Planning Solar

7 min read

Impact of impending credit phase out   

When Tax Credit Advisor took a look at the solar energy market last summer, it was as hot as our nation’s capital in August. While the industry has been undergoing some fundamental and evolutionary changes since then, solar still shines brightly. At the same time, some darkening clouds are starting to appear on the horizon and shadowing the vista, necessitating serious examination for property owners considering solar installations.

Estimates of the average price-per-watt of solar energy vary depending on region, size of the generating facility and who is doing the estimate. The average price is currently hovering between $2.71 and $3.57, with some utility-scale operations—the largest scale—dipping as low as $1.00 or even less. This is substantially less than half the cost a decade ago. And as heat-gathering technology continues to increase, the price could drop even lower, all things being equal.

But all things are not equal in the solar realm. The present energy investment tax is 30 percent for solar equipment acquisition and installation costs. It goes down to 26 percent in 2019, 22 percent in 2020 and ten percent in 2026. This is based on the expectation that costs continue going down and efficiency continues to rise.

“Overall, it’s a good deal,” said Matt Holden, president and CEO of Sparhawk Group of Maine and New York, consultants in building performance, and an engineer by training. “Next year, though, people are going to wake up and there’s going to be a rush to install. And honestly, you have to plan on a good year or so from start, to engineering, bidding, permitting, installation and final inspection.”

Holden also noted, “As an owner of a property paying utility bills, gas is going to be fairly stable. Electricity costs are going to be more of a driver. It is going to become more expensive as they phase out coal and there is competition for the greenest standards. And since the utility has fixed operating costs, as people conserve more, rates are going to go up. To decide whether solar makes sense for you, you have to look at the total situation.”

Local incentives
Some states have their own tax incentives in place, and Holden sees those as the areas where solar installation will be most prevalent. “In Massachusetts, New Jersey, DC and California, where there are local incentives, it sure makes sense. In other areas, it can be just a slog to make it work financially.”

He warns, “Many of the ‘gates’ in the process outside of ownership control include local code review prior to construction, utility interconnection agreements that inform design of the system and electrical permit inspections, which must be completed before the final inspection by the utility company. And then the meter department comes out and installs a new meter, all of which will take longer as demand increases. The number of gates varies by the particulars of the location, but there are many. All of this is further complicated by a shortage of skilled workers in engineering, roof repairs, solar installation, project management, etc. Charting this process at the start is a wise move for an owner.”

But wait, there’s more!

Tariff trouble
One of the key reasons for the decrease in the price of solar energy was that the vast majority of the light-gathering panels were manufactured in China and sold at a low price point, making them virtual commodities. Manufacturing advances contributed to solar panel prices dropping between two and six percent each year.

Last year, a case was brought before the U.S. International Trade Commission by two American manufacturers, claiming Chinese subsidies and dumping practices made them unable to compete. Though solar industry associations opposed the complaint, the commission recommended relief, and in November of last year, the U.S. Trade Representative recommended a 35 percent tariff on Chinese solar cells and modules. On January 22, President Trump knocked a little off the USTR’s number and approved a 30 percent tariff, effective February 7.

There is “fine print,” which states that the tariff kicks in after the first 2.5 gigawatts of imported capacity and decreases to 15 percent by year four. Presumably, the lowering of the rate anticipates a gradual stabilization of the market and greater competition from American vendors. But as part of the president’s overall trade war, this is expected to have a large dampening effect on the industry. In February, recounted the results of an industry survey that reported the majority of solar project developers expected installations to decline by more than 25 percent this year and greater difficulty securing financing.

The 30 percent tariff is expected to add ten to 15 cents to the cost-per-watt. And a Reuters study published in June reported that $2.5 billion in large installation projects have been cancelled or put on hold as a result of the solar panel and module tariffs, putting a sizable number of U.S. jobs at risk. Keep in mind, though, that as the unit price of Chinese solar panels continues to drop, tariffs will drop proportionately. By year four, that additional cost-per-watt is expected to drop to four or five cents.

Manufacturing costs
While those components themselves represent less than a third of the overall cost of a solar installation, it is important to keep in mind the other complications Holden cited, plus the fact that tariffs are also impacting the cost of copper, aluminum and steel—all used in the manufacturing process—and Canadian lumber for roof supports and modifications.

The U.S. solar industry employs about 250,000 workers, including manufacturing, installation, financing and servicing. But the figure has dropped about three percent since the high of 2016 and could drop further based on the current conditions. Some estimates suggest the elimination of the tax credits will contract the market by ten percent, so there are a fair number of moving parts to this equation.

Cost/benefit analysis
And then there is the issue around what Holden called “cost/benefit versus brain damage,” which he defined as “opportunity cost and the use of the owner’s time and talent. Yes, there is a good financial return, but you have to ask yourself if you could get a similar or larger return with your use of time someplace else. It might be better to spend your time and resources on a new deal. Do not be fooled into thinking this is a hands-off process. It’s not like having someone come in and lay carpet. The owner or asset manager has to be involved every step of the way.”

Part of the decision on whether a solar installation is worth the time, trouble and expense to an affordable multifamily housing owner will be based on the physical characteristics of the building. Two of the main considerations will be whether or not the apartments are individually metered, so the cost and savings per unit is quantifiable for both manager and tenant, and whether there is appropriate space on the roof or other unused space for solar collection equipment.

For a nonprofit owner using tax credits, it will be necessary to find a for-profit investor partner who will take the risk. “Everyone has to decide if it’s worth it,” Holden commented.

He also pointed out that simple conservation remains the lowest cost of energy efficiency. “For example, make sure you have the most efficient lighting, insolation and weather stripping. Once you install them, there’s not much you have to do.”

On the other hand, despite the progressive elimination of the energy tax credit and the—at this point—temporary tariffs on solar panels and modules, Holden said, “There is an assumption of more efficiency in the market. Collection prices are coming down and the market is getting more adept.” And despite the current administration’s apparent favoring of coal and other fossil fuels, the overall march towards cleaner, more efficient and renewable energy sources has a momentum and inevitability of its own.

So, though there might be temporary setbacks along the way, that sounds a hopeful note for solar power’s bright future.

Story Contact:
Matthew Holden