The U.S. solar industry has reached full-on preparation mode as it stares down a decline in the federal Investment Tax Credit, which starts to drop from 30 percent next year and will reach a permanent 10 percent in 2022 (dropping to zero for customer-owned systems).
The industry’s main trade group, the Solar Energy Industries Association (SEIA), told Greentech Media that working to gain an ITC extension is currently its “number one priority.” But at the same time, solar developers are wary of banking on an uncertain outcome in Congress.
“Our member companies are incredibly strategic and understand that they need to plan for the law as it exists today, while we’re advocating for a change,” said SEIA President and CEO Abigail Ross Hopper. “There is a lot of conversation and planning and thinking through how to prepare for the step-down.”
While lobbying for an extension, developers can qualify for the credit’s full value of 30 percent using several methods that demonstrate they’ve begun construction, according to guidance the Internal Revenue Service released last year.
Under one option, developers can spend 5 percent of a project’s cost before the end of 2019, known as “safe-harboring ” — most developers are planning to meet this requirement by squirreling away equipment. Under another, developers can demonstrate that they have begun “physical work of a significant nature” at a project, verified through binding contracts.
Developers are currently assessing which options work best for their portfolios, and their actions are creating ripples in the market. I dig into the strategies and their impacts below.
Utility developers eye 100 percent qualification
Utility-scale developers are the most likely to implement strategies to beat the step-down because they have the large balance sheets and favorable federal regulations that allow them to do so.
According to a recent analysis from Wood Mackenzie Power & Renewables, between Q3 2018 and the beginning of 2019, developers shifted from being skeptical of safe-harboring to aggressively plotting the qualification of their fully contracted pipeline. Companies are also looking to get the full 30 percent credit for 35 to 45 percent of uncontracted projects.
All told, analysts expect developers to qualify about 29.2 gigawatts of projects for the full 30 percent ITC.
Most will aim to do so through safe-harboring, with modules the preferred equipment to procure.
That rush on product will create supply constraints toward the end of 2019, with demand outpacing module availability.
Wood Mackenzie analysts believe that later in 2019, the global module market will tighten. If modules become more expensive, U.S. developers may to turn to inverters or other balance-of-system equipment to meet the 5 percent bar. To make sure they qualify, most developers will also likely aim to spend 7 to 10 percent of costs, according to WoodMac.
Ross Hopper at SEIA said developers are earnestly considering whether module supply will be adequate to meet the requirements or whether they’ll need to procure other equipment. “That’s a conversation that’s very alive in our solar community at the moment,” she said.
Each type of equipment chosen for safe-harboring comes with risks. In fact, Wood Mackenzie analysts say all safe-harboring strategies create “major disadvantages” for the development of solar technology.
If developers choose to safe-harbor monocrystalline PERC modules, increasingly the preferred technology due to its higher efficiency, they’ll have to compete with more companies looking to procure them.
If they instead buy monocrystalline or multicrystalline modules well ahead of time, developers forfeit any gains from the declining Section 201 tariffs (though this might be outweighed by earning the full ITC credit).
And purchasing trackers, racking or inverters ahead of time may commit a developer to a certain type of system design that could need changing further along in development.
Residential developers weigh the benefits
Compared to the utility-scale space, residential developers have a relatively relaxed view on ITC preparation. Only third-party-owned providers can legally safe-harbor equipment and only the large players like Vivint and SunPower will have the funds available to do so (unless smaller companies work with a bank on financing).
Contrary to the largely similar approaches taken by utility-scale players, residential developers don’t appear to be approaching ITC strategy as a monolith.
California-based SunPower has said it will safe-harbor modules for its commercial and residential business, for instance, while Sunrun demurred when asked about its strategy during its Q1 2019 earnings call.
“I’ve not seen anyone fall cleanly into one camp or another,” Erin Talbot, general manager of solar at loan provider Mosaic, said at Greentech Media’s Solar Summit in May. “It’s a tricky business strategy.”
In May, SunPower told GTM that it plans to safe-harbor at least 200 megawatts of equipment by the end of 2019, with room for that number to grow.
“We see a significant opportunity to capitalize on the safe-harbor provisions,” said CEO Tom Werner on the company’s Q1 2019 earnings call. “We believe that SunPower has a distinct advantage in this case, due to our vertically integrated business model. This gives us supply chain certainty and predictable cost on proven technology.”
But because cost declines and beneficial rate policies are stronger drivers of demand, WoodMac analysts suggest that for residential businesses, the step-down will serve mostly as a marketing opportunity. (I can personally confirm the existence of SunPower web ads using the tax credit phasedown as a hook.) That will likely mean higher demand before the credit drops to 10 percent.
An extension in the works?
While the industry preps, it’s also making moves on Capitol Hill to boost legislation for an extension. The visualization below, from SEIA and WoodMac, shows how the extension of the ITC has preceded continued growth in the industry, particularly for the utility-scale sector.
As the end of 2019 has neared, solar companies and advocates have become increasingly outspoken about the benefit of extending the credit. SunPower, Sunrun and Mosaic have all made comments supporting an ITC extension, and SEIA, which advocates for the interests of the biggest names in the industry, is actively lobbying on the issue.
In April, 110 House Democrats signed onto a letter calling for the extension of tax credits for the long term. In May, the Senate Finance Committee announced it would create task forces to look at dozens of expired or expiring tax provisions and "fix the seemingly never-ending problem of short-term tax extensions.” One task force will focus on energy. Recommendations are expected at the end of June.
On a longer timeline, several 2020 Democratic presidential candidates have endorsed credits for clean energy.
Though an extension in the short term is far from guaranteed, Ross Hopper said SEIA is seeing interest from lawmakers.
“We are hearing from members of Congress, from both sides of the aisle, who are interested in how we can facilitate additional deployment of solar energy,” said Ross Hopper. “The Investment Tax Credit works to further deployment of solar.”