THE SOLAR SUN RUSH: WHY PUBLIC AND PRIVATE ENTITIES NEED TO ACT NOW BEFORE THE ITC SUNSETS
The federal solar Investment Tax Credit (ITC) will begin to sunset at the end of this year. For commercial solar projects such as those CalCom installs for the California agriculture and water industries, the effects of the ITC’s reduction are different depending on whether the customer is a public or private entity. But for all commercial solar projects, waiting even a few months can make a huge difference in project economics.
What is the ITC?
The ITC, first enacted as part of the Energy Policy Act of 2005 to incentivize the development of renewables, has helped accelerate the solar industry – translating to billions of dollars in revenues and more than 240,000 jobs in the U.S. today. Nearly a million solar projects have been installed in California to date, employing more than 76,000 people according to the Solar Energy Industries Association.
The ITC rate affects project economics for both public and private customers. Therefore, acting soon – before the “sun rush” really hits – is advisable for everyone who wants to go solar.
What the ITC Means to Private Companies
Private entities with tax appetite can deduct 30% of total solar project costs through the ITC. But this credit is being reduced in 2020 to 26%, in 2021 to 22%, and will stay at 10% for commercial and utility projects indefinitely. For residential projects the ITC disappears in 2022.
To qualify for the ITC, tax-paying entities must establish that construction of a qualified solar facility has begun in one of two ways: a Physical Work Test that demonstrates that work of a significant nature has begun, or the Five Percent Safe Harbor test – i.e, paying or incurring 5 percent or more of the total cost of the facility in the year that construction begins. Projects that meet either of these criteria by December 31, 2019, will qualify for the full 30% credit.
CalCom customers who want to take advantage of the full credit are encouraged to complete either of the above by August 1 to ensure all proper paperwork has been processed in time.
How Public Customers Can Benefit from the ITC
Since public entities like water districts, local governments and other public agencies have no tax liability, they are not eligible for the direct tax advantages of the ITC. However, many public entities today are financing solar using a power purchase agreement (PPA), providing favorable long-term pricing. The institution that owns the PPA assuming it is a for-profit enterprise – can take advantage of the ITC and pass along at least part of the savings in the form of a lower PPA rate.
There is a chance that the ITC will be renewed again, but politics are always unpredictable. The best bet for ensuring maximum benefit from the ITC is to go solar this year.