Solar ITCs deliver positive IRRs to US government

08. August 2012 | Top News, Applications & Installations, Industry & Suppliers, Global PV markets, Markets & Trends | By:  Becky Beetz

A new analysis of the U.S. Federal Solar Investment Tax Credit (ITC) claims that both residential and commercial photovoltaic projects supported by the ITC can deliver a nominal 10 percent internal rate of return (IRR) to the U.S. government.

SolarCity solar photovoltaic installation.

Solar leasing programs have come under fire, but the study says taxpayers will see a return under them.

Renewable energy is a contentious issue in the U.S., with many in the political sphere lobbying against the industry and fighting for the removal of federal support. Solar has particularly come under fire, after the Solyndra debacle first came to light last year, and the Republicans are now pushing for the approval of the emotively-named No More Solyndras Act.

Stories in the media are also purporting that solar leasing, a financing mechanism which has rapidly gained traction in the U.S., with the establishment of such companies as SunRun and SolarCity, are unfairly piling on inflated costs to U.S. taxpayers.

However, according to a new study, Paid in Full, released by the U.S. Partnership for Renewable Finance (US PREF), a program of the American Council On Renewable Energy (ACORE), the tax revenues generated by either a solar lease or power purchase agreement (PPA) can "more than" offset the initial cost of the Federal expenditures associated with the ITC – a 30 percent tax credit available for residential and commercial photovoltaic systems.

As such, over a 30 year period and when combined with a lease or PPA, a US$10,500 residential solar ITC can deliver at least $22,882 in benefits to the Federal government, while a $300,000 commercial solar ITC can deliver at least $677,627. This is said to equal a return of investment (ROI) of 118 percent and 126 percent, respectively, and an IRR of 10 percent, respectively. The US PREF said that even when taking depreciation into account, gains can be made. See table below for US PREF’s calculations, and click here to access the study.

 

Residential

Commercial

Initial ITC outlay

$10,500

$300,000

Nominal gross revenue

$22,882

$677,627

Nominal net benefits

$12,382

$377,627

ROI on ITC

118 %

126 %

IRR on ITC

10 %

10 %

 

With depreciation

 

 

Nominal gross revenue

$12,469

$380,127

Nominal net benefits

$1,969

$80,127

ROI on ITC

19 %

27 %

IRR on ITC

1 %

1 %

Source: US PREF

In addition to delivering positive returns to the U.S. government, gains are also said to be created for taxpayers, via the fixed payment structures of PPAs and leases, which are said to have been enabled by the ITC. The US PREF added that the solar ITC further “"spurred significant" solar activity in the U.S. and helped to attract "substantial" private investment.

"Along with the ITC, new lease and PPA-based financing models have emerged that allow the hosts of solar power projects to avoid or dramatically reduce the upfront capital cost of building the projects and see more immediate cost savings than were previously possible under purchase plans," wrote the study’s authors.

They went on to say that both leasing programs and PPA models have helped to boost the U.S. solar industry from a cumulative capacity of 79 MW in 2005, to over one GW of residential and commercial or non-residential projects in 2011. Furthermore, they referred to GTM Research’s latest Solar Market Insight report, which found that these financial structures accounted for over 60 percent of the residential photovoltaic installations in California, and over 80 percent in Colorado.

The study also highlights the job creation which has occurred on the back of the ITC. "The ITC contributed to the growth of the solar energy workforce at a rate of 6.8 percent between August 2010 and August 2011, which is nearly 10 times the overall national employment growth rate in the same period. The Howard H Baker Center Study noted that the solar industry has produced more jobs per megawatt-hour than any other energy industry and predicted that the industry could grow to up to 430,000 jobs by 2020," it pointed out.

The ITC was introduced under the Energy Policy Act of 2005. Having been extended for one additional year in December 2006, an eight year extension was introduced in 2008. Under the current law, it will stay in place until December 31, 2016.

The study concluded, "The ITC incentivizes the private sector to invest in the solar industry, and generates a measurable fiscal return to the taxpayer, in addition to creating positive impact on employment and the environment. This analysis demonstrates that over the life of a solar asset, the initial cost outlay of the ITC is more than offset by the tax revenues generated in lease and PPA scenarios. Even when viewed independently of its considerable environmental benefits, the ITC’s long-term extension has created the foundation of an industry that can help America stake its ground as a global leader in domestic, renewable energy production."

The September edition of pv magazine will feature articles on leasing and other solar financing programs.


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