Critical Solar Incentive Extended!

December 22, 2015

In a tremendous boost to the future growth of solar energy in US, Congress voted to approve a multi-year extension of the federal Investment Tax Credit (ITC)!

As Institute Director Ronen noted in his recent Wall Street Journal op-ed, the ITC has paid incredible dividends for America and looks to do continue to do so in the coming years. An analysis by GreentechMedia estimated that the ITC extension would result in over $40 billion of additional U.S. solar investments. According to the Solar Energy Industries Association, extension of the ITC will mean that solar power capacity with reach 100 gigawatts (GW) by 2020, from around 27 GW today, which is electricity to power 20 million American homes and supply 3.5% of U.S. generation. 

Congress also chose to gradually decrease the value of the ITC overtime, a proposal which parallels policy recommendations the Institute published last April.  While the rampdown schedule differs from the Institute's proposal, notably with the continuation of the permanent 10% commercial ITC after 2022, the political reality that Congress would only agree an extension if it contained a phase out was generally affirmed. 

The specifics for the commercial ITC (Section 48) are as follows:

  • Projects that commence construction before the end of 2019 receive the full 30% ITC
  • Projects that commence construction before the end of 2020 receive a 26% ITC
  • Projects that commence construction before the end of 2021 and are placed in service before 2023 receive a 22% ITC
  • Projects that commence construction before the end of 2021 and are placed in service after 2023 receive a 10% ITC

Projects that qualify for the residential ITC (Section 25D) are on the same schedule except they don't qualify for the commence construction clause, meaning they need to generating electricity by 2019 to get the 30% credit, by 2020 to get the 26% credit, by 2021 to get the 22% credit.  The residential credit ends after 2021.

GWSI Director Ronen was quoted extensively in this Yale Clean Energy Finance Forum article by Kat Friedrich explaining how this extension came about and its likely impact on solar industry growth levels:

 

Just when it seemed as if the United States solar investment tax credit (ITC) was running out of energy, federal legislators charged it up for another few years last Friday. Barring other changes, by the time the credit winds down gradually, it will have put the national solar industry on a smooth glide toward a profitable future.

The credit applies to both residential and commercial projects. It will taper from 30 percent through 2019 to 26 percent through 2020, 22 percent until 2022, and 10 percent thereafter.

The ground rules were changed to ensure that all of the dates above apply to the beginning of project construction. If a project is constructed before 2022 but isn’t put in service until 2024 or later, the credit will drop to 10 percent.

Corporate office buildings in the sunlight

Political Engineering Changes the Picture

The credit was packaged together with approval for crude oil exports as part of a large omnibus bill, the Consolidated Appropriations Act of 2016. The bill is a composite of many compromises. It was passed in part to ensure that no stalemate would occur that could cause a government shutdown.

“It’s a happy day for solar,” said Amit Ronen, director of GW Solar Institute at The George Washington University. “A few weeks ago, we didn’t even think it was possible.”

In 2015, pessimistic prospects for the ITC led our website to publish and curatemultiple articles about the cliff the industry faced. The situation did not turn around until recently. It is unclear how much of a role the COP21 climate conference played in the resolution of the issue.

Ronen and James Mueller, director of research at GW Solar Institute, analyzed five potential scenarios for phasing out the ITC in their report, “Softer Solar Landings: Options to Avoid the Investment Tax Credit Cliff.” In our earlier interview, Mueller said it was unlikely that free-market-oriented legislators would want to keep the ITC on board indefinitely.

The new phase-out represents an alternative that is appealing to both Republicans and Democrats because it ensures that the solar industry will become more independent of the tax credit and will not experience a sharp drop in employment, Ronen said.

“The key is to get over the cliff and to see the future where these tax credits may not be needed any more,” Ronen said. “That was a very important dynamic for some conservative members to see.”

Although legislators who are supportive of solar power tried for years to persuade their peers to extend the ITC, it took a long time for a critical mass of support to solidify.

Ronen said Sen. Harry Reid (D-Nevada), Sen. Maria Cantwell (D-WA), Sen. Michael Bennet (D-Colo.), Sen. Dean Heller (R-Nevada), and Sen. Ron Wyden (D-Ore.) played key roles in moving this legislation forward.

Data Analysis Shows the Growth Potential

“When this proposal was announced a few days ago… solar stocks jumped by 20 or 30 percent,” said Francis Martin O’Sullivan, director of research and analysis at MIT Energy Initiative. “The solar industry, I’m sure, is welcoming this warmly.”

In a recent statement, Solar Energy Industries Association (SEIA) said, “A five-year extension of the ITC will lead to more than $133 billion in new, private-sector investment in the United States economy by 2020. And much of this growth will come from small businesses, which make up more than 85 percent of America’s 8,000 solar companies.”

SEIA said this will lead to solar power tripling by 2020 and growing to 3.5 percent of the nation’s electricity generation. 20 million homes will be solar-powered.

“The solar industry now has a seat at the table with the nation’s other major electricity producers,” SEIA said.

GTM Research ran the numbers and published an article that said solar installations would increase by 54 percent.

The two charts below, produced by Bloomberg New Energy Finance, show the contrast in the projected growth of the solar industry in the United States before and after the new legislation was passed.

 

Bloomberg graph of solar prospects before the new ITC legislation

Note: All capacity is quoted in DC. Forecast build is the sum of the utility-scale pipeline, a calculation of economic build by segment, and any additional capacity needed to meet binding policy requirements.

 

 

Bloomberg graph of solar prospects after the new ITC legislation

Note: Assumes five-year phase-out as described in the omnibus budget bill released Dec. 15. All capacity is quoted in DC. Forecast build is the sum of the utility-scale pipeline, a calculation of economic build by segment, and any additional capacity needed to meet binding policy requirements.

 

Before the legislation was proposed, the solar industry was already on an upswing. According to GW Solar Institute’s report, the industry is on track for a second record-setting year in 2015. New solar installations are projected to total over 8 GW in 2015. Meanwhile, the industry is expected to create 36,000 new jobs. This is close to 20 times the average rate of industry growth in the United States.

Stefan Reichelstein, director of the Sustainable Energy Initiative at the Stanford Graduate School of Business, coauthored a paper that examined a possible phase-out trajectory for the ITC earlier this year. Ronen and Mueller examined the same question.

The solution legislators selected is more generous to the industry than either of these proposed plans.

“Our work had basically pointed to the impending danger of a cliff for the solar industry,” Reichelstein said.

After the new legislation passed, Reichelstein ran his simulation again and found vastly altered results. “If I look back at the numbers and now put in the schedule Congress just passed, I see solar being competitive across the board in all the applications in all the states, with significant margins to spare.”

Reichelstein’s simulation covered five states that make up 70 percent of the solar market: California, Colorado, New Jersey, North Carolina and Texas. He looked at utility-scale, commercial and residential markets in all of these states. He found that in the new scenario, all of the states and sectors will be in the black.

“We’d be safe making those predictions for states that are geographically close to the ones we’ve looked at, but… we’d have to crunch the numbers,” Reichelstein said. “You have to have a mature group of contractors and suppliers.”

In MIT’s report “The Future of Solar Energy,” O’Sullivan and other coauthors expressed skepticism about the federal decision to use the investment tax credit to support the solar industry. “If your primary objective for the support mechanism is the most efficient mitigation of carbon emissions, then subsidizing production rather than subsidizing investment is the most efficient.”

“The new proposal, while perhaps not ideal, is certainly a reasonable half measure,” O’Sullivan said. “The scheduled ramp-down is reasonable. This is going to provide a degree of assurance and certainty.”

GW Solar Institute’s report said the ITC has been generating a 10-percent internal rate of return for the federal government. This did not include economic development and environmental benefits.

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