NewEnergyNews: TODAY’S STUDY: HOW SOLAR MAKES MONEY FOR TAXPAYERS/

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YESTERDAY

THINGS-TO-THINK-ABOUT WEDNESDAY, August 23:

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  • Weekend Video: The Truth About China And The Climate Crisis
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  • THE DAY BEFORE THAT

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  • The Global New Energy Boom Accelerates
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  • Texas Heat And Politics Of Denial
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    Founding Editor Herman K. Trabish

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    WEEKEND VIDEOS, June 17-18

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  • WEEKEND VIDEOS, August 24-26:
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  • The Virtual Power Plant Boom, Part 1
  • The Virtual Power Plant Boom, Part 2

    Tuesday, August 07, 2012

    TODAY’S STUDY: HOW SOLAR MAKES MONEY FOR TAXPAYERS

    Paid in Full; An Analysis of the Return to the Federal Taxpayer for Internal Revenue Code Section 48 Solar Energy Investment Tax Credit (ITC)

    Connie Chern, July 2012 (US PREF and SolarCity)

    Executive Summary

    The investment tax credit (ITC) for solar photovoltaic (PV) projects, expanded under the George W. Bush administration as a part of the Energy Policy Act of 2005 and modified as a grant-in-lieu of tax credit program under the Obama Administration, has enabled financing mechanisms that generate a positive return for the federal government.

    Over the life of a solar photovoltaic (PV) asset, the initial cost of federal expenditures associated with the ITC can be more than offset by the tax revenues generated in lease and Power Purchase Agreement (PPA) scenarios, both of which create fixed payment structures and provide a positive financial return on investment to the federal taxpayer. This paper demonstrates that, over the life of solar assets, lease and PPA financing structures can deliver a nominal 10% internal rate of return (IRR) to the federal government on the federal investment tax credit (ITC) for residential and commercial solar projects.

    Based on this analysis, a $10,500 residential solar credit can deliver a $22,882 nominal benefit to the government and a $300,000 commercial solar credit can create a $677,627 nominal benefit in lease and PPA scenarios over a 30-year period (the minimum expected life of the assets).

    The fiscal return demonstrated in this model is independent of, and additive to the numerous other benefits of solar projects, including job creation, energy independence, the preservation of natural resources and the health benefits of cleaner air.

    Introduction

    The investment tax credit (ITC) for solar power projects, expanded under the George W. Bush administration as a part of the Energy Policy Act of 2005 and modified as a grant-in-lieu of tax credit program under the Obama Administration, has attracted substantial private investment for domestic solar projects and enabled financing mechanisms that generate a positive return for the federal government. Over the life of a solar photovoltaic (PV) asset, the initial cost of federal expenditures associated with the ITC can be more than offset by the tax revenues generated in lease and Power Purchase Agreement (PPA) scenarios, both of which create fixed payment structures and provide a positive financial return on investment to the federal taxpayer. This paper demonstrates1 that, over a 30-year period (the minimum expected life of the assets), lease and PPA financing structures can deliver a nominal 10% internal rate of return (IRR) to the federal government on the ITC for residential and commercial solar projects; the weighted results and discussion below further detail the fiscal benefits of the ITC to the federal government. Based on this analysis, a $10,500 residential solar credit can deliver a $22,882 nominal benefit to the government, and a $300,000 commercial solar credit can create a $677,627 nominal benefit in lease and PPA scenarios.

    Moreover, this fiscal return is independent of, and additive to the numerous other benefits of solar projects, including job creation, energy independence, the preservation of natural resources and the health benefits of cleaner air. This finding is particularly significant given the increasing popularity of lease and PPA financing models in the solar industry. GTM Research’s most recent Solar Market Insight report indicated that these investment structures accounted for more than 63 percent of California residential installations, and more than 80 percent of Colorado residential installations in the first quarter of 2012

    Background

    The United States government has incentivized the development of a wide range of energy sources over the last century to fuel its economic growth. The majority of those investments have been focused on mining, transporting and burning fossil fuel more cheaply or building more nuclear power capacity. Even today, incentives for solar energy lag far behind other fuel sources. The University of Tennessee’s Howard Baker Center published a report in May 2012 that indicated that “incentives per MWh of reserves for solar are less than any other fuel source by a factor of ten.”3 The ITC represents a notable exception that has fostered the growth of a vibrant, domestic solar power industry that has grown to employ more than 100,000 Americans. Also referred to as Internal Revenue Code (“IRC”) Section 48, the ITC provides a tax credit equal to 30 percent of the eligible costs of a solar power project to the owner of the project.4 The expansion of the ITC in 2005 and its 8-year extension in 2008 were inflection points that spurred significant activity in the U.S. solar industry. Prior to this extension, the solar industry had largely been dependent on piecemeal, stop-and-start incentive programs that discouraged long-term investment. Approximately 90 percent of the nearly 5,000 megawatts of solar capacity in the U.S. today has been installed since the ITC was increased at the beginning of 2006, according to data from the Solar Energy Industries Association and GTM Research.² The ITC contributed to the growth of the solar energy workforce at a rate of 6.8% between August 2010 and August 2011, which is nearly 10 times the overall national employment growth rate in the same period.5 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 2020.3 The ITC is making a positive impact for a nation attempting to recover from a period of high long-term unemployment and carefully weighing how to invest in job creation.

    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. Leases and PPAs are common ways to finance solar projects that are built on-site for commercial and residential hosts, and the subsequent analysis will focus on those scenarios, and not on utility scale projects. Lease and PPA models have been a major driver of solar industry growth over the last three to four years, playing a role in increasing America’s annual solar capacity from just 79 MW for all types of installations in 2005 to more than 1,000 MW for residential and commercial/non-residential projects in 2011.²

    Discussion

    The ITC enables the development of projects that generate direct payroll taxes and other revenues which generate returns to the government. These government returns are generated by the direct participants in a solar transaction – the developer (or an investment fund established by the developer), the system installer, and the energy user. The following table provides a listing of hypothetical scenarios that have been modeled (the “ITC Payback Model”) using industry data for the purpose of assessing the impact to the government when providing a 30% ITC in a residential or commercial PV installation. As reflected in the table below, the ITC Payback Model addresses the impact of two of the most common methods in which the electricity user may pay for the solar-generated power with fixed payment structures: 1) the equipment lease and 2) the PPA. Equipment Lease: When solar equipment is leased, the vendor typically designs, constructs and sells the system to a developer (or fund, if one has been created by the developer). The developer typically obtains financing for the acquisition by monetizing the tax benefits and future cash flows. The developer/equipment owner then leases the equipment to the electricity user, who makes either monthly or upfront lease payments under a lease agreement that typically runs from fifteen to twenty years.

    Power Purchase Agreement: A PPA is like the structure of an equipment lease in that a vendor or installer designs, constructs, and sells the system to a developer (or fund, if one has been created by the developer) who has obtained financing for the acquisition by monetizing the tax benefits and/or borrowing funds. However, instead of leasing the equipment, the developer/equipment owner sells the power generated by the PV system to the electricity user for a contracted price and term under a PPA. As a result, the electricity user will purchase the electricity generated at a contracted price, typically on a monthly basis over a fifteen to twenty year period. The economics of a PPA are similar to the economics of lease, since both leases and PPAs are priced using the estimated value of solar energy generated. As such, the model uses the PPA and lease terms interchangeably.

    The ITC Payback Model reflects these payment methods for two types of electricity users – corporations (i.e. commercial installations) and homeowners (i.e. residential installations). Due to the variation in local market dynamics such as the cost of electricity and availability of local incentives, the ITC Payback Model has been prepared using general assumptions for five geographically distributed states with a relatively high number of PV installations as recorded by the National Renewable Energy Laboratory, and the results are weighted based on the number of NREL-reported installations in each of the five states. The following tables summarize the five states used in the ITC Payback Model as well as the weighted results.

    These government returns have been generated by modeling taxable wages and revenues by the direct participants in a solar transaction – the developer, the installer, and the energy user. Assumptions used in the ITC Payback Model have been included in Exhibit A, and a copy of the ITC Payback Model is available in the link at Exhibit C & D. SolarCity Corporation hired audit, tax and advisory firm KPMG to assist it in performing certain advisory and tax services around the analysis of the fiscal impact of the ITC, including consideration of the application of current income tax law and evaluation methodology for Federal Government incentives. A copy of the KPMG report is included in Exhibit B.8

    The ITC Payback Model does not account for other benefits such as taxable revenues and wages from other participants such as providers of modules, inverters, balance of system components and other materials, subcontractors, brokers, accountants and attorneys.

    Inclusion of these benefits would have an even greater positive impact on the return to the government. For purposes of illustrating the return on an ITC investment for the government, the ITC Payback Model does not account for the cost to the federal government from depreciation since the depreciation of capital improvements applies without regard to how the capital improvements have been financed. Additionally, depreciation is not specific to the solar industry. However, should the cost of depreciation deductions be accounted for in the government return on ITC, the weighted results are as follows:

    As illustrated in the table above, even with depreciation deductions factoring negatively against the tax revenues generated, the commercial and residential PPA/lease scenarios operate above breakeven. Monthly payments for electricity, made by residential and commercial customers, constitute taxable income for the lease or PPA provider; as such, the value of taxes paid on this income more than offsets the value of the ITC. Finally, due to the relatively nascent state of the domestic solar economy, depreciation benefits have proven difficult to efficiently monetize and are not always fully accounted for in existing solar financing structures.

    The following discussion identifies certain other non-tax or indirect benefits that have not been included due to the difficulty in quantifying the benefit.

    Job Creation: As of August 2011, over 100,000 solar jobs existed across all fifty states.5 Solar jobs include only workers who spend at least 50% of their time supporting solar-related activities. Additionally, between August 2010 and August 2011, the solar industry created over 6,700 jobs, for an increase of 6.8%, which substantially outperforms the economy-wide growth of 0.7% over the same period.5 The ITC model does not account for the long-term benefit to the country of job creation. Health, Environment, Energy Independence: Another benefit of solar power projects is in the reduction of America’s dependence on resources that can have an adverse effect on human health and the environment. In the quest to attain energy independence, policymakers have turned toward the exploration of natural resources such as natural gas or oil deposits. This alternative may deplete resources or have other adverse effects on the environment, such as gas/oil leaks, oil spills, carbon emissions, etc. Furthermore, population-based health impact assessments have estimated an average of $3.7 billion in public health damages each year from particulate matter emitted directly from coal-fired power plants.8

    Reductions in air pollution can lead to reductions in health care costs for a healthier population. The solar industry provides a mechanism for reducing harmful emissions and aids in the movement toward energy independence without damaging the environment and human health.

    Conclusion

    Energy is the lifeblood of industry and a key lever of American progress. As the U.S. continues to work toward economic recovery, the most effective energy policies will encourage private investment to generate maximum return on incentives. 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.

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