Hidden Renewable Energy Project Benefits: Incentives & Tax Credits

Friday, July 19, 2013

Renewable Incentives and Tax Credits

Most of the electrical infrastructure in the United States is more than 50 years old. Generation, transmission, and distribution technologies in use today would be familiar to utilities operating 100 years ago. Our planet, however, would be almost unrecognizable. Without going through the litany of energy security, resource scarcity, environmental, and population problems, the generation of electric power is responsible for the largest part of carbon emissions plaguing our atmosphere. Thankfully, renewable generation resources have displaced a fair portion of fossil-fired plants, albeit at a higher cost to us ratepayers.

To encourage the adoption of renewable technologies and encourage lower costs resulting from economies of scale, the Federal Government and many State Governments have passed legislation involving short-term cash incentives and tax credits. These credits and incentives drive down the cost of a solar photovoltaic (PV) power plant to the point where the electricity produced costs roughly the same as electricity generated using thermal power. This equivalent-cost concept is known as "grid parity."

Because owning an electric generation plant is an expensive and risky proposition, most owners want their investments recouped in as short a time as possible. Benefits of the tax/incentive structure are realized during the first six-and-a-half years a plant generates energy. For this reason, the first seven fiscal years of PV plant operations are known as the "tax recapture period."

Side Benefits of Owning a PV Power Plant

Using California as an example, since it is home to the largest installed base of PV power plants, there are a number of benefits available to owners of solar PV systems that aren't readily apparent.

Utility Rate Reductions

 

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When all rebates, offsets, incentives and tax benefits are accounted for, about 40% of the cost to build a solar project is recovered after the first year of operation. After six operating years, about 90% of capital costs have been repaid.

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At Cupertino Electric, most of our clients are metered at "time-of-use" rates, which impose the highest charges during the hours of peak energy demand. Since PV systems only make power during daylight hours, their output generally offsets a large portion of these high costs. Recognizing that PV systems output energy when it's needed most, the regulated utilities have created special rates to encourage PV system installation. For example, PG&E has Rate A6 that offers on-peak rates as low as $0.12 per kWh for customers with PV systems who are also willing to risk a $0.45 per kWh penalty for power delivered when their PV system is under-producing. For this reason, we usually recommend that clients wait until their PV systems have operated for an entire year before deciding whether the A6 rate is beneficial.

IRS-Allowed Investment Tax Credit (ITC)

In addition to certain incentives, the IRS allows a PV system owner to deduct 30% of the adjusted capital cost of a system directly from his/her Federal tax bill. The "adjusted" capital cost includes costs that are directly associated with the PV system, not ancillary costs such as the replacement of a roof to ready the facility for a PV system.

With this credit, the system owner has some flexibility regarding when to take the credit. The owner can take the credit at any time following the first year of on-line operation of the PV system. While this benefit expires at the end of 2016, we anticipate that the credit will resurface after 2016, but only at a lower, 10% valuation.

IRS-Allowed Accelerated Asset Depreciation

In addition to the one-time Investment Tax Credit, the IRS also allows the owner of a PV system to fully depreciate the adjusted capital cost of the system (asset) over a five-and-one-half year period. By contrast, other elements of an electric distribution system must be depreciated over 15 years.

Often, analysts assume that 100% of the capital cost is subject to the 30% tax credit, but calculation of the "depreciable basis" excludes indirect costs referenced above and one-half (50%) of the ITC. Instead, depreciation is apportioned based on the IRS' Modified Accelerated Cost Reduction System (MACRS):

Operating Year 1 – 20% of adjusted Basis

Operating Year 2 – 32% of adjusted Basis

Operating Year 3 – 19.2% of adjusted Basis

Operating Years 4 & 5 – 11.52% of adjusted Basis

Operating Year 6 – 5.76% of adjusted Basis

State Property Tax Benefit

While not as significant as the incentive and tax benefits detailed above, some states that have a program to encourage solar PV generally require a functioning PV system to be excluded from the property tax basis for the premises on which it is installed.

About Steve Schumer

As senior energy strategist for Cupertino Electric’s Energy Alternatives Division, Steve Schumer draws on more than forty-three years of combined experience in the areas of fossil, nuclear, alternative and renewable power generation/distribution. In his current role at Cupertino Electric, Inc. (CEI), Steve develops financial and engineering models for alternative energy projects, oversees utility and regulatory relations, interfaces with high-level customers and is responsible for project development.

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