Should the Investment Tax Credit’s Sunset Strategy Be Changed?

The United States solar industry is apprehensively discussing the 2017 phase-out of its federal 30-percent Investment Tax Credit (ITC). Now, a report by faculty at Stanford Graduate School of Business has outlined a blueprint for an alternative sunset strategy for the ITC.

The research results have been submitted to the United States Department of Energy (DOE), the sponsor of the project. So far, DOE and Congress have not responded to the report.

“We hope it stands a chance politically – that is, in Congress – for a change in the tax laws,” said professor Stefan Reichelstein, coauthor of the report. “It offers a deal, a quid pro quo – over the next 10 years, the incentives would be higher, but then they would be phased out after 2024.”

It is urgent for the federal government to review and act on the recommendations of this report, Reichelstein said. “Investors dislike uncertainty. It would make sense to send early signals to investors, to homeowners, and to the industry [about] how the tax code will change and what incentives will remain.”

According to the report, “The U.S. Investment Tax Credit for Solar Energy: Alternatives to the Anticipated 2017 Step-Down,” the ITC for corporate investors is currently scheduled to drop from 30 percent to 10 percent at the beginning of 2017.

The ITC was created by the Energy Policy Act of 2005 and extended by the Emergency Economic Stabilization Act of 2008. The ITC has played a major role in catalyzing growth in solar installations. The accelerated depreciation tax shield available through the Modified Accelerated Cost-Reduction System (MACRS) has also aided the industry.

Eliminating the ITC precipitously at the end of 2016, the report said, would greatly damage the competitiveness of the solar industry. But adopting a gradual phase-out strategy would keep most of the industry competitive.

How could the phase-out be adjusted to maintain the viability of the solar installation industry? The authors propose an alternate scenario that would have multiple steps. Between 2017 and 2020, companies could choose between a 20 percent ITC or a 40 c/W ITC. Then, for the time period between 2021 and 2024, these tax credits would each drop by 50 percent. At the end of 2024, the credits would sunset.

The economic model shows that with this adjusted schedule, the solar installation market would largely remain competitive in five states where it is already established.

Should the ITC End?

On a larger scale, a national debate is taking place over whether the tax credits should even be phased out at all. A statement issued by Solar Energy Industries Association (SEIA) in response to this report says the ITC should be left as is because fossil fuels receive substantial subsidies compared to solar energy.

Reichelstein said he partially agrees with SEIA’s statement. “I think, overall, there is a good case to be made for why renewable energy – in particular, solar – should receive public support through the tax code – the argument being that we unfortunately in this country don’t have pricing for carbon emissions.”

“[Carbon pricing] would make producers internalize the full cost,” Reichelstein said. “Absent that, it makes sense to provide support and incentives. From that perspective, I’m all in favor of maintaining an ITC. It comes down to the question of what magnitude should be there.”

Another solution has also been proposed. A report from MIT Energy Initiative, “The Future of Solar Energy,” recommends partially replacing the ITC with master limited partnerships (MLPs) or real estate investment trusts (REITs). Overall, the MIT report said, attaching a price to carbon emissions would help to increase solar power’s competitiveness.

How Would the Stanford Plan Work?

As solar panels decrease in cost, the ITC may become less crucial than it is today. However, it is important to synchronize the timing of the phase-out with the increase in solar affordability, Reichelstein said.

To develop their alternate phase-out strategy, the authors of the Stanford report created an economic model based on the levelized cost of electricity (LCOE) for five states – California, Texas, North Carolina, New Jersey and Colorado.

These states have well-developed solar installation industries in place, but differ from each other in many other ways. When one looks at insolation rates, market maturity, labor and material costs, and market structures, each state is unique.

The LCOE calculations identify the average break-even sales revenue per kWh that power producers need to obtain to justify investing in solar installations.

The authors calculated the year-to-year change in LCOE for each state’s residential rooftop, commercial-scale, and utility-scale markets. They found that a “smoother glide path” toward ending the ITC would preserve the competitiveness of most markets in these five states.

How would other states with less-developed solar markets fare if the ITC is decreased or ended?

According to Reichelstein, states experience higher soft costs for a limited period of time when they are starting to break new ground in developing their solar installation industries. However, these costs drop once installers become more experienced.

Once these emerging markets each establish a base of experienced installers locally, they will most likely experience similar trends to those seen in the high-performing states profiled in the study.

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