Is The Answer To The ITC Sunset Blowing In The Wind?

SI Staff
Written by Mark Del Franco
on January 21, 2014 No Comments
Categories : Policy Watch

Solar sector advocates are already working to extend the investment tax credit (ITC), the industry's key legislative incentive. The ITC – which provides a 30% tax credit for qualifying commercial and residential solar projects – expires on Dec. 31, 2016.

In a move borrowed from the wind sector's playbook, the Solar Energy Industries Association (SEIA) and others are lobbying Congress to tweak the language contained in the ITC to indicate when projects begin – not a deadline for when projects must enter service – to qualify.

According to Ken Johnson, vice president of communications at SEIA, the association supports H.R. 2502, the Renewable Energy Parity Act of 2013 introduced last year by Rep. Mike Thompson, D-Calif., that would change the current placed-in-service requirement for the ITC to a commence-construction standard. The change would allow qualifying solar commercial and residential projects to be eligible for the 30% ITC until Dec. 31, 2018, so long as construction starts on or before the end of 2016 – ostensibly a two-year extension.

According to SEIA, applying the ‘commence construction’ standard across the renewable energy sector would drive the installation of an additional 4 GW of solar capacity in 2017 and 2018 and would create tens of thousands of additional new domestic jobs.

The wind industry used a similar tactic when the production tax credit (PTC) was set to expire at the end of 2012. When the PTC was ultimately extended on Jan. 2, 2013, the new rules contained provisions for starting projects.

If no changes are made to the ITC, the incentive will be worth 10% beginning in 2017. Many industry advocates, such as SEIA, maintain that solar projects will not be economical at 10%. Others say the increasing cost-competitiveness of solar power could buffer any shock caused by the end of the 30% incentive.

‘I'm not sure where the market will be by 2017, but prices are coming down fast,’ says John Marciano, partner at law firm Chadbourne & Parke. ‘It is possible deals could work at 10% by then.’

Marciano adds that time gained from a start-of-construction provision ‘would be helpful, particularly for large projects, and definitely for solar thermal.’

According to SEIA, the ITC has helped solar installations grow by more than 3,000% since the ITC was implemented in 2006 – a compound annual growth rate of 77%. Above all, the ITC has helped bring stability and flexibility to project developers, such as Duke Energy Renewables, which owns more than 100 MW of generating capacity at 17 U.S. solar farms.

‘The ITC has been a significant driver of projects, so the [ITC] has met its objective,’ says Greg Wolf, president of Duke Energy Renewables.

According to Wolf, in addition to decreasing costs and advances in the technology, the solar sector needs to keep the ITC in place to ensure solar energy meets it full potential. If the rules governing the ITC were to change, he advises the U.S. Department of Treasury to issue guidance on the implications of any changes no later than the end of 2015 so that developers can act accordingly. In all likelihood, the pace of solar projects would slow considerably ahead of the deadline.

‘If that were to happen, I think it would smooth out that little bubble you would have had in 2016,’ he says.

However, the timing involved to make changes coincides with the looming specter of tax reform. In December of last year, Senate Finance Committee Chairman Max Baucus, D-Mont., proposed reforming energy-related tax incentives that would overhaul energy tax breaks offered by the government and consolidate or extend many of the provisions promoting renewable energy that are currently only temporary. For solar, that meant decreasing the ITC from 30% to 20%.

With all energy tax incentives coming under increased scrutiny, any legislative tweaks are far from assured.

‘'Start of construction' is not an easy legislative change in the current partisan environment in Washington,’ says David Burton, a partner at law firm Akin Gump Strauss Hauer & Feld. ‘I think 'start of construction' is more likely than tax reform because Baucus is leaving the Senate to be the ambassador to China, and a consensus has yet to gel with respect to tax reform.’

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