Solar Investment Tax Credit: The Green New Deal Before the Green New Deal
By Ryan Dings
The arrival of the Green New Deal Resolution has sparked a lot of debate, excitement and even some controversy. More than anything, we’re excited the discussion around comprehensive climate policy is taking place, because the price of inaction in the face of climate change is increasing by the minute.
Sadly though, comprehensive policy providing the framework for a clean energy future is years away. In the meantime, there is already robust federal clean energy policy providing meaningful incentives to accelerate the transition to a clean energy economy. Dare I say, the Green New Deal before the Green New Deal.
It is called the Investment Tax Credit (“ITC”) and it provides for a 30% federal tax credit on the eligible basis (i.e. cost) of new solar energy systems installed in the United States. Congress introduced the ITC in the 2005 Energy Policy Act with the intention of promoting investment in the renewable energy sector. Since the implementation of the ITC in 2006, the legislation – and the ITC – has been extended twice over in bipartisan fashion, first in 2008 and second in 2015. Don’t tell anyone, but the dirty little secret of clean energy is that it creates jobs, hence the bipartisan love for solar in a town that can’t get anything done.
With the second extension, the ITC for commercial solar (the Sunwealth team’s specialty) is scheduled to phase down from a 30% tax credit in 2019 to 26% in 2020, 22% in 2021 and 10% in 2022, where it will then remain.
The ITC created a tremendous incentive for solar development, and the solar industry responded. From 2009 to 2019, the industry saw incredible growth. In 2009, the solar project costs were high and the installation numbers were low. But the incentive provided by the ITC compelled investment from private markets. In turn, the investment brought scale. And the scale has dramatically reduced the costs of labor and materials of installing a solar system.
In other words, this government policy – designed to accelerate clean energy development – worked!
Moreover, the ITC spawned a new type of solar equity investment product which has been embraced by institutional investors. Because the developers of solar projects could not make use of all tax credits created by the systems, third-party equity financing, known as Tax Equity, was introduced to deliver both cash benefits and tax credits to investors.
Billions upon billions of dollars of tax equity investments are completed each year by eligible corporate and individual accredited investors. And with 2019 serving as the final year of the 30% tax credit before the ITC phasedown, Tax Equity investment will be as robust as ever.
So what does the ITC – now 13 years old – have to teach us about the Green New Deal Resolution? Three thoughts come to mind:
First and foremost, the ITC worked as a massive catalyst for solar development. The tax credit acted as a marvelous incentive which compelled the private markets to act, bringing capital to the industry, reducing costs, and creating jobs and clean energy.
Second, under eventual Green New Deal legislation, an unequivocal, clearly defined tax credit for storage could help accelerate the storage market in the same way as solar. An unequivocal, robust tax credit for solar and storage would be even more powerful.
Third, and perhaps most importantly, there’s no need to wait for the Green New Deal. Tax Equity provides a proven, government-backed incentive for investors to invest in solar and generate double-digit returns. And beyond tax equity investing, the clean energy industry offers a number of investment options that provide meaningful returns, exceptional impact and non-correlation to the tremors of the public markets.
Don’t get me wrong, we love the clean energy principles espoused in the Green New Deal – especially the notion of equitably making the transition to a clean energy economy. In the meantime, let’s use the ITC, the favorable economics of renewable energy, and the urgency of climate change to invest now!