Lifting the ITC Utility Exemption ‘Turns the Key’ for Power Companies

While nearly all the players in the solar industry count the recent extension of the U.S. investment tax credit as a win, perhaps no group stands to benefit more from this legislative victory than utility companies.

Previously, utilities were subject to an exemption barring them from taking advantage of a 30 percent investment tax credit for solar power projects. This exemption effectively eliminated utilities from owning solar power stations outright, forcing them instead to buy solar-generated electricity from third-party financiers under power purchase agreements. Utilities were also bound on the other side by state renewable portfolio standards, especially in states with solar cutouts. These two forces left some utilities in a precarious position—unable to include solar power stations as a capital asset for rate-basing, but forced to pay higher-than-avoided cost prices for electricity.

Lifting the public utility exemption, which lets utilities take advantage of the 30 percent investment tax credit, will make solar power system economics more attractive for utilities than in the past. Tax equity potential combined with the continued downward march in module average selling prices and cheaper, faster installation methods may provide the necessary groundwork for a shift in how utilities relate to the rest of the solar industry. The most significant aspect of this is the allowance the exemption’s elimination gives utilities to start acting like, well… utilities.

In nearly all states, utilities participate in a tightly regulated process that determines the return on equity they are able to receive for a given asset investment. Return on equity is recouped from consumers in the form of a tariff on top of the electricity rate. Rate-basing is standard practice, but can only be done when the target asset is under utility control.

With solar this was previously not the case. Instead of owning projects outright, the exemption forced utilities to enter into power purchase agreements with solar financing companies like SunEdison. The new legislative regime may force a shift in utility renewables strategy, moving them from electricity buyers to system buyers. With this shift it is likely utilities will start buying solar power systems outright from turnkey project developers, effectively cutting out the third-party financiers that have become so prevalent in the past four or five years. This is a net benefit for the solar industry. First, it will get utilities to think constructively about including solar power in their asset portfolio. Second, it will allow more projects to be built, giving domestic solar suppliers a market potentially on par with those of their German and Spanish counterparts.

Getting utilities to think constructively about solar power is crucial for increasing the penetration of solar power in the domestic generation portfolio. Utilities must now face crucial questions regarding the integration of solar power into their preexisting load. This will likely lead to an increase in the deployment of next-generation transmission and distribution capabilities as well as the increasing use of smart grid technologies to manage a hybridized load portfolio.

Ultimately, lifting the utility exemption may be the single best thing for the domestic solar industry. Utilities, which have always had access to lower-than-average costs of capital will be able to outcompete third-party financiers in this increasingly dry credit market. This means more projects will get built at lower prices, but with stable and known rates of return. A little certainty is good for any industry, but especially for one that has gone so long without it.