

“The ITC is not the end-all, be-all for solar policy,” says Merkelson. “There are a lot of other policies that impact the cost of solar. If you look at different states, you’ll see solar is doing really well in some places and less well in others. The ITC is a federal incentive that goes hand-in-hand with a bunch of state policies.”

Burton believes non-tax policy on the state level is essential. “If more states have strong renewable portfolio standards for utilities and net-metering policies for homeowners and businesses, solar will be in pretty good shape,” he remarks.

On the federal level, Burton adds, the Paris Agreement the U.S. and over 100 additional countries entered into during last year’s COP21 “will put some real motivation in our country to support solar and more renewable energy.”

Merkelson suggests the ITC extension reflects many other renewables-friendly trends, both globally and in the U.S. Regarding the Paris Agreement, she says, “It set a goal for all of humanity to reduce our climate impacts, and the ITC is a part of how we get there. The ITC extension is a concrete step.”