It’s no secret, the Solar Industry is growing at a record pace. According to the Solar Energy Industries Association (SIEA), solar has experienced an average annual growth rate of 33% in the last decade. There are now more than 130.9 gigawatts (GW) of solar capacity installed nationwide, enough to power 23 million homes!
The commercial solar market, which is made up of on-site solar installation for business, non-profits and governments, has grown unevenly in recent years as the industry continues to unlock the financing tools needed to provide access to a wide swath of business types. It is worth noting that increasing adoption of clean energy goals by the commercial solar market, bodes well for future growth. With less than 2% of commercial electricity demand served by on-site solar, there remains a considerable opportunity for growth.
The tremendous growth of solar over the past decade is due to many factors, including rapidly declining costs, increasing demand across private and public sectors for clean energy, and strong federal policies like the solar Investment Tax Credit (ITC).
In a surprise victory for solar and clean technology industries, the Senate passed the Inflation Reduction Act (IRA) of 2022, that includes $370 billion in spending for renewable energy and climate measures. The most important provision of the bill is the long-term extension of the Investment Tax Credit (ITC), an instrumental tool for launching the solar industry as we know today. Through the bill, the ITC has been extended 10 years at 30% of the cost of installed equipment! In 2033 the ITC will drop to 26% and then down to 24% in 2034.
Under the IRA, projects will be able to choose the Investment Tax Credit (ITC) or the Production Tax Credit (PTC). The ITC becomes available for costs of interconnection for projects with a net output of less than 5 MWac.
Under the Build Back Better Act (BBBA) direct pay also becomes available for many of the traditional clean energy credits—essentially allowing taxpayers to treat the credits as a payment of taxes and, thereby, receiving a cash refund from the Treasury to the extent the taxpayer was treated as making payments in excess of its actual tax liability. The IRA significantly restricts this provision by limiting the direct pay option to certain categories of tax-exempt entities. However, other entities would be eligible to elect direct pay for certain tax credits, including the 45Q credit, for the first five years of the credit period. This exception would not apply to the wind or solar PTC / ITC. Although the direct pay option is only available to a limited set of taxpayers, the IRA provides that most renewable energy tax credits generally may be transferred/sold to unrelated parties. This represents a significant change to prior statutory and case law regarding the availability of tax credits to taxpayers. The transfer election is made on a facility-by-facility basis, which may provide flexibility for project owners to claim credits with respect to certain “facilities” within a project (e.g., a turbine) and sell the credit applicable to other facilities. Credits once transferred cannot be subsequently transferred to another transferee.
The ability of project owners to sell tax credits could, in some circumstances, present an alternative to traditional tax equity investment, attract a new group of investors beyond traditional tax equity investors and provide the sponsor/developer greater flexibility and options regarding monetization of the credits. However, as was the case with the prior 1603 cash grant regime introduced as part of the 2009 stimulus package, the benefits of such an option would not fully allow developers with limited tax capacity to effectively capture the value of project tax attributes (in particular, accelerated depreciation). Thus, a sponsor or developer with limited tax capacity would still need to seek tax equity investment to monetize these tax benefits.
Taxpayers may transfer all or portion of credits, which may allow sponsors/developers to finance part of a project using the typical tax equity structure and fund the remainder by entering into long-term agreements with unrelated parties for the transfer / sale of the unallocated credits.
The level of the base credits and adders are shown in the IRA Summary that you can download from the link below.
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