Solar Tax Credits and Politics

Solar and wind advocates hailed the United States Senate’s move Thursday night to extend for another year a key incentive program for big renewable energy projects. But they warned that another provision of the tax compromise under consideration could devastate the industry.

First the good news for green energy proponents: If the tax bill passes in its present form, developers will be able to receive through 2011 a federal cash grant to cover 30 percent of the cost of solar power plants, wind farms and other large renewable energy projects.

Enacted as part of the 2009 stimulus package, the Treasury cash grant “1603” program was offered as an alternative to a 30 percent investment tax credit that few developers had use for as they typically have no profits to offset. And so-called tax equity investors who would buy those credits from renewable energy developers in exchange for financing their projects largely disappeared as the recession took hold.

The cash grant program is set to expire at midnight on Dec. 31, which led California and federal regulators to green light nearly 3,000 megawatts’ worth of solar power plants over the past three months, with two more projects expected to be approved next week.

But that building boom is likely to go bust unless the cash grant program is extended.

“An extension of the program will keep our U.S. industry growing and help achieve the industry’s goal of installing enough new solar energy to power 2 million new homes each year by 2015,” Rhone Resch, president of the Solar Energy Industries Association, a Washington, D.C., trade group, said in a statement Friday. “The program has allowed the solar industry to grow by over 100 percent in 2010, create enough new solar capacity to power 200,000 homes and double domestic solar employment to more than 93,000 Americans.”

Of course, this time next year, the solar and wind industries would find themselves in the same exact position. Congress’ failure in past years to enact a long-term extension of a production tax credit for wind developers, for instance, led to a cycle of boom and bust as the tax credit would expire and then later be revived for another year or two.

The industry views cash grants as a more efficient way to fund renewable energy projects than the complicated tax equity market. But in any event, Resch told me last month that if the cash grant is extended another two years, the tax equity market should have recovered enough to provide sufficient financing for solar power plants and wind farms.

Now the bad news: As part of the tax compromise, the Senate is considering allowing companies to claim 100 percent depreciation on capital equipment purchased for the next two years. So far, no concrete language has been written into the bill but the idea is to goose the economy by spurring big-ticket purchases of machinery that can be written off a company’s taxes in one year rather than, say, a decade.

Entrepreneurs like Lyndon Rive, chief executive of SolarCity, a Silicon Valley solar installer, fear that tax equity investors will lose whatever appetite they had for renewable energy projects if they can buy assets that can be depreciated immediately.

“The solar industry is tiny compared to other capitalized assets corporate America buys,” Rive said in an interview. “They won’t buy them because they won’t need to buy them. It will depress demand for solar assets.”

The wouldn’t be a problem next year if the cash grant is extended but would be devastating in 2012 if 100 percent depreciation is available but the cash grant is not, according to Rive.

“It’s great for corporate America but it will be death for solar – it will be worse than financial crisis,” he said.