The Tax Shield That Generates Solar Power

Here at ETE, we are generally very supportive of renewable energy. Many of my friends accuse me of being a hippie when I advocate for solar power, but solar energy isn't for hippies anymore. It's for capitalists with profits that they'd like to shield from taxes.

The Energy Policy Act of 2005 (EPACT 2005) was groundbreaking in many ways, but the biggest incentive it included for the solar industry was the creation of an expanded Investment Tax Credit (ITC) that covers 30% of eligible solar system costs. The ITC, coupled with solar being designated as 5 year property under the MACRS depreciation schedule, spurred the development of a vibrant tax equity investing marketplace for solar financing. Through 2013, solar also qualifies for 50% bonus depreciation which sweetens the economics even further. But wait, there's more! Many states also have special tax credits, deductions, and incentives for solar that make a solar investment a can't lose proposition for anyone with a tax liability and a sunny roof. 

At ETE, we are very experienced in doing renewable energy feasibility analysis for end use customers, developers, or as an outsourced expert working for an incumbent consultant serving the client. For end use customers with a tax liability that own their building or have a long term lease, buying the solar energy system is almost always more profitable than leasing or doing a Power Purchase Agreement (PPA). The graphic below shows the effective purchase price of a solar energy system in MA after the tax benefits have been realized.

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Although there is a lag in the monetization of the tax benefits, the effective cost of this 400 kW solar energy system is just under 42% of the quoted sticker price. For customers that decide to buy their system, these tax incentives have very interesting implications when it comes to financing options. ETE has demonstrated for many customers that some of the best ways to finance a solar energy system is with plain vanilla lending options offered by a local community bank. The graphic below presumes that a customer makes a down payment equal to the value of the tax benefits that accrue in year 1 and finances the rest of the system cost with a long term loan.

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The graphic above is rather oversimplified, but the point is that the down payment on a system can be less than the value of the tax attributes. Doing this would make the system cash flow positive immediately. In addition, the long term financing arrangement can be structured so that the value of the electricity and Solar Renewable Energy Credits (SRECs) produced can be greater than the debt payments. As a result, the end use customer could make a spread between the income from the system and the debt payments. 

For some customers, a PPA is still the best option, but anyone who signs a PPA without fully vetting the financial possibilities of outright ownership is doing themselves a disservice.