Since 2006 the U. S. solar industry and its customers have enjoyed a 30% Investment Tax Credit (ITC) at the Federal level, also known as the Section 25D Residential Solar Investment Tax Credit, or Federal Residential Renewable Energy Tax Credit. This solar incentive was slated to end at the end of 2016 for residential customers, but has been extended to 2019, and will then phase out by 2022.
Use IRS Form 5695 to claim your Residential Energy Credits
Affordability of Residential Solar No Longer Threatened by Loss of ITC
30% Solar Investment Tax Credit Extended Through 2019
What the loss of the Investment Tax Credit (ITC) would have meant to homeowners is that the cost of installing residential rooftop solar energy production systems would have increased to the point that buying and owning solar would have been much less affordable. This may have benefitted the electric utilities and their investors, as it would have insured continued enslavement of their residential customers, and continued profitability from utility rate increases. Commercial solar applications were to remain eligible for favorable tax treatment, including ITC and depreciation. For homeowners, however, desiring to own their own solar generation systems, the tax savings were scheduled to go away at the end of 2016.
Established by the Energy Policy Act of 2005, the investment tax credit provides a tax credit of 30 percent of the value of solar projects. Annual solar installations have grown by at a compound rate of 76 percent since the act was implemented in 2006. Under the newly revised law, the 30 percent solar tax credit will extend through 2019 and then decline gradually to 10 percent in 2022. After 2022 the credit will be eliminated for residential solar installations but will continue at 10 percent for commercial applications.
Certain utility companies and large scale solar industry investors actually lobbied congress to let the ITC incentive expire for residential customers. At the same time, however, these industry groups asked congress to further subsidize the commercial side of the business.
One such company that wanted to see the ITC end is Sunnova, a leading financier of residential photovoltaic (PV) systems. Sunnova’s business model is to install solar at “no cost” to the homeowner, and to profit by selling power directly to the homeowner on a long term power purchase agreement. Instead of paying the local electric utility for energy consumption, the homeowner enters into a long term contract paying Sunnova or similar companies on a long term contract. Meanwhile, Sunnova benefits from both the tax credit and depreciation on the solar system investment on your roof.
Following is an excerpt from a letter sent by Sunnova’s CEO to ranking members of the House and Senate finance committees.
“The solar industry is increasingly an established industry that no longer needs government subsidies to survive. Rather, the solar power industry is now ready to use capital market structures that other, more mature energy sources have access to, such as Master Limited Partnerships. The MLP Parity Act, sponsored by Senators Moran and Coons in the Senate and Representatives Poe and Thompson in the House, has strong bi-partisan support. The bill would level the playing field among various energy sources, not just solar, by allowing them to access the MLP capital structure, thereby giving all energy sources access to lower cost capital. In contrast to the ITC, the MLP Parity Act is supported equally by both parties and applies to multiple technologies. If legislators are interested in supporting the continued growth of the industry, we encourage them to support the MLP parity act rather than an extension of the ITC.”
This self-serving letter urged Congress to allow the Investment Tax Credit to expire for homeowners who might pay cash or finance the ownership of their own solar energy generation systems. Instead, this company wanted Congress to make it easier for big companies to access investment capital to build its business. Their business model is to contract with residential customers for the installation of solar panels at no cost, and to purchase power from their company, rather than the electric utility. They do not want people to own their own energy generation systems. Instead, they want to own the system installed on your roof, and for you to become enslaved to them for your energy needs, rather than to your local electric utility.
The ITC, which makes it easier for homeowners to afford the purchase their own systems, is actually a major threat to this business model.
If you can afford to buy your own system with cash or credit, then you will no longer be enslaved to anyone for your energy needs. Instead, you can pocket all of the money you would otherwise be paying to the electric company. The current 30% ITC represents money you would otherwise pay in Federal income taxes, and has the effect of subsidizing your energy purchase, or giving you a 30% refund or discount on your investment.
The ITC also serves a public purpose. As more people go solar for their energy needs, the country’s reliance upon fossil fuels (oil and gas) is reduced.
The payback from such an investment on the part of homeowners, who would take ownership of their own energy production systems, can easily be realized within 7 to 8 years or less. At the same time, however, those systems can be expected to produce energy for 25 years or longer.
Homeowners have just 3 choices today when it comes to satisfying their appetites for electricity:
- Purchase and own their own wind or solar power generation system. The ITC makes this option more affordable, essentially reimbursing the homeowner for 30% of the cost. Loss of this benefit and incentive increases the cost of ownership accordingly. If you can afford to make the investment, and if you can benefit from the tax credit, purchasing your solar energy system may be a very wise investment. Homeowners with sufficient equity may qualify for one of several Property Assessment Clean Energy (PACE) programs to fund the purchase.
- Enter into a lease or Power Purchase Agreement (PPA), cutting current costs and locking in a predetermined future cost. The PPA service company owns and maintains the system on your roof, and receives tax benefits in the form of the ITC and depreciation. This option is attractive because you benefit from lower cost power at a fixed rate, but have no out-of-pocket investment. Such plans can be either set at a level rate for the term of the contract, or may include a scheduled escalator clause where you will know at signing what your future costs will be.
- Or simply do nothing, and continue to pay the ever increasing rates your electric utility chooses to charge. This option serves the electric utility and its investors really well. If this is your choice, be sure to factor in the utility’s future rate increases into the cost of not taking action today.
Going solar by options 1 or 2 are obviously preferred over remaining subject to increasing electric utility rates, assuming your home is properly situated to take advantage of solar. Taking advantage of the ITC while it is available, before it disappears at the close of 2016, makes option 1 especially attractive. Where the tax benefit may not be enticing, or if the purchase investment is not feasible, then option 2 may be best course of action. Either of these options are preferable and less costly than doing nothing.