Brian Taylor

Sr. Director, California Public Sector

Contact Brian

No tax liability? No problem. Public institutions can benefit from the federal investment tax credit (ITC) -while it lasts.

Over the last decade, the Federal Investment Tax Credit (ITC) has helped spur the growth of the U.S. solar industry, and has made solar accessible for millions of homeowners, commercial businesses and even public entities– whether they have tax liability or not. However, this incentive won’t last forever. After a brief extension, we are now approaching the first year of the incentive’s scheduled stepdown, and one thing is clear – if solar customers want to maximize their electricity savings, they need to act fast.

What is the ITC?

If you aren’t familiar with the ITC, here’s a brief overview. In 2005 Congress passed the Energy Policy Act, creating a 30 percent investment tax credit (ITC) for residential and commercial solar energy systems. These credits created a major boon for the solar industry, helping to grow annual solar installations by over 1,600 percent since its implementation – an annual growth rate of 76%! The ITC is a dollar for dollar reduction in taxes that the project sponsor benefits from. Meaning, those that buy solar systems can today get the system for 26% off the sticker price and pay their systems off sooner. This is a huge incentive for home and business owners looking to reduce their tax liability. However, public entities, such as schools, cities, and municipalities, were originally unable to benefit from this discount because of their lack of tax liability.

How does the ITC apply to public entities?

Fortunately, the industry has created a means to bring discounted solar to those that can’t or don’t want to own a system. For nearly two decades, Power Purchase Agreements (PPAs) have also enabled public entities and non-profits to reap the benefits of solar. By entering into a PPA, a solar customer simply pays an affordable kilowatt-hour rate to the system owner (usually the developer) for a fixed period. These agreements are meant to last 15-20 years while the price, or PPA rate, remains predictable, flat, or in some cases, even de-escalates.

So how does the tax credit apply to public institutions? The PPA model allows a tax equity investor (think businesses with big tax bills, such as banks), to leverage the cost savings from the tax credit, which are then passed down to the solar customer in the form of a reduced PPA rate. For example, a public school district with a 5MW project could save $20 million on their electricity expenses over the 20-year term of their PPA agreement. Conversely, if a school decides to purchase the system outright, they would not be eligible to receive the discount that the tax credit provides. They’d also be responsible for overseeing the operations and maintenance of the system over its lifetime, which a PPA guarantees. These are just some of the added benefits that PPAs afford.

Estimated Savings (California)

Why Now?

The Federal ITC, like all tax incentives, is temporary. After an initial extension, the ITC is currently set to follow a step-down schedule beginning at the end of this year. Prior to 2020, projects entering into construction were eligible for the full 30% discount. At the start of 2020, the incentive began to step down and currently hangs at 26%. This further de-escalates to 22% in 2021 and after 2022 will remain flat at 10% for commercial and utility customers. The incentive for residential customers, unfortunately, will phase out entirely.

Stepdown Schedule

For those that want to take full advantage of the savings that solar offers, now is the time to act. In order to benefit from the 26% savings, construction, or a financial commitment to begin construction of a new solar project, needs to occur this year. Any new endeavours after will see a reduced rate of 22%. While we’re nearly half-way into 2020, customers, especially in the public sector, might think they’re too late.

Luckily, associations exist that help public entities save time and money on running RFPs and selecting vendors, such as SPURR, or the School Project for Reduced Utility Rate Reduction. SPURR allows member organizations, including public schools, universities, municipalities and cities, to “piggyback” off-of their own competitive RFP process.

Although the ITC is stepping down, it’s not too late to jumpstart your solar procurement process and take advantage of the full savings. Our team of solar experts can help you through the process and see how much solar could reduce your electricity bill.

Brian Taylor

Sr. Director, California Public Sector

Contact Brian