As we near the expiration of the federal Investment Tax Credit at the end of 2016, large swaths of the solar industry are engaged in a full-court press with energy stakeholders and legislators to emphasize how badly their business will be hurt by the elimination of the tax credits (referred to as renewable energy tax credits, or RETCs) provided through Section 48 of the Internal Revenue Code.
The fervent hope among those in the solar industry is that Congress will extend the expiration date for the subsidy in recognition that the industry needs more time to gain a foothold as interest in clean energy gradually increases and costs stabilize. So far, however, the solar industry seems to be facing an uphill struggle, as there appears to be no clear consensus among legislators that the expiration date should be extended.
The tax credits are awarded through a provision that allows qualified projects to collect tax credits for 30 percent of eligible costs. The solar installers work hard to monetize these credits by marketing them to financial institutions that have income that can be offset by the tax credits. Based on current rates of return guiding the solar investment marketplace, developers can expect to offset about 40 percent to 45 percent of the installation costs -- which for many solar developers is the difference between staying in business and folding.
The institutional investment community, for its part, has been relatively slow to embrace RETC. At least part of this slow movement from the investment world is due to the newness of the RETC. It lacks the track record of other generally accepted tax credit programs such as the much longer-running low-income housing tax credit and the historic preservation tax credit programs. However, a more compelling and fundamental reason for the reluctance of the investment community may be the real reason that RETCs have not caught fire among the biggest institutions, which are always hunting for opportunities to deploy tax mitigation strategies.
Each sizeable financial institution (big banks, insurance companies, etc.) establishes its own investment guidelines to meet its internally defined risk avoidance strategies. But even within all of these varying sets of guidelines, a few common themes persist among investment department decision-makers: They don’t like orphaned asset classes, and they don’t like orphaned vendors. In other words, they're not in the business of making one-off investments in one-off asset classes that are soon to go away with one-off, one-time vendors that may not be in business in two more years.
With the commonly circulated knowledge among solar industry professionals that solar installation/investments require a full measure of post-closing attention and asset management to ensure that performance projections are met for the 30-year RETC projection models, the investment world’s best reason to stay on the sidelines away from RETC is the solar industry’s own panicky claims that they cannot survive at all, much less for 30 years, without an ITC extension.
So with the solar industry caught in a Catch-22 partly of its own making, it appears the only solar developers likely to garner the attention of institutional investors during the final two years of the subsidy will be the ones able to make compelling arguments that they will survive the subsidy’s elimination and remain able to asset-manage these long-term investments. Their ability to avoid the “orphan” characterization will be rewarded even further with larger market shares as the subsidy-reliant competition folds up their tents.
Thomas Jensen is the Managing Principal and Director of Finance and Capital Markets for City Power Development Group, an energy services company.