Tax Credits for Solar, Storage & Electric Vehicles: An Update and Retrospective

Barring a miracle as Utility Dive reported yesterday, congress will not be extending the tax incentives that segments of the solar industry have utilized since 2005. Rather than go into the specifics since you can read the Utility Dive piece if you wish, the main takeaways are that there’s little to no appetite for clean energy economy legislation in Washington, and that storage and EV are included in the loss. Of course, we’re in “step-down” mode anyway, where the tax credit is down from its original 35% to its current rate of 26%, 22% next year. After 2021, the ITC will expire for residential and remain at 10% for commercial projects indefinitely.

The Energy Policy Act of 2005 created this tax incentive, called the Investment Tax Credit (ITC). There’s no doubt that it stimulated the industry, especially large, utility scale solar. But it helped commercial and residential solar grow as well.

That said however, for the projects of the type AIRE works with, the ITC has been of limited value for many aspiring organizations. We are all-in by 2008 with the notion that these “coupons” should be available to all. We felt like there was a “model” that would be the elegant solution, but we became critical of the tax equity strategy for our audiences. (That history is here.) It’s one possibility but there are other strategies. (Just to be clear, they make a lot of sense for commercial entities and residential solar buyers.)

Our experience is:

• Tax incentives are easy to create and hard to use, especially for good folks trying to benefit a tax exempt entity [1]
• Tax incentives were designed for institutional investors and high wealth individuals (i.e. they privilege wealth and discriminate against wage-earning do-gooders.)
• With a lower corporate tax rate, the value of the credit itself is diluted.
• The necessary transactional costs for structuring deals can make smaller projects difficult to scale
• Finally, although we don’t have a smoking gun, we’ve seen enough to suspect that some (maybe many) installers have internalized the ITC and captured its value in their bottom line.

Phase out of tax credits for renewable energy has been on the legislative chopping block once and survived but it looks like it won’t have another life. But rest assured, there are other ways to develop solar at your organization. We learned that “modalities” is the way to think of this with every case being unique. Right now, we see the utilities as potentially the biggest barrier (those that charge “solar punishment fees” to connect solar) and maybe that’s where we need to put our energy. Better yet, we know some amazing nonprofits that say “we must do this anyway!” The price is right and humanity can’t afford to wait.

[1] As my friend and colleague, Jeff Deal, an applied mathematician likes to say, IRS and accounting is NOT math. Also, one of our early collaborators called it “micky mouse math” to simply multiply your project cost by 35% in order to determine your “discount.” Tax work is definitely NOT math.

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