Unless Congress acts to extend it, the 30% Federal Investment Tax Credit (ITC) for commercial solar energy projects will step down to 10% on December 31, 2016. The ITC has been a major factor in America’s solar industry growth, helping solar installations increase by an average 48% annually since implemented in 2006.
UPDATE 12/2015: The Solar Investment Tax Credit has been extended! Learn more about how changes to the ITC will benefit commercial solar.
A decline in the solar ITC would make it more challenging for businesses and large organizations to tackle their electric bills, achieve sustainability goals, and modernize their operations. We hope to see it extended. However, given the uncertainty on the horizon, now is the time to act to ensure that your business takes full advantage of the solar ITC and maximizes ROI on your solar project.
The following example illustrates the difference between a commercial solar project in California incorporating the current 30% ITC and one using the 10% credit. In this example, the calculations are based on a one megawatt (MW) solar photovoltaic (PV) system installed for a major retailer, paid for in cash and sited in the Pacific Gas & Electric (PG&E) utility service area.
The example assumes a $2 million initial investment and a 6% discount rate, as well as performance degradation modeled at 0.5% annually over the 30-year lifetime of the system. Here are the potential financial differences between a 30% and 10% solar ITC:
- With the 30% tax credit in place, the post-tax initial investment eases to $1.4 million. The project’s internal rate of return (IRR) would be 17.4% and the net present value (NPV) would be about $2,083,000.
- In the 10% ITC scenario for the same solar installation, the post-tax initial investment increases $400,000 to $1.8 million. The project’s IRR falls to 14.3% and the NPV drops to about $1,765,000.
Specific customer quotes will vary based on several factors including utility rates, location, facilities, energy usage, and the type of financing selected. But the general idea is the same: although the payback on a solar PV system using a 10% tax credit is still decent, the return on one benefiting from a 30% ITC is substantially better. That’s why the time to act is now!
A step-down in the ITC could also lead to more subtle changes in commercial solar project design, and indeed the entire market. For example, more complex and expensive solar installations, such as solar carports, would become financially challenging relative to larger, straightforward installations. At the same time, smaller systems with a lower price per watt could have a relative advantage over systems with high marginal capacity costs. In other words, in a 10% ITC world, it may be less compelling to offset your entire electric bill if certain parts of the solar installation are substantially more expensive than others.
We’re here to help. Our experienced team will work with you to design, plan and construct the most financially beneficial and environmentally responsible commercial solar system. REC Solar manages every step of the commercial solar process, and we provide a variety of financing options to fit your business’ needs.
For most businesses seeking to take advantage of the 30% tax credit on their solar project, the construction start date should take place before May 2016. Therefore, initial project evaluation and analysis should begin as soon as possible. The 30% solar ITC may yet be extended by Congress, but it’s impossible to predict the future.
No matter what happens with the solar ITC, one thing is clear: there’s no time like the present to go solar!