The Solar Investment Tax Credit (ITC) is one of the most popular and successful federal policy mechanisms ever enacted to support renewable energy in the US. In the 14 years since its enactment, there has been 59% compound annual solar growth nationwide. With the step-down of the tax credit beginning at the end of 2019, potential solar customers have limited time left to take full advantage of its benefits.
What is the ITC?
The ITC is a tax credit can be claimed on federal corporate income taxes for 30 percent of the cost of a solar photovoltaic (PV) system that is placed in service during that year. The tax credit is claimed against the tax liability of residential and commercial investors in solar energy property. This credit is used when homeowners purchase solar systems outright and have them installed on their homes or when businesses install, develop and/or finance solar projects.
History and Future of the ITC
The ITC was originally established by the Energy Policy Act of 2005 and was set to expire at the end of 2007. Due to the success of the program Congress has extended its expiration date multiple times, most recently in 2015. That extension set up the tax credit to step down to 26 percent for projects that begin construction in 2020 and 22 percent for projects that begin in 2021. After 2021, the residential credit will drop to zero while the commercial and utility credit will drop to a permanent 10 percent.
Impact of the ITC Step-Down
According to Energy Information Administration data in 2015 (when the ITC was scheduled to expire at the end of the next year), if the 30% credit was not extended, rooftop solar photovoltaic installations would plunge 94% in 2017 and utility-scale projects would decline 100%, with neither recovering anywhere close to today’s levels even a decade from now. Bloomberg predicted solar installations would drop by two-thirds in 2017, which the Solar Energy Industries Association estimated would cost America 100,000 jobs.
The economic projections aren’t as grim this time around. A study from Bloomberg estimates that the loss of the tax credit will cause solar capacity to only quadruple, instead of quintuple, by 2022, which is still a substantial increase. A Wall Street Journal analysis reinforces this assessment.
So, what has changed over the last few years to mitigate the effect of ITC’s decline? For starters, this stepdown is less severe than the proposed 2015 iteration, which called for a straight drop from 30 to 10 percent. The more gradual step-down, combined with recent legislation that allows homeowners to claim their tax credit as soon as the construction of the system begins (as opposed to when the system is operational), will allow significantly more installs to qualify for a higher credit. Additionally, solar installation prices have continued their sharp decline. The cost to install solar has dropped by more than 70% since 2010, and prices as of Q4 2018 are at or near their lowest historical level across all market segments.
The solar industry will still prosper without the ITC. However, the planned growth will not be as dynamic. Customers should be aware of the impending changes and plan accordingly, but can still be optimistic about sustained industry growth.