The Future of the U.S. Solar Market

The solar energy investment tax credit (ITC) has been instrumental in fueling the growth of American solar industries, increasing solar manufacturing capacity, and driving consumer costs down. It has acted as a stable, long-term incentive that reduces prices and creates jobs in solar energy, making solar an economically viable alternative to fossil fuel energy. Currently, the ITC is set to drop 66% at the end of 2016 (from 30% to 10%), the impact of which is tentatively understood. The pertinent question remains: what will the U.S. solar market look like in a post-ITC world?

To provide some back ground, the solar energy ITC was established with the Energy Policy Act of 2005. The 30% ITC for commercial and residential solar energy systems originally applied from the beginning of 2006 through the end of 2007. These credits have been further extended by the Tax Relief and Health Care Act of 2006 and the Emergency Economic Stabilization Act of 2008. The multiple-year extension of the residential and commercial solar ITC has helped annual solar installation grow by over 1,600% since the ITC’s implementation in 2006—a compound annual growth rate of 76%.

If there is no legislative action prolonging the solar ITC, the Obama administration’s 2015 fiscal year budget would replace the ITC with a production tax credit at the end of 2016, meaning that a solar project would benefit only after it is built and producing power.  The Solar Energy Industries Association (SEIA) issued a statement that asserts the production tax credit “simply can’t address the upfront costs of fuel-free solar projects,” and held by their belief that “the Administration’s sudden, 180-degree shift in tax policy could have devastating consequences on the future development of solar energy in America.”

Legislative efforts to extend the ITC are already under way. U.S. Senators Michael Bennet (D-CO) and Dean Heller (R-NV) introduced a bipartisan bill in February that would allow firms to qualify for the ITC for solar projects that begin construction before the credit’s expiration date instead of having to wait until those projects are completed and in service. Without intervention ITC qualifying projects must be capable of generating power by Dec. 31, 2016.

Not everyone advocates for the elongation of the solar ITC, however. Some industry figures are looking at the tax threshold as a hurdle best to get over with soon. "I've had a change of outlook in the last few years," said Blake Jones, co-founder and CEO of Namaste Solar. "At first, I was fighting for the incentive kicking and screaming, and now I want to rip the Band-Aid off. So I am looking forward to it going to 10 percent. I wouldn't mind if it was zero."

The accelerating growth of the solar industry makes for uncertain predictions just a few years ahead. The first fiscal quarter of 2014 has seen the domestic installation of 1,330 MW of solar photovoltaics (PV), up 79% over Q1 2013, to total 14.8 GW installed capacity (approximately enough to power 3 million homes). In another significant development, the quarter was the largest yet for concentrating solar power. “Solar accounted for 74% of all new U.S. electric capacity installed in Q1 2014, further signaling the rapidly increasing role that solar is playing in the energy market,” said Shayle Kann, Senior Vice President at GTM Research. “Expect to see a resurgence in the non-residential market, combined with continued incremental residential growth, throughout the rest of this year.”

The solar industry continues to emphasize financial innovation as a catalyst to drive down the cost of capital available to investors and developers interested in the asset class. These efforts are based on the idea that if the industry can access “cheaper” capital –capital demanding less aggressive returns– more projects will be viable and the industry will grow more quickly.

For example, a solar energy project selling electricity at 6 cents/kilowatt-hour and providing a 4% internal return rate (IRR) does not interest most investors, while a project selling electricity at 15 cents/kilowatt-hour and providing 9% or 10% IRR generally does.  

Therefore, if more investors are willing to invest at 6% or 7%, then more solar projects should be viable because the project itself does not have to generate as much profit, which means the project does not need to charge the offtaker as much for the power the project is selling. Consequently, there should be a greater number of potential customers willing to purchase the electricity from the solar project, and therefore more solar projects will be built.

For a more in depth financial analysis, you can read Yuri Horwitz and Will Grave’s two part article on the solar industry and ITC.

With the solar industry still only accounting for a fraction of a percent of American energy demand, paired with the rapidly increasing need to utilize carbon-neutral energy sources, the Earth Day Network hopes to see Congress extend the solar ITC and/or buttress the growing PV industry with new legislation.

Author: Ben Criswell