Will Solar Plunge Off the Tax Credit Cliff?

The Federal Investment Tax Credit (ITC) is set to expire at the end of 2016 — and if it does, residential solar may be in trouble. “The ITC is the swing factor for homeowners — the plunge from 30 percent to zero will dramatically slow down sales for customer-owned systems,” opined Barry Cinnamon, CEO of Cinnamon Solar.

On top of this, many local solar rebates are declining or sunsetting altogether, leaving the ITC as one of the last remaining solar incentives. Net energy metering (NEM) — another kind of incentive — is also under fire in many utility jurisdictions as witnessed in a number of high-profile battles since 2011. (See Vote Solar’s website Our Solar Rights for more on NEM battles nationwide.)

In some ways the industry went through this loop in the solarcoaster back in in 2008, before President Bush signed into law the Emergency Economic Stabilization Act of 2008 — effectively kicking the ITC expiration can down the road until 2016. However, this time is different. With fiscal conservatives controlling both Washington and many statehouses, clean energy incentives are facing intense scrutiny.

This environment has created great uncertainty for the industry and its investor community. Industry professionals have argued for a variety of strategies, including supporting the extension of the ITC, planning appropriately for its expiration, or supporting its expiration. So what should you do?

What Can You Do? Hedge Your Bets While Supporting the Extension

At the beginning of February, President Obama unveiled a $3.99 trillion budget for 2016 that includes provisions for a permanent extension of the ITC. While unlikely to pass in the deeply divided House and Senate, the scale of this proposal suggests that the administration will support preserving the ITC. 

At the very least, SEIA is calling on congress to include “Commence Construction” language for the ITC in the tax extenders package. This language allows projects to qualify for the ITC if construction begins prior to its expiration at the end of 2016. SEIA estimates that this legislation would drive 4,000 MW of solar capacity and create tens of thousands of new domestic jobs.

Solar installers across any segment — utility, industrial, commercial, or residential — should support efforts that help extend the ITC. Sign the petition today, which includes a form letter you can fill out and send to your local legislator. 

As an industry, we should also hedge our bets and work to streamline our operations, fill our pipelines, and leverage as much automation as possible (via software, business model innovation, and process design) in order to lower our cost structures and place more focus on customer experience and flawless project delivery. If the ITC is extended, we can consider these steps a soft cost reduction bonus. If it’s not extended, we will be closer to the cost structures necessary to sustain business at a lower volume.

Shayle Kann, Senior VP of GTM Research referred to the expiration of the Investment Tax Credit as “the cliff,” which he believes will force the solar industry to essentially revert to its 2014 market levels. But even with the potential ITC “cliff” in the near future, GTM Research analysts are predicting continued growth in the residential solar sector up through boom time again in 2020.

The smallest residential installers are the ones most vulnerable to the expiration of the ITC. According to comments by Jigar Shah on Kann’s analysis, “the top 10 percent of providers will be at 3-5X the volume in 2016-17 and the other 90 percent of players will go out of business in 2017 because they are simply not able to use software and tools to become more efficient.”

Perhaps a dire prediction by Shah, but smaller installers should take heed of the spirit of his comments. Small installers need to capture best practices and lessons learned from the successful growth of the top industry players, and from mature overseas markets like Australia and Germany. Most success amongst these constituents has centered around continued focus on creating customer value through innovative financing strategies, developing lower cost customer acquisition strategies, and operations streamlining, all of which result in valuable and (hopefully) sustainable soft cost reductions.

If it’s not extended, the residential ITC (Section 25 of the tax code) goes to zero at the end of 2016. Residential solar installers need to plan their path to sustainable soft cost reductions before then so they won’t be caught surprised — pleasantly or otherwise.

Lead image: Cliff via Shutterstock

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Pamela Cargill is Principal of Chaolysti, a consulting firm developing strategies that help residential solar installers operate effectively and lower soft costs. She has brokered operational effectiveness programs at some of the largest national brands in residential solar and scaled a small installer into the Northeast's market leader in the late-2000s. Follow her on Twitter @chaolyst

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