Tax Credit Extension Makes Commercial Solar More Profitable

By Sam H. Lee

“Don’t you ever get the feeling that all your life is going by and you’re not taking advantage of it?”

          ― Ernest Hemingway, The Sun Also Rises

It could’ve been For Whom the Bell Tolls in the solar industry, at least in the short-term. But to the surprise of many, Congress extended the solar investment tax credit (ITC) for five more years. This means the hot debate over the near-term viability of solar has been settled. Solar energy, deployed at the right locations, makes solid economic sense.

Will you take advantage of the ITC extension and reap the benefits: financial, sustainability, brand value and long-term energy security?

That depends.

Commercial and industrial (C&I) solar does not have a one-size-fits-all solution. To maximize the benefits, you need to evaluate all of your properties and determine where, when and how to optimally deploy solar. With variations in local incentives, technologies, utility rate structures and rules, installation costs, vendors, financing and other factors, the analysis can be daunting. And, for companies and real estate owners with a large number of properties, five years is not a lot of time to strategically deploy solar and take full advantage of the ITC.

It’s time for companies and real estate owners to take charge and utilize a disciplined, strategic approach so they can make confident decisions and deploy solar profitably over a rational time horizon.

Economic impact

The full 30 percent tax credit is available through 2019. It then drops to 26 percent in 2020, 22 percent in 2021, and 10 percent in 2022 and beyond. This phase-out provides a rational “soft landing” and enables companies and property owners to make smart investment decisions. The 2015 legislation also includes a “commence construction clause” which extends the credit to solar projects that started development before the deadlines listed above, as long as they are completed by the end of 2023.

The ITC extension is projected to spur nearly 100 cumulative gigawatts of solar installations in the U.S. by 2020, resulting in $130 billion of investment. By 2020, more solar will be installed each year in the U.S. than was added to the grid cumulatively through 2014, according to GTM Research.

How does the ITC extension affect the economic value of C&I solar projects? It provides an ability to plan solar deployments in a more systematic fashion and better anticipate when and where projects might meet internal return requirements.

The graph below shows the impact on returns (internal rates of return or IRRs) from a solar project with and without the ITC extension. The disruptive 2016-2017 chasm without the ITC extension (blue bars) is replaced by a predictable curve of energy costs with the ITC extension (green bars). Even as the tax credit tails down in later years, the returns more than support the economics of a solar system, due to falling solar installation costs and increasing utility rates along the way.

This chart shows the impact on returns (internal rates of return or IRRs) from a solar project with and without the ITC extension.

With the ITC in place through 2022, companies and real estate owners can analyze all of the properties in their portfolios in a disciplined manner and rank the solar potential of each property to provide a strategic deployment picture.

Properties can be grouped by IRR into deploy, watch and wait categories.

(See the chart below, colored green, yellow and red.) The analysis is based on assumptions about energy rate increases and installation price declines for each specific location (3 percent and 5 percent, respectively, in the table below).

With the ITC in place through 2022, companies and real estate owners can analyze all of the properties in their portfolios and rank their solar. Properties can be grouped by IRR into deploy, watch and wait categories — pictured here in colors.

For example, Figure 2 (above) shows the analysis of a proposed solar project in Northern California as a function of the IRR hurdle rate for a company (assumed to be 12 percent), the current energy rate (12 cents per kilowatt-hour) and the estimated current installation cost ($2.20/watt-peak (Wp)). The site will likely meet the 12 percent hurdle rate in two years, where the future energy rate is 12.73 cents/kWh and the installation cost is $1.99/Wp, yielding an expected IRR of 12.50 percent. If the local installation cost decreases more quickly and/or the energy rate increases more steeply, the project may become viable sooner. The analysis puts this particular property on management’s list of solar projects to reconsider quarterly for the next two years.

This methodology requires a company to dedicate the resources and time to assess their property portfolio and create the right metrics up front (operational savings, project IRRs, energy offsets, carbon offsets, etc.). Then a disciplined deployment strategy can be established. Armed with this strategy and analysis, energy managers can have confidence in the plan and gain long-term buy-in from vital decision-makers and stakeholders. The next five years can be spent deploying solar – and other renewable energy systems – efficiently and profitably.

Assess, choose, deploy, profit

In the complex energy policy environment that there will be unpredictable factors moving beneath the surface all the time – such as Net Energy Metering (NEM) policy changes. The ITC extension makes markets far less reliant on state-level incentives in the coming years, which in the past have been major drivers in determining whether or not a state has a robust solar industry. However, companies and real estate owners must continuously monitor state incentives and their impact on the economics of potential solar sites in their portfolio.

It is crucial that C&I solar customers and solar developers not get passive in the wake of the ITC extension and simply push pre-selected projects forward. Your five-year solar plan must incorporate “check points” and other ways of looking out for variabilities so you can fine-tune your strategy along the way. Knowledge and flexibility are the keys to completing a large portfolio of solar projects that achieve your target metrics and economics.

With the full 30 percent tax credit in place only through 2019, now is the time to go solar — with a solid deployment plan that delivers dependable returns and sustainable climate benefits.

Image credit: Pixabay 

Charts courtesy of Alta Energy 

Sam H. Lee is CEO and Founder of Alta Energy, a renewable energy analytics and procurement company that empowers commercial, industrial and agricultural enterprises identify and complete renewable energy projects efficiently and profitably.  http://www.alta-energy.com/