The Sun Also Rises: The Investment Tax Credit Extension And … · 2019-04-29 · Contact: 650.345.2582 | [email protected] | 2 The Sun Also Rises: The Investment Tax Credit

The Sun Also Rises: The Investment Tax Credit Extension And New Opportunities To Profitably Deploy Solar

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2 Contact: 650.345.2582 | [email protected] | www.altaenergyinc.com


It could’ve been For Whom the Bell Tolls in the solar industry, at

least in the short-term.

But, to the surprise of many, Congress extended the solar

Investment Tax Credit (“ITC”) for five more years – through 2021.

This means the much-debated near-term viability of solar has been

settled. Solar energy, deployed at the right locations, makes solid

economic sense. The ITC extension is projected to spur nearly 100

cumulative gigawatts of solar installations in the U.S. by 2020,

resulting in $130 billion of investment. By 2020, more solar will be

installed each year in the U.S. than was added to the grid

cumulatively through 2014. (Source: Greentech Media Research)

Now, it’s time for solar energy to truly shine.

Will you take advantage of the ITC extension and reap the

benefits: financial, sustainability, brand value and long-term energy

security?

That depends.

Commercial and industrial (“C&I”) solar does not have a one-size-

fits-all solution. To maximize the benefits, you need to evaluate all

of your properties and determine where, when and how to

optimally deploy solar.

“Don't you ever get the feeling that all your life is going by and you're not

taking advantage of it?” Ernest Hemingway, The Sun Also Rises.



With variations in local incentives, technologies, utility rate

structures and rules, installation costs, vendors, financing and

other factors, the analysis can be daunting. And, for companies

and real estate owners with a large number of properties, five

years is not a lot of time to strategically deploy solar and take full

advantage of the ITC

It’s time for companies and real estate owners to take charge and

utilize a disciplined, strategic approach so they can make confident

decisions: become proactive rather than reactive to market whims

and the asymmetric information advantages of some market

participants. This way, you can deploy solar profitably over a

rational time horizon.

“

Economic Impact

The full 30% tax credit is available through 2019, then drops to 26% in

2020, 22% in 2021, and 10% in 2022 and beyond.

This phase-out provides a rational “soft landing” and enables

companies and property owners to make smart investment

decisions. The 2015 legislation also includes a “commence

construction clause” which extends the credit to solar projects that

started development before the deadlines listed above, as long as

they are completed by the end of 2023.

How does the ITC extension affect the economic value of C&I solar

projects? It provides an ability to plan solar deployments in a more

systematic fashion and better anticipate when and where projects

might meet internal return requirements.



The graph below shows the impact on returns (internal rates of

return or IRRs) from a solar project with and without the ITC

extension. The disruptive 2016-2017chasm without the ITC

extension (blue bars) is replaced by a predictable curve of energy

costs with the ITC extension (green bars). Even as the tax credit

tails down in later years, the returns more than support the

economics of a solar system, due to falling solar installation costs

and increasing utility rates along the way.

Figure 1: Energy Prices, Install Costs and ITC Affecting Project Returns

(1) Definition of qualification also changed from requiring full interconnection to starting the project within the year. (2)(3) Assumptions: (1) 5%/year decrease; (3) 3%/year increase, in central California with insolation of 1,650kWh/kW.

2016 2017 2018 2019 2020 2021 2022

Federal ITC % without Extension 30% 10% 10% 10% 10% 10% 10%

Federal ITC % with Extension(1) 30% 30% 30% 30% 26% 22% 10%

Assumed $/Wp Installed(2) $2.20 $2.09 $1.99 $1.89 $1.79 $1.70 $1.62

Assumed Avg Energy Rate c/kWh(2) 12.00 12.36 12.73 13.11 13.51 13.91 14.33

Unlevered IRR without ITC Extension 11.8% 9.1% 9.9% 10.9% 11.9% 12.9% 14.0%

Unlevered IRR with ITC Extension 11.8% 12.8% 13.8% 14.9% 15.1% 15.3% 14.0%

With the ITC in place through 2022, companies and real estate

owners can analyze all the properties in their portfolios in a

disciplined manner and rank the solar potential of each property to

provide a strategic deployment picture.



For example, Figure 2 shows the analysis of a proposed solar

project in Northern California as a function of the IRR hurdle rate

for a company (assumed to be 12%), the current energy rate

(12.00c/kWh) and the estimated current installation cost ($2.20/

watt-peak (“Wp”)). The site will likely meet the 12% hurdle rate in

two years, where the future energy rate is 12.73c/kWh and the

installation cost is $1.99/Wp, yielding an expected IRR in the table

of 12.50%. If the local installation cost decreases more quickly and/

or the energy rate increases more steeply, the project may become

viable sooner. The analysis puts this particular property on

management’s list of solar projects to reconsider quarterly for the

next two years.

This methodology requires a company to dedicate the resources

and time to assess their property portfolio and create the right

metrics up front (operational savings, project IRRs, energy offsets,

carbon offsets, etc.).

IRR of Solar Project at 30% ITC

$2.20 $2.09 $1.99 $1.89 $1.79 $1.70 $1.6212.00 10.7% 11.2% 11.8% 12.3% 12.9% 13.6% 14.2%12.36 11.0% 11.6% 12.1% 12.7% 13.4% 14.0% 14.6%12.73 11.4% 11.9% 12.5% 13.1% 13.7% 14.4% 15.0%13.11 11.6% 12.3% 12.8% 13.5% 14.1% 14.8% 15.5%13.51 12.1% 12.7% 13.2% 13.8% 14.6% 15.3% 15.9%13.91 12.5% 13.0% 13.7% 14.3% 15.0% 15.6% 16.4%14.33 12.8% 13.5% 14.0% 14.7% 15.5% 16.1% 16.8%

$/W Build Cost

Energy Rate c/kW

h

* assumes 3% energy rate increase/yr and 5% price decrease/yr; production estimated at 1,500kWhr/kWp equivalent to MidAtlantic or Northern California locations

Figure 2: Project Returns (IRR) as Function of Energy Rate and Installation CostsFigure 2: Project Returns (IRR) as Function of Energy Rate and Instalattion Costs

Assumes 3% energy rate increase/yr and 5% price decrease/yr; production estimated at 1.500kWhr/kWp equivalent to MidAtlantic or Northern California locations

Properties can be grouped by IRR into “Deploy,” “Watch” and

“Wait” categories. (See chart below, colored green, yellow and

red.) The analysis is based on assumptions about energy rate

increases and installation price declines for each specific location

(3% and 5%, respectively, in the table below).



The NEM rules govern how companies can offset the electricity

usage at sites with solar systems. Any excess energy generated

(e.g., during the day when the sun is shining) can be exported to

the grid for credit, which can be used later when there is no solar

generation (e.g., after sunset).

California, among other states, is considering changing the NEM

rules to effectively add additional costs for companies using solar

to offset local electricity use – and thereby reduce the profitability of

solar projects. The California Public Utilities Commission is

finalizing the state’s NEM 2.0 rules, to become effective after the

current NEM cap of 5% is met by California’s major investor-owned

utilities (“IOUs”).

Watch for Rain Clouds: NEM Rules

There are a few rain clouds on the horizon that could muddy the waters.

Servicing utility companies are likely to mitigate some of the benefits of C&I

solar projects by challenging the Net Energy Metering (“NEM”) rules.

Then a disciplined deployment strategy can be established. Armed

with this strategy and analysis, energy managers can have

confidence in the plan and gain long-term buy-in from vital

decision-makers and stakeholders. The next five years can then be

spent deploying solar – and other renewable energy systems –

efficiently and profitably. This results in a more structured, time-

efficient and profitable approach than reacting to one-off, often

disruptive, deployment opportunities.


It is crucial that C&I solar customers and solar developers not get

passive in the wake of the ITC extension and simply push pre-selected

projects forward.

For companies and real estate owners, this may increase the cost

of being interconnected to the IOUs’ grids by 2-3 c/kWh of energy

produced and exported to the grid by on-site solar systems. All

three California IOUs (PG&E, SCE and SDG&E) are likely to reach

their NEM caps in 2016, and the new NEM 2.0 rules will apply

going forward. This could reduce the economic returns of solar

systems deployed in the latter part of 2016 and in 2017, depending

on a facility’s energy load and generation profile.

From their perspective, the utilities’ argument may have merit. They

seek to spread some of the unavoidable costs incurred by utilities

which are currently tied to energy bills based on usage, for which

NEM customers currently also receive credit when exporting

excess power to the grid. However, these policy changes may add

costs for companies that deploy solar in the future.


NEM policy changes are one of many potential moving pieces in

the solar future over the next five years. The ITC extension makes

markets far less reliant on state-level incentives in the coming

years, which in the past have been major drivers in determining

whether or not a state has a robust solar industry.

Assess, Choose, Deploy, Profit


However, companies and real estate owners must continuously

monitor state incentives and their impact on the economics of

potential solar sites in their portfolio.

It is par for the course in the complex energy policy environment

that there will be unpredictable factors moving beneath the surface

all the time. Your five-year solar plan must incorporate “check

points” and other ways of looking out for variabilities so you can

fine-tune your strategy along the way. Knowledge and flexibility are

the keys to successfully executing your long-term strategy.

Completing a large portfolio of solar projects takes time to achieve

the right metrics and economics. With the full 30% tax credit in

place only through 2019, now is the time to go solar – with a solid

deployment plan that delivers dependable returns and sustainable

climate benefits.


ASSESS

CHOOSE

DEPLOY

PROFIT



www.altaenergyinc.com

Learn more:

We have enabled Fortune 1000 companies, real estate firms and

other enterprises to define their sustainability and operational

savings goals; develop deployment strategies meeting their own

unique targets and addressing specific limitations; and execute on

those strategies without taking focus away from their core

businesses.

We provide on-site solar, off-site renewables, energy storage and

other solutions. We are vendor, technology and financing structure

agnostic, and do what is best for enterprise buyers of renewable

energy.

We welcome the opportunity to hear about your unique needs and

goals, then help you develop and execute a customized, profitable

renewable energy strategy.

Contact Alta Energy: We Can Help

Alta Energy’s sole focus is to help companies analyze and deploy

renewable energy in a simplified, profitable manner.

P | 650.345.2582

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The Sun Also Rises: The Investment Tax Credit Extension And … · 2019-04-29 · Contact: 650.345.2582 | [email protected] | 2 The Sun Also Rises: The Investment Tax Credit