In the United States, a federal Investment
Tax Credit (ITC) has been an attractive lure for investors in solar
projects. However, the ITC was given a limit: it is designed to
phase out in 2016.
The 30 per cent tax credit that currently provides the policy
incentive driving record-breaking investment in solar projects in
the United States takes six years to receive fully, beginning once a
solar project has been completed. Each of the six following years,
the investor can take 15 per cent of the full amount of the tax
credit. But the last solar projects to qualify will have to be
completed by the end of 2016.
So how will U.S. solar firms manage without it? Will the industry
experience a sudden drop in credit attractiveness to investors in
just three years? PV Insider talked to solar stakeholders to find
out if they have plans to hurdle this bump.
Solar firms split on ITC’s likely extension
"It seems unwise to assume that the ITC will be extended," says Ben
Higgins, Director of Government Affairs for Mainstream Energy Corp.
"As such, we have essentially a four-year deadline, until the end of
2016, to continue driving costs down, optimising our business
structures, and defending the other foundational policies, which are
so important to solar's growth. Solar can't be an emerging industry
forever, and 2017 may put our promises of cost reduction and 'grid
parity' to the ultimate test."
Upsolar’s Chief Technology Officer, Stephane Dufrenne is more
optimistic: “Many are predicting - with good reason - that the ITC
will be extended," he says.” Although this credit extension will
likely be lower than the current 30 per cent rate, the new figure
should still serve as a strong financial incentive when paired with
a continued decline in module and balance of systems costs.”
“Overall we're very optimistic about PV's ability to compete in the
long term," says Borrego CEO, Mike Hall. "The good news is that
prices have come down so far so fast, that we are relatively close
to unsubsidised grid parity in some markets.”
He adds that factors outside of the PV system cost curve will also
have a tremendous effect on competitiveness after the expiration of
the ITC: the price of natural gas, movements in state and federal
regulations regarding carbon and renewable energy, changes to net
metering regulations, and interest rate movements.
"If the ITC does expire, it won't mean the end of the US solar
market," says Marc Roper, VP of Sales and Marketing at Tioga Energy.
"Installed PV costs continue to fall, electricity rates continue to
rise -- so we expect the value proposition for grid connected PV
would survive the expiration of the 30 per cent ITC."
Roper points out that by reducing the value of the tax credit, the
credit becomes less important to the economics of a project, so that
risk associated with tax benefit recapture goes down, which he
thinks should result in new pools of project capital entering the
market to invest in solar projects.
A startling number
Looking at the issue from the solar finance side, Clean Path’s Tom
Price agrees with Roper. He estimates that the solar industry is
going to be able to manage without the ITC quite well. Clean Path is
currently providing capital, credit and expertise for about a
gigawatt of solar projects.
But surely wouldn’t replacing a tax credit worth 30 per cent require
something like a 30 per cent improvement? This would be quite a tall
order for any industry, let alone one in its commercial infancy.
Actually, it would not be that draconian, according to Clean Path.
Price says that replacing the ITC will amount to making a
surprisingly small change.
“If you change the interest rate by a point or two - that a project
has to pay for its debt - and if you change the performance
degradation positively by a quarter of a per cent then you can
compensate for the loss of the investment tax credit,” says Price.
“And that’s because, over time, those slightly lower costs, and that
slightly increased performance, more than make up for the 30 per
cent upfront.”
“It’s quite a startling number when you realise that,” he adds.
This idea that a relatively small percentage improvement will
suffice is echoed by SolarCity spokesman Will Craven. Their post ITC
plan includes an "expectation for a steep decline in both local and
federal incentives, and we are targeting annual cost reductions
between 5-6 per cent to be able to continue to offer customers the
same value proposition after the ITC drop.”
Why financing costs will come down
“This industry is still very young,” Price emphasises. “It’s been
less than one year since the very first third-party-financed project
built for a PPA in the United States came out of its six year tax
recapture period.”
Until now, the finance industry has been loaning money based on an
assumption of the risks associated with a nascent industry. But he
strongly believes that as more projects come online and begin
performing as expected, perceived risk will decline, and bank rates
will come down.
“The whole industry is predicated on the six year investment tax
credit return period of time, but those projects are only just now
starting to work,” he points out and references Warren Buffett’s
recent foray into solar project ownership as an example of solar’s
increasingly mainstream appeal.
He believes that as more U.S. banks realise that solar projects with
PPAs are very low risk projects, “the likely interest charged for
money for a project will decline. It’s basically like buying a CD,
but one that’s producing energy.”
They are buying something “that is going to make money, month in and
month out, year after year, and the more stable the investment, the
lower the financing rates, so we won’t need to pay as much money.”
“As the banking industry gets more comfortable with the new industry
that is solar,” says Price, “they’ll be comfortable saying ‘you
know, I don’t need eight or nine per cent return. I’m happy with
seven, and I know it’s stable; it’s not speculative.’”
© PV Insider 2011
http://news.pv-insider.com/photovoltaics/us-solar-firms-prepare-end-itc