HomeMy WebLinkAboutBerkeley Lab - Exploring the Economic Value of EPAct 2005 PV Tax Credits_Feb_07
CASE STUDIES OF STATE SUPPORT
FOR RENEWABLE ENERGY
Berkeley Lab and the Clean Energy States Alliance
Exploring the Economic Value of
EPAct 2005’s PV Tax Credits
Mark Bolinger and Ryan Wiser, Berkeley Lab
Edwin Ing, Law Offices of Edwin T.C. Ing
Introduction
CONTENTS
The market for grid-connected
photovoltaics (PV) in the US has
grown dramatically in recent years,
driven in large part by PV grant or
“buy-down” programs in California,
New Jersey, and many other states.
The recent announcement of a new
11-year, $3.2 billion PV program in
California suggests that state policy
will continue to drive even faster
growth over the next decade.
Federal policy has also played a
role, primarily by providing
commercial PV systems access to
tax benefits, including accelerated
depreciation (5-year MACRS
schedule) and a business energy
investment tax credit (ITC).
January 1, 2006, for an initial period
of two years, and in late 2006 were
extended for an additional year.
Unless extended further, the new
residential ITC will expire, and the
30% commercial ITC will revert
back to 10%, on January 1, 2009.
Introduction ...................1
Taxation of State Grants
and Interaction with
Federal Tax Credits........2
Analysis.........................7 How much economic value do these
new and expanded federal tax
credits really provide to PV system
purchasers? And what implications
might they hold for state/utility PV
grant programs? Using a generic
(i.e., non-state-specific) cash flow
model, this report explores these
questions.
Discussion......................8
February 2007 (update of
March 2006 report) 1 We begin with a
discussion of the taxability of PV
grants and their interaction with
federal credits, as this issue
significantly affects the analysis that
follows. We then calculate the
incremental value of EPAct’s new
Since the signing of the Energy
Policy Act of 2005 (EPAct) on
August 8, the federal government
has begun to play a much more
significant role in supporting both
commercial and residential PV
systems. Specifically, EPAct
increased the federal ITC for
commercial PV systems from 10%
to 30% of system costs, and also
created a new 30% ITC (capped at
$2000) for residential solar systems.
Both changes went into effect on
Download other clean energy
fund case studies from:
http://eetd.lbl.gov/ea/EMS/cases/
or
www.cleanenergystates.org
1 For an application of this model, and
the concepts included in this report, to
California, see Ryan Wiser and Mark
Bolinger, “Federal Tax Incentives for
PV: Potential Implications for Program
Design”
(http://eetd.lbl.gov/ea/emp/reports/Wiser_
Bolinger_CPUC_PV_Tax_03_2006.pdf)
Case Studies of State Support for Renewable Energy February 2007
as much as 50% of installed system costs. If
non-taxable, such grants will cut in half not only
the value of the federal ITC, but also the tax
benefits of depreciation (for commercial
systems). The economic impact is not trivial.
For example, under the assumptions described
later, our cash flow model reveals that a
residential PV system garners the same value (in
terms of net present value of after-tax cash
flows) from a $2.7/W non-taxable grant as it
does from a $4/W taxable grant; conversely, it
would take a non-taxable grant of $5.8/W to
provide a commercial system with the same
after-tax value as a $4/W taxable grant.
and expanded credits for PV systems of different
sizes, and owned by different types of entities.
We conclude with a discussion of potential
implications for purchasers of PV systems, as
well as for administrators of state/utility PV
programs.
Taxation of State Grants and
Interaction with Federal Tax Credits
Perhaps surprisingly, whether or not the Internal
Revenue Service (IRS) considers grants made by
state/utility PV programs to be taxable income is
a critical factor in determining the value of the
new and expanded tax credits under EPAct. 2
This is because, at least for the foreseeable
future, most PV systems in the US are likely to
be installed with the financial support of a
state/utility PV program. If the grants provided
by these programs are considered to be taxable
income, then a grant recipient can claim the
federal ITC (and depreciation if a commercial
system) on the full cost or “basis” of the system.
If, however, the grants are not considered to be
taxable income, then the grant recipient must
reduce, by the amount of the grant, the basis to
which the federal ITC (and depreciation) apply.
This example demonstrates not only the
magnitude of the impact, but also its disparate
effect on residential and commercial PV
systems. Because of the $2000 federal ITC cap
for residential systems (which will be binding
for all but the smallest systems) and the absence
of depreciation benefits, residential systems are
better off financially with a non-taxable, rather
than taxable, grant. The opposite is true for
commercial systems, which are better off paying
income tax on the grant, and then applying the
uncapped ITC and accelerated depreciation to
the full basis of the project.
3
As a result, the taxable or non-taxable status of
the grant carries significant federal tax
consequences. PV grants frequently buy-down
Given the degree of economic impact at stake,
whether or not PV grants are taxable is clearly
an important question.4 Unfortunately, the IRS
has provided limited direct guidance on this
issue. Section 61 of the Internal Revenue Code
generally defines gross (taxable) income to
mean income derived from any source, except as
otherwise provided in statute. The IRS broadly
interprets this definition to treat government
grants as taxable income unless statutorily
excluded from taxation.
2 For earlier work on this topic, see Susan Gouchoe,
Lynne Gillette, Christy Herig. 2004. “Are Solar
Rebates and Grants for Homeowners and Businesses
Taxable?” ASES SOLAR 2004 Proceedings.
http://www.dsireusa.org/documents/PolicyPublicatio
ns/Taxability_ASES_2004.pdf
3 See the conference report to the Crude Oil Windfall
Profits Tax Act of 1980, which states that “under
present law…if property is financed with nontaxable
government grants, the tax basis in the property, for
such purposes as depreciation and investment credits
(including energy investment credits), is reduced to
the extent that the property is financed with such
grants.” It goes on to explain that “grants which are
taxable are not taken into account under these [credit
offset] rules because their taxation serves as a partial
offset; similarly, credits against State and local
income taxes are not taken into account because the
deductibility of these taxes under the Federal income
tax implies that the effect of these credits is
equivalent to the effect of a taxable grant.”
Though this suggests that PV grants should
generally be considered taxable, four possible
grounds for exclusion from taxable income
4 Though a useful and otherwise thorough reference
document, the March 2006 Solar Energy Industries
Association’s (SEIA) “Guide to Federal Tax
Incentives for Solar Energy (Version 1.1)” does not
directly address this question. For more information,
see http://www.seia.org/manualdownload.php.
Exploring the Economic Value of EPAct 2005’s PV Tax Credits 2
Case Studies of State Support for Renewable Energy February 2007
the size of the system (e.g., $/W), rather than on
its purchase price. Furthermore, while in some
instances state PV programs do provide grants to
system retailers or installers, who in turn pass
them through to system owners in the form of a
reduced purchase price, in substance the grant is
from the PV program (the retailer or installer
would not have reduced the purchase price
without having received the grant) and therefore
the price rebate exclusion is not likely to apply.
might be explored. Specifically, a PV grant
would be considered non-taxable if it were
found to be one of the following: (1) a
government social welfare payment; (2) a
manufacturer or dealer rebate of the purchase
price; (3) a contribution to the capital of a
corporation; or (4) a utility energy conservation
subsidy. Below we discuss each of these
possibilities in turn, focusing in particular on
what appears to be the most relevant potential
exclusion – the possibility that a PV grant might
qualify as a utility energy conservation subsidy.
6
5 Contribution to the Capital of a Corporation:
Section 118 of the Internal Revenue Code
excludes from taxable income contributions to
the capital of a corporation. This exclusion
applies to money transferred to a corporation
(but not other types of businesses, such as LLCs
or partnerships) by a government unit in order to
obtain an advantage for the general community,
rather than for direct services or recompense.
Moreover, the contribution must, among other
things: (1) become a permanent part of the
recipient’s working capital and not be used for
paying dividends, interest, or anything else
chargeable to or payable out of earnings or
income; (2) be employed in or contribute to the
production of additional income to the recipient;
and (3) be bargained for by the recipient.
Government Social Welfare Payments: While
broadly defining taxable income to cover
government grants, the IRS as a matter of public
policy has created an exclusion for government
welfare payments to individuals. In order to be
non-taxable, however, such payments must be
based on the recipient’s established need. Since
few if any PV programs require grant recipients
to establish need, this exclusion is not
particularly applicable (one possible exception
might be PV grants offered specifically to low-
income households).
Manufacturer or Dealer Rebate of the
Purchase Price: Certain reductions in the
purchase price of an asset may be considered
non-taxable. In Technical Advice Memorandum
8924002, the IRS reviewed its past revenue
rulings and concluded that “in order for the
receipt of funds to be considered a non-taxable
price rebate that reduces the basis of an item of
property, several features must be present: (1)
the rebate must be based on the purchase price
of the item; (2) the manufacturer or dealer of the
item must be the party offering the rebate; and
(3) the recipient must be able to negotiate or
renegotiate the purchase price in an arms-length
transaction. ...therefore, a [non-taxable] rebate is
treated as a reimbursement of the purchase price
and not an accession to wealth.”
7
Most PV programs fail to meet at least the first
two requirements for this price rebate exclusion.
Specifically, most programs base their grants on
5 The tax analysis that follows does not take into
account, and may not be applicable to, third-party-
owned PV systems.
6 It is also worth noting that taxation cannot be
avoided by providing grants to retailers or installers,
rather than system owners. As shown later in this
section (in the discussion of the Section 136
exclusion), the IRS has clearly held that any tax
liability (or exclusion from tax liability) associated
with a grant rests with the intended recipient (in this
case, the system owner), and cannot be shifted to the
retailer, installer, or any other third party. Thus, in
the event that retailers do pass through taxable grants
to PV system purchasers, both parties are obligated to
pay income tax on the grant amount (and the system
purchaser must also increase the basis of the system
to its full, undiscounted value). Though at first blush
this may seem like double taxation, it is no different
from the more straightforward case in which the
grant goes to the system purchaser, who pays income
tax on the grant (but does not reduce basis) and
provides the retailer with taxable revenue equivalent
to the full, undiscounted cost of the system.
7 General Counsel Memorandum 37354 (December
21, 1977); Private Letter Ruling 9401035 (October
14, 1993); Edwards v. Cuba Railroad Co (268 U.S.
628, 1925); Detroit Edison Co. (319 U.S. 98, 1943);
Exploring the Economic Value of EPAct 2005’s PV Tax Credits 3
Case Studies of State Support for Renewable Energy February 2007
covers some solar energy systems, including PV
systems.
Since, in most cases, a PV grant recipient does
not “bargain” for the grant,8 9 and is not obligated
to use the grant in the manner specified above,
this exclusion might be difficult to justify.
Furthermore, given that corporations (as well as
other commercial entities) are better off with a
taxable PV grant, it is unclear why a corporation
would ever even try to make the case that PV
grants should qualify for the Section 118
exclusion from taxation. Instead, a more
conservative (and, incidentally, lucrative)
approach would be to simply assume that grants
are taxable – which, after all, is the default
position taken by the IRS under Section 61
(unless otherwise provided in statute).
A key question relating to this exclusion is
exactly what is meant by “provided (directly or
indirectly) by a public utility.” Section
136(c)(2)(b) defines the term “public utility” to
mean “a person engaged in the sale of electricity
or natural gas to residential, commercial, or
industrial customers for use by such customers.
For purposes of the preceding sentence, the term
“person” includes the Federal Government, a
State or local government or any political
subdivision thereof, or any instrumentality of
any of the foregoing.” Clearly, the
administrators of most PV programs in the US
(excepting those administered by utilities) are
not “engaged in the sale of electricity,” and so
do not directly qualify as a public utility.
Since we have heard anecdotally, however, that
at least some (or perhaps even many)
corporations in California have, in fact, treated
PV grants as contributions to capital, we allow
for this possibility in the analysis presented later
in this paper.
But might such programs be considered to
indirectly provide energy conservation subsidies
from a public utility? In many instances, state
renewable energy funds (the non-utility
administrators of most PV programs in the US)
are financed by utilities or their ratepayers,
thereby raising the possibility that they are, in
fact, indirectly providing energy conservation
subsidies from a public utility. The conference
report to the Energy Policy Act of 1992,
however, indicates that Congress inserted the
“directly or indirectly” phrasing in Section 136
Utility Energy Conservation Subsidy: Since
1991, Section 136 of the Internal Revenue Code
has treated certain utility energy conservation
subsidies as non-taxable income. Specifically,
Section 136(a) states that “Gross income shall
not include the value of any subsidy provided
(directly or indirectly) by a public utility to a
customer for the purchase or installation of any
energy conservation measure.” Section
136(c)(1) defines the term “energy conservation
measure” to mean “any installation or
modification primarily designed to reduce
consumption of electricity or natural gas or to
improve the management of energy demand
with respect to a dwelling unit.” This definition
U.S. v. Chicago, Burlington & Quincy Railroad (412
U.S. 401, 1973)
8 This bargaining requirement would, if taken
literally, appear to be difficult to satisfy in the case of
most government grants. Revenue Ruling 93-16
(1993-1 Cumulative Bulletin 26), however, addressed
this requirement with respect to FAA grants to airport
owners. In that ruling, the IRS deemed the grants to
be “bargained for” because they were “competitive,
highly sought after, and made pursuant to meaningful
criteria and conditions” (Kimberly S. Blanchard,
“The Taxability of Capital Subsidies and Other
Targeted Incentives,” Tax Notes, November 8, 1999).
9 Section 210(11) of the National Energy
Conservation Policy Act of 1978 (Public Law 95-
619) defines “residential energy conservation
measures” to include “devices to utilize solar energy
or windpower for any residential energy conservation
purpose, including heating of water, space heating
and cooling…that are warranted by the manufacturer
to meet a specified level of performance over a
period of not less than three years.” The Energy
Policy Act of 1992, which first implemented Section
136 of the tax code, appears to have adopted this
definition (at least according to the conference report
– the specific adoption or definition does not appear
to be codified in the Act or in Section 136 of the
code). Finally, the IRS recently found (through a
private letter ruling) that the Energy Trust of
Oregon’s cash incentives for PV systems do qualify
for the Section 136 exclusion, and therefore that PV
is an eligible “energy conservation measure.”
Exploring the Economic Value of EPAct 2005’s PV Tax Credits 4
Case Studies of State Support for Renewable Energy February 2007
Earlier IRS revenue and private letter rulings –
though on a different statutory provision – do
address these broader issues, and in some cases
could be interpreted as indicating that the source
of a program’s funds would characterize the
program.
to prevent third party contractors (e.g.,
equipment vendors, such as PV retailers or
installers) from taking advantage of the Section
136 exclusion. Specifically, it states:
10"...the conferees believe that third party
contractors should not be at a
competitive advantage or disadvantage
with respect to the tax benefits provided
by the exclusion. In addition, the
conferees believe that when a utility
provides a payment to a third party
contractor, the utility is indirectly
providing the subsidy to the person for
whom the contractor is providing the
energy conservation measure and the
exclusion should apply to such person.
Thus, the conference agreement
provides that the exclusion applies to
any subsidy provided
Subsequently in Private Letter
Ruling 853004 (April 30, 1985), however, the
IRS indicated that a subsidy administered by a
governmental unit would be treated as a
government program whatever the funding
source, suggesting that utility-funded,
government-administered programs would not
qualify for the Section 136 exclusion.
Furthermore, the congressional report on the
subsequent enactment of the Section 136
exclusion for utility energy conservation
subsidies contains no express repudiation of the
IRS' previous position on government subsidies.
One might, therefore, expect the IRS to stick to
its position taken in Private Letter Ruling
853004 that characterizes a government-
administered program as a government program,
regardless of the funding source.
directly or
indirectly to a utility customer, if such
subsidy otherwise would be included in
income. For example, if a public utility
provides a subsidy to a customer to
partially offset the cost of the
installation of an energy conservation
measure on the customer’s premises, the
provision [Section 136] applies to
exclude [from taxable income] all or a
portion of the value of such subsidy.
Likewise, if the public utility provides a
payment to an independent contractor so
that the contractor can provide for the
installation of an energy conservation
measure on the utility customer’s
premises at a reduced price, the [Section
136] exclusion applies to the customer
for the
Nevertheless, some uncertainty remains over the
scope of the exclusion provided under Section
136 as it relates to state PV programs.
Specifically, some of the rulings cited above –
which, it should be noted, concerned credits and
statutory provisions somewhat different from
those of interest here – conflict with one another,
and only address this issue peripherally (i.e., in
commentary not necessary to the legal holding
of the case). Furthermore, these rulings
distinguish primarily between utility- and
government-administered programs, raising the
question of how the IRS might characterize
programs funded by utilities (or their ratepayers)
but administered by non-utility, non-
governmental entities (e.g., non-profit
administrators, such as the Energy Trust of
Oregon or the Sustainable Development Fund in
southeastern Pennsylvania).
indirect subsidy supplied to the
customer." [Emphasis added.]
In other words, the conference report discusses
the “direct or indirect” subsidy only in the
context of independent contractors – e.g.,
equipment vendors that might otherwise gain “a
competitive advantage” if provided access to the
exclusion. It does not directly touch on the
broader issues of program administration or
governmental subsidies.
New insight on this question arrived in January
2007, when the IRS found (in a private letter
10 See Revenue Ruling 81-52 (1981-1 Cumulative
Bulletin 9); Revenue Ruling 83-145 (1983-2
Cumulative Bulletin 14); and Private Letter Ruling
8342047 (July 18, 1983).
Exploring the Economic Value of EPAct 2005’s PV Tax Credits 5
Case Studies of State Support for Renewable Energy February 2007
In short, the IRS rulings to date on Section 136
suggest that otherwise-qualifying subsidy
payments provided under a utility-administered
program will qualify for the exclusion; those
provided under a government-administered
program likely will not qualify for the exclusion
(regardless of the funding source);
ruling) that the Energy Trust of Oregon’s
residential PV incentives do qualify for the
Section 136 exclusion from gross income. The
ruling seems to rest on the Energy Trust – a
501(c)(3) non-profit – being a non-governmental
entity that indirectly provides the utility-funded
(i.e., ratepayer-funded) subsidy. In aggregate,
payments made by the Energy Trust to
residential customers of a particular utility do
not exceed funds collected from that utility,
thereby helping to substantiate the program as a
utility program that benefits that utility’s
customers.
12 and those
administered by a non-profit might qualify if the
program can be characterized as a utility
program. Given, however, a degree of lingering
uncertainty, and that private letter rulings may
not be used or cited as precedent, individual PV
programs seeking clarity on this issue may wish
to consult directly with the IRS.
With respect to the “directly or indirectly”
question, the Oregon ruling simply states that
“The legislative history of [Section 136] clarifies
that the subsidy need not be provided directly by
the public utility to the customer, and that the
exclusion [from gross income] applies to the
customer to whom a subsidy may be indirectly
provided by the utility.” This statement seems
to indicate a broader IRS interpretation of the
conference report to the Energy Policy Act of
1992 than previously presented in this report.
That is, it seems to indicate that the IRS does not
consider the “directly or indirectly” language to
refer only to third-party contractors or
equipment vendors who might otherwise benefit
(in lieu of the utility’s customers) from the
Section 136 exclusion. Without further textual
clarity, however, a definitive interpretation of
the IRS’s position on this issue is not possible.
11
Summary: In summary, though it is difficult to
generalize, given the highly factual nature of the
law surrounding this issue, it appears that grants
made to commercial PV systems will, in most
cases, likely not qualify for any of the four
exclusions discussed above, and will therefore
be considered taxable grants that do not reduce
the project’s basis to which the federal ITC and
depreciation applies. The one potential (though
perhaps unlikely) exception would be if PV
grants to corporations were determined by the
IRS to be contributions to capital under Section
118, in which case corporations – but not other
types of businesses, such as partnerships or
LLCs – would need to exclude the grants from
gross income, and reduce the project’s tax basis
by the amount of the grant. The taxability of
grants made to residential PV systems will vary
based on whether those grants are administered
(either directly or indirectly) as a utility program
under Section 136, with some uncertainty as to
11 In arguing its case with respect to this “directly or
indirectly” issue, the Energy Trust stressed the
following: that it is a tax-exempt non-profit entity
that was created specifically for the purpose of
administering the utilities’ conservation and
renewable energy programs; that it does so through
contractual and “fiduciary-like” relationships with the
utilities; that its programs have replaced those
previously offered by the utilities; and that it has
brought a new-found predictability and stability to
conservation and renewable energy programs,
thereby benefiting the state of Oregon as well as
ratepayers of the participating utilities. It is not clear
which, if any, of these arguments influenced the
IRS’s conclusion that the Energy Trust indirectly
provides the subsidy on behalf of the utilities.
12 The recent Oregon private letter ruling clouds the
issue with respect to governmental administrators.
Previous IRS rulings (discussed earlier) suggested
that a government-administered program would never
be considered a utility program, and therefore would
not qualify for the Section 136 exclusion. The recent
Oregon private letter ruling, however, suggests that
the IRS will, in some cases, allow utility programs
that are not administered by a utility to qualify for the
exclusion. Hence, it follows that if a governmental
administrator can make a strong case that it is
administering a utility program, it is possible that the
IRS might find the program eligible for the Section
136 exclusion.
Exploring the Economic Value of EPAct 2005’s PV Tax Credits 6
Case Studies of State Support for Renewable Energy February 2007
13what exactly constitutes a “utility” program.
To reflect this outstanding uncertainty, our
analysis below allows for the possibility of
either taxable or non-taxable grants to both
residential and commercial systems.
The resulting values for systems sized between 1
and 20 kW are shown in Figure 1. For 1 kW
residential systems, the new EPAct ITC provides
the same value as a non-taxable grant of $1.9/W
(or a taxable grant of $2.7/W).15 This value,
however, drops precipitously to around $0.5/W
non-taxable (or $0.7/W taxable) for 4 kW
systems, and to $0.2/W non-taxable (or $0.3
taxable) at 10 kW. This decay in value as
system size increases is due to the $2000 cap on
the credit, which contributes an increasingly
smaller proportion of total costs as system size
increases. Because the 30% commercial ITC is
not similarly capped, its value (relative to the
10% ITC available previously) remains fairly
constant across different system sizes (even
much larger system sizes than shown – e.g., 250
kW), equivalent to a taxable grant of just over
$2.00/W (or non-taxable grant of just over
$1.50/W). Finally, EPAct’s PV tax credits
provide no value to tax-exempt entities, to those
subject to the alternative minimum tax, or to
entities with no tax liability for other reasons.
Analysis
To examine the potential value of EPAct’s new
and expanded PV tax credits, we developed a
cash flow model of a PV system in a generic
state that offers a buy-down grant (either taxable
or non-taxable) of $4/W.14 Our approach was to
determine how much this $4/W grant could be
reduced, given EPAct’s new or expanded PV tax
credits, such that the PV system purchaser
would remain indifferent (between pre- and
post-EPAct conditions) in terms of the net
present value of after-tax cash flows. The size
of the reduction can be thought of not only as
the maximum amount by which a PV program
could reduce the size of its grants without
causing the after-tax economics of PV to
deteriorate (relative to pre-EPAct conditions),
but also as the maximum value of the EPAct
credits, on a grant-equivalent, $/W basis.
13 Section 136 does not apply to commercial systems,
and so cannot be used to argue for tax-exempt
treatment of grants to such systems. Though Section
136 originally included – with limitations –
commercial energy conservation measures as well,
these were ultimately stripped out by the Small
Business Job Protection Act of 1996.
14 Other assumptions include: a cash-financed
system with a 25-year project life; some economies
of scale in installed costs ($10/W at 1 kW, $9/W at 2
kW, $8.5/W at 6 kW, and $8.2/W at 20 kW, with
linear interpolation between these points); 15.4%
capacity factor (i.e., 1350 kWh/kW/year); $0.12/kWh
avoided electricity cost, escalating at 3%/year
(treated as taxable income for commercial, but not
residential, systems); no state tax credits; state
depreciation follows federal (i.e., 5-year MACRS);
federal ITC reduces basis for federal depreciation by
half of the ITC (i.e., 15%); federal ITC does not
reduce basis for state depreciation; tax brackets of
28% (federal residential), 34% (federal commercial),
and 8% (state residential and commercial); $4/W
grant is either taxable or non-taxable at both the
federal and state level; state income tax payments are
deductible from federal income; and a 7% nominal
discount rate.
15 The fact that the taxable grant-equivalent value is
higher than the non-taxable grant-equivalent value
should not be interpreted to mean that a residential
system owner is better off with a taxable grant;
indeed, as described earlier at the beginning of the
tax analysis section, the opposite is true. Instead, this
taxable/non-taxable differential is due to the fact that
a taxable grant represents pre-tax income, whereas a
non-taxable grant represents after-tax income.
Reducing the size of a taxable grant (e.g., in response
to EPAct) reduces the recipient’s tax liability without
impacting the value of the EPAct credit; this
reduction in tax liability, in turn, allows a further
reduction in grant size (a positive feedback) relative
to a non-taxable grant.
Exploring the Economic Value of EPAct 2005’s PV Tax Credits 7
Case Studies of State Support for Renewable Energy February 2007
0.0
0.5
1.0
1.5
2.0
2.5
3.0
1 2 3 4 5 6 7 8 9 1011121314151617181920
System Size (kW)
Residential (taxable grant-equivalent)
Residential (non-taxable grant-equivalent)
Commercial (taxable grant-equivalent)
Commercial (non-taxable grant-equivalent)
No tax liability, or subject to AMTGrant-Equivalent Value ($/W)Figure 1. Incremental Value of EPAct PV Tax Credits
Interestingly, with the exception of non-taxable
commercial grants, our results are not dependent
on our baseline assumption of a $4/W grant (vs.
a $2/W grant, for example). In the case of a
taxable grant, the size of the grant is immaterial
(at least for this purpose), as it does not reduce
the project’s basis, and therefore does not impact
the incremental value of the ITC or depreciation.
In the case of a residential non-taxable grant, the
ITC is almost always (except for the smallest
systems) capped at $2000 – even after reducing
the project’s basis by the grant amount – so
again the size of the grant that we have assumed
is, for the most part, immaterial to our results.
Commercial non-taxable grants, however, will
impact the size of the uncapped ITC, meaning
that our results for this special (though perhaps
unlikely) case will vary depending on the grant
size assumed.
Discussion
Results of the analysis presented above hold
important implications for both PV system
purchasers and administrators of PV programs.
For PV system purchasers, it is clear from
Figure 1 that the economic value of EPAct’s
new and expanded tax credits is strongly
dependent on system size as well as the type and
tax status of the system owner. Commercial PV
system owners with tax liability will benefit
greatly from the expanded ITC, as will owners
of small residential systems from the new
residential ITC. On the other hand, larger
residential systems and systems owned by
entities with limited or no tax liability (e.g.,
municipalities, non-profits) will gain little from
the EPAct credits. These differences will no
doubt affect the nature of consumer demand for
PV while the credits are in effect: home-owners
may demand smaller PV systems, while larger
entities with limited or no tax liability may
increasingly choose third-party ownership to
indirectly capture the benefits of these new
credits.
At the same time, EPAct’s credits may not
ultimately be worth as much as the maximum
values presented in Figure 1,16 because PV
programs could (and in some cases have done
so) reclaim some or all of EPAct’s value (while
16 It should be emphasized that the analysis presented
in this paper is generic (i.e., not state-specific), and
that outcomes will differ in individual states that
offer state tax incentives, or present other
complexities. State-specific analysis is required to
determine the true value of EPAct tax credits under
any specific PV program. Footnote 1, for example,
provides a citation for analysis conducted specifically
for California’s PV program administrators.
Exploring the Economic Value of EPAct 2005’s PV Tax Credits 8
Case Studies of State Support for Renewable Energy February 2007
still leaving system purchasers no worse off than
before EPAct) by reducing the size of grants
offered. Reducing grant size can help to stretch
program budgets over a larger number of PV
installations, without unduly suppressing growth
in the market. Furthermore, by targeting any
reductions at those specific system sizes and
types that stand to benefit the most from EPAct
– e.g., commercial and small residential systems
– program administrators may help to level the
playing field and ensure that EPAct does not
favor certain market segments (e.g., commercial
and small residential systems) while
disadvantaging others (e.g., tax-exempt and
large residential systems).
Reducing grant size – even in a targeted fashion
part as a result of these factors, the Solar
– by the maximum amounts represented in
Figure 1, however, may not be ideal for a
number of reasons. Worldwide demand for
solar modules and the increase in the cost of
silicon feedstock have pushed PV module costs
higher in recent years. Program administrators
may wish to let the new and expanded federal
credits offset this price increase, and perhaps
even go a bit further to boost return on
investment and thereby stimulate additional
demand for PV. Furthermore, EPAct’s tax
credits may not be perceived by consumers to be
as valuable as a grant that reduces up-front cash
outlays. Finally, unless extended, EPAct’s new
and expanded PV tax credits will expire at the
end of 2008.
In
Energy Industries Association (SEIA) has
recommended that any reduction in rebate levels
not exceed 50% of the estimated value of the
Federal ITC.17 To date, several PV programs,
including those in New Jersey, Oregon, and
Wisconsin, have reduced their grant levels in
ur findings also have important implications
inally, the fact that residential system owners
response to EPAct’s new and expanded federal
credits. For the most part, these reductions have
been relatively modest (except perhaps with
respect to larger residential systems) in
comparison to the maximum incremental value
of the EPAct credits presented in Figure 1.
O
for policy design, and the type of incentive
offered. Specifically, many PV programs
(including California’s new $3.2 billion, 11-year
solar initiative) are considering shifting (or have
shifted) from capacity-based incentives (i.e., the
$/W grants described in this paper) to
performance-based incentives (i.e., $/kWh
payments over time), at least in part based on the
belief that capacity-based incentives reduce the
project’s basis to which federal tax credits and
depreciation apply, making them less valuable
than performance-based incentives, which do
not reduce basis. As shown in this report,
however, capacity-based incentives will only
reduce tax basis if they are non-taxable, which in
many cases appears unlikely (particularly for
commercial systems) given the tax analysis
presented above. As such, though there may be
good reasons for shifting to performance-based
incentives, maximizing the value of federal tax
credits may not be among them.
F
benefit most from non-taxable grants (while
commercial owners prefer taxable grants) has
implications for PV program administration.
Where possible, new PV incentive programs for
residential customers would ideally be
administered in a way so that non-taxable grants
can be provided (e.g., by utilities or non-profits
that fall under the Section 136 exclusion).
Within existing programs, administrators may
want to seek clarification from the IRS –
perhaps using arguments that capitalize on some
of the uncertainties presented in this report – that
their residential (but not commercial) incentives
are non-taxable.
17 In addition, SEIA recommends that the total
program budget be maintained (i.e., so that the
program is able to support a greater number PV
systems at the reduced grant level), that any
reductions in grant size be made in such a way as to
not degrade the economics for any customer class
(i.e., use differentiated incentives), and that changes
be made in a transparent and forward-looking
fashion.
Exploring the Economic Value of EPAct 2005’s PV Tax Credits 9
Case Studies of State Support for Renewable Energy February 2007
ABOUT THIS CASE STUDY SERIES
A number of U.S. states have established clean energy funds to support renewable and clean forms of electricity
production. This represents a new trend towards aggressive state support for clean energy, but few efforts have
been made to report and share the early experiences of these funds.
This paper is part of a series of clean energy fund case studies prepared by Lawrence Berkeley National
Laboratory and the Clean Energy States Alliance. The primary purpose of this case study series is to report on
the innovative programs and administrative practices of state (and some international) clean energy funds, to
highlight additional sources of information, and to identify contacts. Our hope is that these case studies will be
useful for clean energy funds and other stakeholders that are interested in learning about the pioneering
renewable energy efforts of newly established clean energy funds. To access or download all the case studies,
see: http://eetd.lbl.gov/ea/ems/cases/ or http://www.cleanenergystates.org/
ABOUT THE CLEAN ENERGY STATES ALLIANCE
The Clean Energy States Alliance (CESA) is a non-profit initiative funded by members and foundations to
support the state clean energy funds. CESA collects and disseminates information and analysis, conducts
original research, and helps to coordinate activities of the state funds. The main purpose of CESA is to help
states increase the quality and quantity of clean energy investments and to expand the clean energy market. The
Clean Energy Group manages CESA, while Berkeley Lab provides CESA with analytic support.
CONTACT THE MANAGERS OF THE CASE STUDY SERIES
Ryan Wiser Mark Bolinger Lewis Milford
Berkeley Lab Berkeley Lab Clean Energy Group
1 Cyclotron Rd., MS90-4000
Berkeley, CA 94720
105 North Thetford Road
Lyme, NH 03768
50 State Street
Montpelier, VT 05602
510-486-5474 603-795-4937 802-223-2554
rhwiser@lbl.gov mabolinger@lbl.gov lmilford@cleanegroup.org
FUNDING ACKNOWLEDGEMENTS
Berkeley Lab’s contributions to this case study series are funded by the Clean Energy States Alliance, and by the
U.S. Department of Energy (the Assistant Secretary of Energy Efficiency and Renewable Energy, as well as the
Office of Electric Transmission and Distribution, Electric Markets Technical Assistance Program) under
Contract No. DE-AC02-05CH11231. The Clean Energy Group's efforts in connection with this work and
related activities are funded by the Clean Energy States Alliance, and by The Surdna Foundation, the Rockefeller
Brothers Fund, the Oak Foundation, The John Merck Fund, The Emily Hall Tremaine Foundation, and The
Education Foundation of America.
DISCLAIMER
This document was prepared as an account of work sponsored by the United States Government. While this
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thereof, nor The Regents of the University of California, nor any of their employees, makes any warranty,
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Exploring the Economic Value of EPAct 2005’s PV Tax Credits 10