We have seen significant growth in the implementation of solar energy. In just the last three months, major companies with large footprints have announced new solar projects. Walmart indicated in March that it would install solar power arrays on the top of a dozen stores in Ohio. According to reports, these solar arrays represent a tenth of all the solar currently installed in the state of Ohio. In May, Verizon announced its expansions of solar initiatives saying it would invest $100 million on solar and fuel cell projects at 19 of its facilities in seven states. In June, Walgreens announced it would build more than 200 new solar installations at its drugstores throughout six states, bringing the total solar installations at its stores to 350. Mega brands like Apple, IKEA and Toyota have also announced solar expansion in recent months.
These flagship brands are the tip of the iceberg for the U.S. Solar market, which has seen significant growth from businesses and consumers. According to the Solar Energy Industries Association (SEIA), in the first three months of 2013, 723 megawatts of new solar capacity were installed. This number represents a 33 percent increase over the first quarter of 2012. The U.S. Federal Energy Regulatory Commission (FERC) stated in its April energy infrastructure report that the nation’s total installed capacity of solar power has reached 5.14 GW, which represents 0.44 percent of a total capacity of 1,162.26 GW. Although fewer total utility-scale installations became operational from January through April of this year, the total capacity for this year’s first quarter is substantially higher generating 845 MW vs. 348 MW in the same period last year.
Much of the growth in solar is caused by the decreasing cost of photovoltaic cells and solar-power plants. And yet, reduced costs are just part of the equation. Innovative financing strategies are also driving the growth in the use of solar energy. Proper legal and financial structuring is critical to project success. The correct structure can reduce the cost of debt and maximize the value of state and federal tax credits.
Federal Investment Tax Credits for renewable energy property (Renewable Energy ITCs) were created to encourage investment in renewable energy property. The Renewable Energy ITC is a federal tax credit of either 30 percent or 10 percent of expenditures on eligible energy systems, depending on the type of technology adopted. Solar technology, fuel cells, and small wind turbines qualify for a 30 percent credit and geothermal systems, microturbines, and combined heat and power qualify for a 10 percent credit.
The Renewable Energy ITC generally offsets taxes dollar-for-dollar and is claimed in the year the renewable energy property is placed in service. Typically, in a renewable energy project utilizing Renewable Energy ITCs, the transaction is structured so that a private investor, such as a bank or another publicly-traded company, makes an equity investment in the entity undertaking the renewable project in order to capture the incentive provided by the investment tax credit generated by the project.
The cost of electricity is accelerating upward—this is the result of decommissioned coal and nuclear plants, rising natural gas prices, and the uncertain future of coal due to aggressive long term federal efforts on coal emissions. The cost differential between solar and fossil fuels is narrowing dramatically and the ability to fix the price of your electricity with a solar installation is increasingly attractive.
Solar: A unique opportunity
Federal tax law, reduced construction and material costs, and increasing electricity costs have combined to make solar energy arguably the most attractive renewable energy. Tax attributes are a critical piece of the financing and it’s important to match and structure those attributes with the debt and equity necessary for the overall financing. While our team continues to work on many different types of energy projects, we see a unique opportunity with solar energy. Major companies are achieving reduced costs by managing energy more efficiently. Should your business follow suit?