Is this the end of the 'Tax Credit' Era?

Oct. 27th, 2012

New large scale solar farms like the one shown above may see a drop in production if the solar tax credit is repealed

While the candidates petition for your vote in the elections over the next 10 days, there is a huge buzz in the North Carolina solar industry on the future of the eligible 35% state tax credit, while even bigger worries over the federal 30% Investment Tax Credit creates a worry that the 'golden era' of the tax credits may be in jeopardy. Lawmakers have focused heavily on cutting spending to help balance the budget, and with repeated failed solar businesses making headlines, it makes for an easy target in a cutthroat battle of congress.

So what will happen if the tax credits just disappear? A good answer might be to take a look at wind. The federal production tax credit for wind production has just over 2 months left of life before it expires. And since wind projects need to be placed in service before the incentive expires to receive the tax credit, there is very little activity going on in new wind power construction. Is the industry dead? No. Of course not. But this is a huge blow for sure. Expect to see a similar slowdown in new solar if the tax credit is repealed early, which is a nice way of saying solar will pretty much fall off the face of the map in the US.

With the wind energy tax credit expiring this year, new wind production has seen a sharp decline.

Another way of seeing what might happen is to look at Spain. Generous government policy and feed-in tariffs for solar production were enacted in 2004 and the country saw a major boom in the solar industry. But in 2008 when the financial crisis struck Europe, the Spanish government made sweeping cuts to federal subsidies, including solar, which took a huge hit. Spain went from being one of the worlds largest solar producers to miniscule within just a few years. It just goes to show you how closely tied energy is to government policy in the world.

But the answer for the investor is simple. With the tax credits and other subsidies, solar power is a good long term investment. But without those added incentives to sweeten the deal, it's not. Those who are coming into the market because it makes good financial sense will take their money elsewhere, and the industry will be left to fight for the remaining scraps of business it can find. Soon the solar installers, workers, electricians, plumbers, and manufacturers will leave the field as well. The 15,000+ new solar jobs and $3.7 billion in revenue created in North Carolina alone will be in jeopardy.

Whether or not the tax credit is repealed in 2013, we must look at how it has changed the solar industry since it was set in place. For one, cost has come down significantly. Even without the tax credit, solar power is more affordable today than it was prior to its implementation. It has created thousands of jobs in North Carolina, and hundreds of thousands of jobs across the U.S.  The carbon offset has been tremendous, and energy costs have been lowered significantly because of it, which in turn is passed onto the consumer.

While I personally never thought a permanent tax credit for solar energy was the solution, I do
believe that the repeal should be gradual, and if at all possible, restructured to better suit individual investors and residential families. The cost of installing a solar array on a residential home is still quite high, and the opportunity for a family to take advantage of the tax credits offered is low. For one, not many families make the necessary income to take advantage of the tax credit, which is capped at $10,500. The corporate tax credit is capped at $2.5 million, allowing for much larger solar installations. But even then, you will be hard pressed to find many North Carolina companies with such a large appetite. Hence we see the several financial modeling tricks such as flip partnerships and sale leasebacks that can make the accounting quite messy. Perhaps a better approach would be to allow for a grant in lieu of tax credits, similar to the Federal 1603 grant that expired last year. Allow better net metering standards for residential customers to make it easy to connect to the grid and offset their utility bills. Enable third party electricity sales and offer solar leasing to residential homes that would remove the burden of a large financial investment of a solar array.

No matter what happens after the elections in November, it is important to not forget why we are all here in the first place. We see a need for a change and a desire to remove ourselves from dependence on fossil fuels, foreign oil, and to create a better environment and atmosphere for ourselves and future generations. We are likely not going to run out of oil and gas in the next few years, not even in the next 20 years, but we will eventually have to make a choice to either continue to rely on a diminishing power supply coupled with increasing costs, or make a move to a long term viable, safe alternative. One day we will have to change our ways. And the sooner we can become a part of it, the sooner we can all benefit from it.