The following is an excerpt from a white paper I wrote this summer regarding the US solar industry. I hope you enjoy!
The United States has until recently lagged behind Europe in terms of embracing solar energy. However, over the past few years there has been a steady increase in federal and state incentive policies that make solar energy more beneficial to producers and consumers alike. Due to the lack of a clear federal mandates, there are many policies and incentives offered through the federal government, state governments, local governments, utilities, and private companies. These incentives can be mandates to acquire a certain amount of energy from renewable sources, cash grants, tax credits, tax exemptions, performance based incentives such as feed-in tariffs, accelerated depreciation of equipment as well as many other measures.
Renewable Portfolio Standards
Renewable Portfolio Standards (RPS) are state policies that require energy suppliers or utilities to purchase a certain amount of energy from renewable sources such as solar, wind, and geothermal. For example, Arizona can say that 2% of its energy must be generated from renewable sources. This also creates a market for renewable energy credits (REC’s) that can be purchased, sold, or traded by the utility to comply with RPS policies. Currently, 29 states and the District of Columbia have enacted RPS policies. Together these states account for almost 40% of the US electricity load. In addition to requiring a certain percentage of the electricity mix come from renewable sources, states can create “carve outs” or “set asides” that specifically target a certain type of renewable energy. One example of this is New Jersey’s solar carve-out that requires 5,316 GWh of solar power by 2026. There is no federal RPS yet although the Obama administration has advocated for 25% of America’s electricity come from renewable sources by the year 2025.
Financial incentives can include grant programs that usually target larger commercial or industrial projects and offer direct cash payments to defray the cost of eligible systems or equipment. A rebate is another financial incentive that is offered to the purchaser after a system has been installed in order to make the cost of the system more competitive compared to conventional energy systems. These direct financial incentives lower the initial cost of the technology and lead to an increase in production, thereby decreasing the price further. The goal is to have producers ramp up the production cycle to reduce costs to the point that a subsidy is no longer necessary. Performance based incentives are cash payments resulting from the actual energy output of a solar system on a dollar per kilowatt-hour ($/kWh) basis. These incentives are generally reserved for large scale solar facilities, however, there is a new interest in feed-in tariffs based on their success in Europe that can be used on a smaller scale and even residential properties through the use of net metering.
Net metering allows the owner of a solar system to sell back energy to the grid via a contract with the utility at a determined rate per kilowatt-hour. Basically, electricity flows both ways through the meter – using power when it needs it and selling power back to the grid when the solar system is producing more energy that the facility is using. Net metering is the cornerstone of distributed generation, and distributed generation lends itself to solar photovoltaic installation on residential and commercial properties. Distributed generation not only allows a PV user to power their property, but it also rounds out the peak electricity loads that utilities face in the afternoon when power comes from the dirtiest sources. There is no federal net metering policy yet, but 43 states have adopted policies to allow it.
Two of the most common financial incentives are direct cash incentives that provide money to lower the upfront costs associated with solar projects and tax incentives that reduce the tax liability of the individual, company, or organization that installed the solar energy system.
Federal Grant Program
Currently, the federal government is offering direct cash incentives for solar energy through the Federal Grant Program, but more than 30 states and 130 utilities throughout the US offer anywhere between a few hundred dollars up to a million in cash for solar PV projects. In 2009, as part of the American Recovery and Reinvestment Act (ARRA) the federal government passed the Section 1603 Treasury Grant Program that offers a renewable energy grant worth 30% of the value of qualified renewable energy projects including solar, wind, and geothermal. This grant includes commercial, industrial, or agricultural solar projects started before 12/31/2011 and completed by 12/31/2016. As of May 5, 2011 the 1603 program has awarded 2,044 grants for solar electric technology totaling $936 million for more than 6,300 individual solar projects in 45 states and has supported over $3.1 billion in investment. The largest problem with direct cash incentives is that they have to be budgeted for and are not politically feasible in difficult economic times. This leads to volatility in the solar industry and discourages long-term investment and stability.
Federal Tax Credits
Tax incentives including credits, deductions, and exemption are other financial incentives that the federal and state governments are using in order to expand solar energy production. An investment tax credit reduces the taxpayer’s liability for a portion of the cost of buying and installing a solar energy system. Investment tax credits are fairly straightforward and usually limit the dollar amount that the taxpayer can claim. Policy makers favor tax credits because the amount of the incentive generally does not have to be appropriated or withdrawn from a budget. By encouraging development through tax credits, policy makers hope to grow the industry and eventually create jobs in solar and related industries and thus increase the tax base in that district. The 2009 American Recovery and Reinvestment Act (ARRA) also extended the investment tax credit through 12/31/2016 for residential solar electric installations. The credit is equal to 30% of expenditures with no limit to the maximum amount. The ARRA allows taxpayers eligible for the federal renewable electricity production tax credit (PTC) to take the federal business energy investment tax credit or to receive the grant from the US Treasury Department instead of taking the PTC for new installations. Currently, twenty-one states and Puerto Rico offer personal and/or corporate investment tax credits to help offset the expense of purchasing and installing solar energy equipment. Tax credits range from 10% to 50% of project costs, with maximum credit limits ranging form $500 to $12,500 for residential systems and from $25,000 to $10 million for commercial systems. However, a major drawback of the investment tax credit is the policy discourages institutions with a low tax liability from reaping the benefits. Recently, some states and municipalities have attempted to remedy this problem by creating provisions that would allow a “pass-through” option whereby the tax credit can be claimed by a third party who does have a tax liability. This could include a partner of a non-profit as well as homebuilders who integrate solar systems into new construction. In either case it encourages solar power systems to organizations that would not normally be afforded the tax benefit.