US solar firms prepare for end of ITC

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

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