Will the ITC be extended?


In late July, a committee of the U.S. Senate announced that it would begin the work to craft a bill to extend a number of tax credits that were expiring, a process known as “markup.” Four days later, a bill went to the floor of the Senate with the backing of 23 of the 26 Senators on the committee.
The bill contains an extension of the production tax credit for wind, a key federal support. However, despite intensive lobbying by the Solar Energy Industries Association (SEIA) and the support of a number of senators, it does not contain an extension of the ITC.
The Senate Finance Committee “tax extenders” bill came only a week after the Intersolar North America trade show in San Francisco. During the show’s opening ceremony, California Solar Energy Industries Association (CalSEIA) Executive Director Bernadette Del Chiaro spent much of her speech calling on the solar industry to put political pressure on elected representatives to extend the provision.
Despite this setback of the tax extenders bill, GTM Research Vice President of Research Shayle Kann notes that this fight is far from over.
“I guess there’s one opportunity lost at this point,” muses Kann, “but there are plenty of additional opportunities before the end of 2016.”

An uphill battle

At the Solar Power International trade show last October, SEIA announced that it would begin a campaign to extend the ITC. The call came at a difficult time, as the Republican Party maintained control of the U.S. House of Representatives and gained control of the Senate less than three weeks after SEIA’s announcement.
SEIA is decidedly non-partisan, and stresses its work with both parties, noting that it passed the original ITC and got an extension under Republican-dominated congresses and a Republican president.
However, both the solar industry and national politics have changed substantially since 2008. After two years ofDemocratic control, a wave of hard-right activism swept the Republicans back to a majority in the House in 2010, with many freshman congressmen backed by the Tea Party. This new majority has made obstructing President Obama’s policies an aim in itself. This has been particularly true for the renewable energy policies implemented under the American Recovery and Reinvestment Act of 2009, also known as “the stimulus.” And as the Obama Administration backs ITC extension, there may be trouble.

Horse trading

Despite the political theater of Republicans in congress attacking renewable energy, advocates say these majorities are not an insurmountable obstacle. There are two main reasons. The first is that as the solar and wind industries grow, they develop their own political centers of gravity.
“When you have more than 200,000 people employed in an industry, and you’ve got factories, and installers, and projects going in, they really can’t ignore that anymore,” noted SEIA President and CEO Rhone Resch.
However, this may not work as well for solar as it does for wind. Elias Hinckley, a lawyer based in Washington D.C. who provides finance & policy strategy for new energy markets, says that geography makes the task of winning Republican support easier for the wind industry. “A number of wind jobs are located in red districts,” notes Hinckley.
“If you look at the solar map in terms of distribution of where those projects are, those jobs, where manufacturing is, many of those activities fall on the coasts, in predominantly blue jurisdictions. So you just don’t have that same cross-party appeal that wind has.” A more critical reason may be that the ITC is unlikely to be voted on in the floor of either the House or Senate on its own,

At a glance

  • The looming phase down of the ITC has prompted intense lobbying within the solar sector for an extension.
  • Solar’s weighty presence across the U.S. employment landscape makes the sector hard to ignore, SEIA argues, although clean energy ideology may prove less influential to the Senate than broader tax extensions.
  • Some leading voices in the industry actually oppose calls for an ITC extension, arguing instead that solar is robust enough to handle the proposed phase down.
  • Continually fighting for tax credits also serves to increase costs and limit the availability of capital, argues solar veteran Jigar Shah.

xAdvertisementbut as part of a broader package to extend expiring tax provisions. This means that the fate of this important incentive will be decided through a process of bargaining and concessions, where ideology plays less of a role.
As such, the committees where such bills originate have been a focus for SEIA’s lobbying efforts. “I think the key piece frankly is to make sure that we have support on the right committees,” said Resch. “We as an industry have spent a lot of time with Senate Finance, and with House Ways and Means Committee.” Resch names Republican Senators from the West, Midwest and South who have supported the ITC in the Finance Committee, as well as Democratic allies. He also notes the role of Senate Minority Leader Harry Reid, who has been a champion of the solar industry nationally and in his home state of Nevada.
“As we look for opportunities in the fall, for an extenders bill or some other kind of tax bill, we think we have a very good chance of being part of it,” Resch added.

An industry divided

While Resch may be confident of support in key parts of the U.S. Senate, the solar industry is not united behind the campaign to extend the ITC. While leading residential installer SolarCity has argued that the ITC should not be allowed to expire without a leveling of the playing field for energy subsidies, at a GTM Research summit last fall three smaller third-party solar companies said they would prefer to do without the policy.
One of the more vocal opponents of an extension has been one of the solar industry’s biggest celebrities: Jigar Shah. Shah was arguing against an ITC extension as early as 2013, and both he and Entrepreneur and Author Tony Seba have pointed to the costs and limits of industry’s dependence upon this policy.
“The Federal ITC is difficult to monetize by even the largest companies,” Shah told pv magazine . “Tax equity providers routinely charge 10 – 12% for their tax equity when overall project financing for solar power is less than that.” One of the critiques has been the limited number of tax equity investors. And while Shah acknowledges that the pool of tax equity investors has grown in recent years, he warns of problems when the solar market spikes in 2016. “Fundamentally there is a limited pool of tax credit investors and you will see a shortage of tax credit for Tier 2 developers in 2016,” predicts Shah, who also argues that there are larger dimensions to the industry’s dependence upon the policy. “Tax credit investors could invest across the renewable energy spectrum in biomass and other types of technologies,” states Shah. “Tax credit investors today are favoring low-risk utility-scale solar plants, which defeats the purpose of using the tax credit to de-risk new technologies.”

The cliff

Part of the problem with extending the ITC is that it merely puts off the drop from 30% to 10% for another year. In preparation for the policy to expire at the end of 2016, utilities have been rushing to procure contracts with large PV projects that come online in 2015 or 2016, in order to meet future state renewable energy requirements at a lower cost. This is creating a boom of projects scheduled for completion over the next 18 months. One of the provisions that SEIA is pushing for is to allow projects under construction to access the credit, instead of only completed plants, which could take some of the bite off of the December 31 deadline. But this is another delay of the inevitable.
Shah and others argue that the solar industry will be able to reduce costs to meet the realities of a 10% ITC. However, even those who take this position do not deny that there will be short-term impacts. Looking at projects under development, GTM Research estimates that the utility-scale solar PV market will fall 85% from 2016 to 2017 if the ITC is not extended.
Various industry players have suggested that it would be better to slowly phase out the credit by 10% or 5% annually, but this is not how either politicians or advocates typically approach tax credits.
“I think a little bit of it is just a function of the way politics works,” explains Elias Hinckley. “We’re not after good policy, we’re after wins and losses. From an industry standpoint, even if they could recognize that as good policy, you can’t go out and ask for that, because you’re not asking for enough.” As the industry appears stuck with the cliff, having this cliff come later may mean that it is less painful. GTM Research’s Kann notes that the economics of solar PV are getting better year by year. “We’re getting closer and closer to where the market doesn’t need a 30% ITC, and we’re definitely not at the point where the market would continue to grow unabated if you drop to the 10%,” explains Kann.
Kann acknowledges that dependence upon tax equity limits the availability of capital and increases its cost, but says that this must be put in perspective. “The question is still on balance, whether it is better to have the ITC than not to have the ITC,” states Kann. “I think today an imperfect incentive is better than no incentive.” For his part, Shah warns of the dangers of continually fighting for extensions. “My strong preference is for there to be a ‘phase out’ of the solar tax credit, but if it is between uncertainty and certainty, I choose certainty.”

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