Without Congessional action, on December 31, 2016, the Investment Tax Credit (ITC) for renewable energy installations is set to revert back to 10% from its current 30% level.
The ITC has been at 30% since 2008 when recession related legislation kicked in and increased the tax credit to its current level. The 30% tax credit, together with the MACRS rules allowing depreciation of the equipment in full over a 5-year period have stimulated the industry and led to an enormous increase in the installation and generation of renewable energy.
Renewable energy as a source of energy remains a small piece of the overall supply of energy, due to the relative infancy of the industry and the production cost of renewable energy as compared to other sources of power generation.
Infrastructure and equipment costs, such as photovoltaic panels in solar arrays have come down drastically in price, which has narrowed the gap in production costs, but there is still a ways to go. The industry is not at the point yet where it can survive without subsidies, and, therefore, a 30% ITC, as well as more market certainty that the 30% ITC would be around for at least 5-8 years is necessary.
The political headwinds are not, however, in our favor. The initially stated political benefit of renewable energy, that being its ability to reduce our dependence on foreign oil has not really proved to be the case. Renewable energy power generation is not significant enough, but mostly, renewable energy is used to power homes and businesses not cars, trucks, ships, and the other instrumentalities that drive our economy. In an ironic twist, the United States has become one of the world's largest producers of energy, if not the largest. However, our production increases have not been from renewable energy generation, but from advances in fracking technology that have generated natural gas from shale rock in enormous quantities. We have increased our exports of gas, thereby cutting our trade deficit, and we, as one of the world's largest consumers of energy have continued to import large amounts of fossil fuel generated energy to power our cars, trucks, and ships. Moreover, technological improvements in automobile efficiency have reduced the amount of fuel that automobiles utilize, and have most likely had a greater effect on reducing our need for foreign oil than has renewable energy Given that the oil and gas industry, as well as the automotive industry are powerful and well represented, support for renewable enegy tax credits may not be seen as a campaign issue these days.
Therefore, from a political standpoint, there does not seem to be a groundswell of support for extending the current level of tax credits for renewable energy. Moreover, with the partisan divide in Washington, the federal deficit, and the continual debt ceiling issues, getting anything done, let alone a tax credit extension is probably a long shot.
Nevertheless, extending the 30% ITC is a smart decision, with long reaching political gains.
The argument that a lessening or elimination of federal tax credits for renewable energy would spell disaster for the industry, and that the industry is not yet at a level of stability where it can operate without subsidy is a compelling one, and, particularly following the 2008 recession, our economy is changing. The old jobs lost to outsourced manufacturing and support services will not come back. There is growth in service related jobs, and it is undeniable that renewable energy has created an enormous amount of jobs for solar installers, electricians, roofers, general contractors, panel manufacturers, bank loan officers, permitting attorneys, and many more. Lessening subsidies at this point may eliminate jobs, and jobs have been the backbone of our economic recovery thus far. Even with the recent rise in prices for electricity, will it still be possible for renewable energy facilities to be built utilizing the lower level of tax credits that will be present beginning in 2017.
This is an interesting question, and may hinge on how structuring and underwriting renewable energy transactions in a post 30% ITC world would be approached. Specifically, many lenders are currently unwilling to accept renewable energy installations or equipment as the sole collateral for a loan, and have required additional recourse, such as an owner's guarantee or a cross-collateralization against other real property. This even occurs when the loan to value ratio is low by industry standards (from the influx of tax credit equity). With a lower tax credit amount, loans will need to be sized upward, and could result in lenders' collateral and recourse requirements to become more stringent. Cash flow will not be as volatile, if it is affected at all, due to the increased revenue from higher electricity prices. In some states, such as Massachusetts, there are production credits earned when renewable energy is produced (such as SREC's), and the sale of these certificates have subsidized the cash flow of a project. Accordingly, how lenders will underwrite the cash flow on projects that are more reliant on the market rates of electricity versus a combination of reliance on electricity revenue and state subsidies will be interesting.