New Research: Innovative Ways Congress Could Avoid Upcoming Investment Tax Credit Cliff

Policy Brief
April 15, 2015

GWSI Releases New Policy Brief on Options for Softer Solar Landings, Submits Recommendations on Energy Tax Reform at Request of Senate Finance Committee

WASHINGTON, DC -- Today, the GW Solar Institute (GWSI) is releasing a new policy brief, Softer Solar Landings, as part of its Fitting Clean Energy into a Reformed Tax Code research series. This latest brief provides and analyzes potential options for Congress to avoid the upcoming solar investment tax credit (ITC) cliff, set for the end of 2016 under current law. At the request of the US Senate Committee on Finance, the GW Solar Institute is also submitting recommendations for how to fit solar and other clean energy sources into a reformed tax code. Changes in federal tax policy under current law, as well as under major tax reform proposals, threaten the competitiveness of the nation's fastest growing energy industry.

According to the brief released today, the economic shock embedded within current law could increase the cost of solar energy by at least 10 percent in 2017 compared to 2016.  Such a price spike could result in 42 percent fewer utility scale solar installations and 15 percent fewer distributed solar installations in 2017. Leading models from the US Department of Energy find that this abrupt change could wreak even greater havoc, causing a 94.3 percent decrease in distributed solar installations between 2016 and 2017 and a roughly 80 percent decrease in utility scale solar installations.

“The booming solar industry and its 174,000 workforce are a testament to the investment tax credit as an effective policy for bringing new technologies to full market maturity and scale,” said Amit Ronen, Director of the George Washington University Solar Institute. “With solar already paying dividends, Congress should continue the nation's investment -- or at the very least, provide a softer landing.”

While tax reform offers a potential legislative vehicle to avert the ITC cliff, it also threatens to alter the modified accelerated depreciation system (MACRS) that was adopted as part of the last major tax reform effort in 1986 and is critical to the solar industry. In its letter to the Senate Finance Committee, the GW Solar Institute recommended that as Congress works to simplify and fix the nation's broken tax code, it continue successful policies that have worked for solar. Specifically, the recommendations include maintaining accelerated depreciation, creating a level playing field across energy sectors, and investing in innovation through a new permanent technology neutral investment tax credit.

“It's critical that tax policy writers do not pull the rug out from under the growing solar industry as they overhaul the nation's tax code,” said Ronen. "Congress should also act beyond just continuing successful policies like accelerated depreciation and seek to unleash innovation in the energy sector with a permanent technology neutral investment tax credit that removes politics from energy innovation.”

Without Congressional action, the 30-percent ITC for solar and other clean energy technologies will expire at the end of 2016. It will revert to the permanent 10 percent level for commercial systems and go to zero for residential systems. The federal ITC has been an important driver for the remarkable growth of solar. According to the National Solar Jobs Census 2014, almost three-fourths of solar businesses and 94 percent of solar installers stated that the 30-percent ITC has “significantly improved” their business.

A 2012 study by the US Partnership for Renewable Energy Finance (US PREF) found that the 30-percent ITC more than pays for itself in federal tax receipts, generating a 10 percent internal rate of return (IRR) to the federal government for its investment. With the long term certainty provided by the 8-year extension of the 30-percent ITC beginning in 2008, the solar industry responded and became much more efficient, squeezing the average installation cost per watt of large-scale solar photovoltaic (PV) systems down to roughly $2 per watt today from over $7 per watt in 2009. As solar installation costs dropped, federal tax outlays also fell precipitously per watt of installed solar capacity. With a smoother phase out of federal and state support, solar is on track to be broadly competitive across the nation within a decade or less. It is already competitive subsidy free in a few unique markets where solar resources and electricity rates are the highest