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Extension of tax credit brightens solar future

The future of the solar energy industry looks a lot brighter with Congress extending a key tax credit that has fueled its growth over the last decade.

The five-year extension of the federal tax credit that currently saves consumers and companies that install new solar energy systems the equivalent of 30 percent of their investment was hailed by local solar energy installers as a watershed development. They said that it will lead to more solar energy systems being installed in the coming years, averting a big drop-off in activity that had been expected if the incentives had expired as scheduled at the end of next year.

Ashley Regan, director of business development at Lackawanna solar installer CIR Electrical Construction Corp., said she “breathes easy” now that the extension, approved in a vote by Congress on Friday, has added a greater degree of certainty to the solar industry over the next five years.

“Solar developers are no longer having sleepless nights about how their business model will succeed past 2016,” she said. “From here on out, we anticipate a long and prosperous market for solar energy.”

The legislation extends the 30 percent tax credit for three years, through 2019. It then will drop to 26 percent in 2020 and 22 percent in 2022. After that, the tax credit will disappear for residential installations and fall to 10 percent for commercial projects. The credit will be 10 percent in 2022 and beyond for residential systems that are owned by a third party – a model that SolarCity uses as part of its push to offer systems to homeowners without any upfront costs.

SolarCity co-founder and CEO Lyndon Rive is scheduled to join Sen. Charles E. Schumer, D-N.Y., to discuss the law’s passage Tuesday at 11 a.m. at the giant SolarCity factory going up on South Park Avenue in South Buffalo.

Supporters said that ending the tax credit would have tossed the solar industry over a cliff, causing installations to plummet and leading to the loss of tens of thousands of jobs within the industry. They said that it would have devastated an industry that now employs twice as many people as coal mining and throttle growth in a sector that has been adding jobs 20 times faster than the U.S. economy as a whole.

Critics of the tax credit, however, argued that the gloomy predictions for the solar energy industry were overblown. They said the solar energy sector would have slumped in 2017 but then resume growing at a slower pace, thanks to continued cost reductions.

Eliminating the tax credit would have weeded out the weak performers and reward the most efficient firms, the critics said. That’s because eliminating the tax credit would give the industry further incentive to relentlessly drive costs lower. Many Republicans lawmakers, including Rep. Chris Collins, R-Clarence, are against extending the tax credit, arguing that the government shouldn’t prop up the solar energy industry if can’t survive on its own.

“This bill is viewed as a bridge that ensures the short-term viability of the domestic industry,” said Rob Gauchat, vice president of Solar Liberty, an Amherst solar installer. “The bill provides the time necessary for industry costs to continue their decline and be able to compete without the investment tax credit by 2022.”

If Congress hadn’t agreed to the extension, the tax credit would have ended for residential solar systems at the end of next year. The credit for commercial systems would have dropped to 10 percent.

The uncertainty over the tax credit’s future already caused a big shift in strategy at SolarCity, the nation’s biggest rooftop solar installer, which is building a massive solar panel factory in South Buffalo. The California-based company, which has been growing by upward of 80 percent a year, said in late October that it is scaling back its growth targets to around 40 percent annually so it can focus more on improving its cash flow and lowering its costs faster.

SolarCity President Tanguy V. Serra said recently that the company is committed to reducing its costs deeply, regardless of the tax credit.

“Long-term certainty for the ITC sends a strong signal to the marketplace that investment in clean energy is the right way to drive continued economic growth and job creation,” Rive said in a statement.

Critics also argued that the investment tax credit isn’t an efficient way to stimulate solar installations. Because the tax credit can be claimed only by companies that are profitable – and most solar industry firms, including SolarCity, are losing money – solar companies have to sell their tax credits to profitable companies, such as Google and Apple, that are looking for ways to reduce their tax bill. But packaging those tax credits and finding companies to buy them is a costly process.

One study earlier this year concluded that renewable energy developers and consumers captured only half of the value of the investment tax credit. The other half went to financiers and the companies that bought the tax credits.

That prompted researchers at the Massachusetts Institute of Technology’s Energy Initiative to conclude, in a recent report, that scrapping the tax credit in favor of cash subsidies that went directly to the solar energy developer could support the same amount of installations at half the cost.

The uncertainty over the future of the tax credit already has had a big impact on the solar energy industry. Consumers, both homeowners and businesses, had been scrambling to install systems before the end of next year so they could claim the subsidy at today’s level. As a result, solar installations are expected to rise by 24 percent this year to a record high of 7.7 gigawatts, according to GTM Research.

Another forecast by Bloomberg New Energy Finance predicted that installations would rise by more than 60 percent next year to just under 12 gigawatts.

“Our backlog was at a point that, by the end of summer 2016, we would have no longer been able to guarantee the installation by year-end,” said Darrin G. Harzewski, CIR Electrical’s director of solar sales.

Now, with the tax credit extension eliminating the need to rush to finish projects next year, it sees growth of around 25 percent in 2016. But instead of installations plummeting in 2017, the Bloomberg forecast now expects almost 6 percent growth for the industry.

The extension of the tax credits prompted analysts to revise their dire forecasts of decline in the solar industry to projections that were far more optimistic.

GTM Research, which had forecast that solar installations would drop by two-thirds in 2017 without an extension of the tax credit, now estimates that solar installations will rise by 54 percent over the next five years, compared with what it predicted would happen without an extension. That will result in the installation of an additional 25 gigawatts of solar generating capacity during that five-year span. The research firm forecasts that residential installations, which provide the bulk of SolarCity’s business, will grow by 35 percent, compared with what it had forecast without an extension. It forecasts that commercial projects will increase by 51 percent and utility-scale arrays will grow by 73 percent.

Another forecast by Bloomberg New Energy Finance predicted that installations would rise by more than 60 percent next year to just under 12 gigawatts. Now, with the tax credit extension eliminating the need to rush to finish projects next year, it sees growth of around 25 percent in 2016. But instead of installations plummeting in 2017, it now forecasts almost 6 percent growth for the industry.

“It’s a win-win across the board,” said Daniel T. Montante, the president of Montante Solar in Buffalo.

“The investment tax credit is doing exactly what it’s supposed to do, which is to support the development of renewable energy,” he said. “The legislation will remove a lot of uncertainty for the industry going forward.”