August 30, 2011
A CNN radio reporter named Jim Roope wrote an article today that was published on the CNN site focusing on a homeowner in Los Angeles California.
He starts out: If you’ve ever thought, “One day, I’m going to put in a solar energy system,” today might be the day.
Economic issues across the nation are contributing to the early demise of solar incentives such as tax breaks, grants and rebates. “We’ve been thinking about this for several years,” said California homeowner Jim Adams. “The cost wasn’t really coming down, so we went to the bank, asked for a loan and decided to get it done.”
So Adams had a 16-panel system installed on his roof in La Crescenta, California, about 15 miles north of Los Angeles. He received a 30% tax credit from the federal government and a 10% cash rebate from the state. It cost him $16,000 — a savings of $10,000.
This year, a federal 30% cash rebate through the U.S. Treasury Department comes to an end. And the 30% federal tax credit program will conclude at the end of 2016. These incentives, created as part of the federal stimulus package a few years ago, were designed to create a vibrant solar energy market. Along with the federal program, 29 states offered incentives. Many of those state programs are also becoming victims of budget cuts.
In addition, utilities in some parts of the country offer their own incentives up to a certain size limitation referred to as net-metering. For example, Xcel Energy, the largest utility in Minnesota, offered a $2.25 per KW one time cash rebate for all systems under 40 KW in size. Like many of these programs, the calendar allotment of funds (4.6 million for 2011), was exhausted well ahead of the end of the year (August for Xcel), as the demand far outstripped allotted funds. This, even after the intentional 40 kw cap (very SMALL commercial), which translates into a maximum rebate of approximately $90,000 (40 KW x $2.25 = $90k) for any one location was implemented. Xcel offers this rebate like many other utilities for the right to “own” the Renewable Energy Credits (commonly referred to as REC’s), these systems produce for the next 20 years. They can then use these credits to apply against power production from more polluting sources like coal. This allows them to extend the usability of these plants while meeting government clean fuel mandates.
Roope goes on to write:
Sales of rooftop solar panel installations jumped 67% last year, compared with 2009, according to the Solar Energies Industry Association.
The solar industry is lobbying the federal government to continue the 30% cash rebate program that’s ending this year. But there’s not much hope for an extension, considering the current political climate in Washington, where lawmakers are focused on trimming the budget.
Although much of Roope’s article was focused on residential installations, the larger commercial implementations have a lot to lose with the cash rebate ending this year. Most of these installations start in the $250,000 range and easily climb into the 3 to 5 million arena. The 30% cash payment versus credits was implemented in 2011 in an attempt to spur investment, create jobs and help nudge our country away from carbon producing fuels. The 30% in question was switched from a tax credit spread over time to a cash rebate returned to the solar system owners often in as little as a month or two after the system goes live. For a 3 million dollar project (small to medium in the commercial market), that is an instant cash rebate of $900,000 dollars set to move out of the financial equation. Without it, much of the momentum being generated in the industry will subside. A homeowner may decide to spend an extra $10,000 to do the right thing, but businesses and investors dance to a different tune or they end up not dancing at all. Although the components that make up the metrics for these offerings are as solid as they come, they still need to meet investment grade financial hurdles…which, under the existing structure with the cash rebate they do.
To appreciate the impact this will have, consider churches or schools for example. Most of the incentives offered in the past for solar as well as the majority of all other government incentives come in the form of tax incentives. So churches, schools, as well as some hospitals, cities; essentially all non profit organizations have been kept out of the market for these technologies until this last year because as non profits, they obviously have no use for any tax incentives. The 30% tax cash payments reverting back to tax credits spread over following years is due to continue into 2016, but this will result in these entities once again being kept out of this market as third party financing is likely to dry up. You and I will be called on to meet their needs in other taxes and/or user fees. With the accelerated deprecation schedules allowed for renewable energy systems, along with the 30% cash rebate, investors were stepping forward to fund systems for these organizations and others who either did not qualify or do not have the available funds to pay for it themselves.
In our previous example, that 3 million dollar system returned $900,000 only weeks after going live to the investor. They now have $2.1 million into the $3 million dollar system. The additional money the investors receive by selling the power these systems produce at prices at or below what the host would pay to the utility for the same amount of energy, along with the accelerated depreciation schedules and the cash payment make it a serious contender for investors with money to invest and an interest in helping the country move to a more free and clean America.
A case in point, our company Dragonfly Solar, is working with a number of large tax exempt institutions in the U.S. The investor “package” as it exists today has interested parties at the table to help fund the system for these institutions. The structure of these agreements is such that at the end of the 7 years necessary to satisfy the investor tax credits and depreciation, the institution (host), usually ends up owning the system for the rest of its life at a deeply discounted price. These power producing systems then become a long term, ongoing net positive cash flow asset for these entities. Usually a discounted price for the electricity the system produces over the initial term is negotiated between the investor who technically owns the system and the host as well so the host can receive immediate savings until the ownership changes hands. Since these systems have a useful life of 30 – 40 years…the savings can add up to a substantial amount. This lowers overhead and as the price for electricity rises, the more the host saves. It also represents cash flow that lowers the amount of money you and I have to fund via taxes, fees and/or charitable giving. It is a great plan.
In the current environment, the market for the products and services that make up these solar implementations have been increasing at a healthy clip. At the same time, R&D and better manufacturing processes driven by increased competition in this growing market have been steadily driving prices down for these products and services…that is exactly how it should be…but once again, the landscape is due to change.
American policies seem to be often set and last until the next election cycle and then everything is up for debate. And like most professional sports in the US, the “off” season for campaigning for re-election continues to shrink so we end up with political leaders working to implement half-hearted agendas. At the same time policies that should be re-evaluated often continue when the stated objectives are accomplished or just outdated. The amount of money still being directed towards tax incentives for oil, gas and coal – all huge carbon producing industries, is a perfect example of this second point. It is obvious that these incentives for the most part are unnecessary to support profitability for these industries. Many of the companies that enjoy these tax advantages that were implemented decades ago when they were young industries are piling up profits at levels that border on obscene. I am not un-biased. I think much of those incentives ought to be re-directed to carbon-less energy production solutions now. They are doing this right now in much of the rest of the developed and developing world. China is intent on owning the solar market and clearly recognizes the many advantages of generating power in-house with fixed costs and increasing returns…it is a no brainer.
So far this has been a dollars and sense discussion. I have not ventured into the recent examples of what our world’s dependence on other forms of energy has done within the last couple of years to our environment – thinking Gulf of Mexico and Japan; but shouldn’t these issues be a part of the decisioning process for everyone including the U.S. as well? That is real money being used to clean up and one day try to restore what we lost in those 2 recent examples. Instead here we are again in America – one foot in, then one foot out as the next election cycle begins….
Our immediate job now at Dragonfly is to try and persuade these institutions to move quicker than they are comfortable moving so they don’t end up at the table with no-one else there. Based on previous experience, I know this will be a challenge. The right people with the right knowledge will need to test the entrenched-institutionalized ways of doing things. I am pretty sure that is a good definition of progress if we agree we need change. It will take leadership – it always does. The smart money will move this year as the incentives represent an excellent opportunity for all parties. It is a great plan.
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