An Angel Investor’s Perspective: Why We Need the Investment Tax Credit
We had a bit of snow up here in Boston over the winter, so the solar panels on my roof didn’t get much of a chance to see the sun from December through early March. Lately, though, they’ve been cranking, and on April 14, I got my first negative electricity bill of the year. On the same day, I filed my federal tax return, with a pleasant surprise on the bottom line: Uncle Sam owes me a refund this year, thanks to a 30-percent tax credit for my 6kW solar system.
Needless to say, I’m enjoying this sunny month in more ways than usual.
The number of homeowners like me who are realizing real economic benefits from installing solar systems on their roofs is rising quickly. Residential solar has been growing at over 50 percent per year for the past 3 years, catalyzed by decreasing system costs, increasing electricity prices, and federal and state incentives. And a recent study confirms that the benefits extend beyond the typical 6- to10-year payback from electricity savings: Owning a solar system actually increases the value of the home by about the same amount as today’s systems cost.
The solar boom is expected to continue this year and next, but the federal investment tax credit (ITC) for residential solar is set to expire at the end of 2016. The ITC’s expiration is creating considerable uncertainty in the trajectory of market growth beyond that point. (Other forces within the utility industry are adding to the uncertainty, but they’re beyond the scope of this short opinion piece.)
Even though it’s still many months away, there is already much debate about the impact of the expiration of the ITC. Personally, I don’t believe the prognosis is as dire as some would have us believe. Can the industry absorb the price drop needed to offset the loss of the ITC? Actually, it probably can. EnergySage, the online marketplace for solar, aggregates and analyzes data from its national installer network, and it projects that installers should still be able to earn healthy net margins if the ITC expires. Given forecast electricity price increases of 3 to 6 percent annually, the prices for solar PV systems will have to drop about 20 percent to offer similar financial benefits to customers. Luckily, continuing declines in equipment costs, innovative approaches to lower customer-acquisition costs, and increasing volumes associated with market growth will protect and help stabilize installer margins over time.
Will homeowners still want solar systems without the ITC? All signs indicate that they will. Beyond the ever-broader appeal of going green, consumer interest in solar will be sustained by a more transparent and competitive marketplace, new and better financing options, and increasingly attractive economics as electricity prices grow.
So if that’s the case, why do we need to keep the ITC? Because we need to preserve and extend the industry’s growth; we can’t risk letting it subside. The potential for solar as a renewable energy source for our country is enormous, and we’ve barely scratched the surface. The number of homes with rooftop solar will reach 1 million within the next year, but there are 100 million residential structures in our country. More and more of them become suitable for solar every day, as lower pricing enables economic installations on east- and west-facing roofs, in addition to south-facing ones.
Extending the recent boom is one thing. Letting it get out of hand is another. We also need to extend the ITC to avoid the market disruption we will see this year and next as people rush to install solar before the ITC expires. Installers who scale up quickly to meet the temporary spike in demand may create burdensome cost structures that they’ll then need to unwind. Homeowners looking to install solar in this environment are likely to face delays and upward price pressure in an overheated market.
As an early-stage investor in clean energy, I also see the secondary effects of market uncertainty while policy makers debate the extension of the ITC. Innovation is and always has been the flywheel of our economy, and I firmly believe that innovation will ultimately deliver the solutions we need to combat climate change. But early-stage technologies are inherently risky. Uncertainty about key financial and market assumptions compounds the risk and negatively affects the investment climate.
In other words, the ITC benefits not only today’s homeowners and solar installers. It also catalyzes investments in innovation that feeds economic growth.
My more knowledgeable friends tell me there are more efficient means to mitigate climate change and drive renewable growth, but I’m skeptical about the near-term prospects for those better ideas (such as a carbon tax). In the meantime, the ITC isn’t perfect, but it is working.
According to a recent Gallup poll, 91 percent of Americans say the U.S. should put more emphasis (79 percent), or the same amount of emphasis (12 percent), on solar development. Let’s hope the U.S. federal government is paying attention.
Editor’s note: EnergySage, which is mentioned in this article, is one of the author’s portfolio companies.