The Solar industry is booming in America. Within the last ten years, renewable energy technologies have made enormous strides towards becoming cost-competitive with fossil fuel energy sources. In many cases, the cost of adding new renewable generation capacity is already more cost-effective than building new coal or natural gas plant, despite the fact that fossil fuel still receives an estimated $4.6 billion in annual subsidies. This paradigm shift has been caused by numerous factors, including the plummeting cost of renewables and a significant increase in the efficiency with which they’re deployed.
Another important factor in the growth of the solar industry in the US has been the federal tax credit program, through which the government incentivizes renewable energy development. These subsidies, which have invigorated the renewables space, are now set to begin diminishing in value in 2020. In this article, we will break down renewable energy tax credits and discuss what the reductions mean for the future of renewables.
Before we get too deep down any particular rabbit hole, what exactly is a subsidy? A subsidy is a monetary injection or relief from a governmental body aimed at bolstering production, innovation, or consumption. Subsidies can come in many forms and can cover a wide variety of industries. In the case of renewable energy, these subsidies usually come in the form of tax credits. Essentially what this means is that the government wishes to reward anyone who owns or operates a renewable energy system. To understand these subsidies better, let’s take a moment to zoom in on solar.
The federal solar tax credit is known as the ITC (Investment Tax Credit). The policy was first implemented in 2006 under the administration of former President George W. Bush. The ITC gives solar customers a tax credit equal to 30% of the cost of the system. The ITC is available for both residential and commercial projects. The original idea was to provide a little boost to the solar industry for a few years, before tapering off support when the industry had become more robust. Since the ITC was first introduced, the solar industry has grown by a staggering 10,000%. The value of the tax credit was originally slated to be reduced in 2015, but Congress passed a multi-year extension to continue providing the 30% tax credit through the end of 2019.
That brings us to today. The full 30% ITC will be available through the end of 2019, at which point it will begin to ramp down. In 2020, new solar systems will only be eligible for a 26% tax credit. In 2021, the ITC drops another 4% down to 22%. At the end of 2021, the ITC will be eliminated for residential projects, while commercial projects will still be eligible for a 10% tax credit. In light of this information, one thing becomes clear: The best time to go solar is RIGHT NOW, while the maximum ITC value is still on the table.
So what does all this mean for the future of the solar industry? It’s true that the ITC has been a major factor in the success of solar over the past 13 years. However, many of the leaders in the renewable space think that the industry is now robust enough to withstand the curtailment of the ITC program without seeing a significant drop in growth.
Much of the progress made during this period is totally independent of the ITC program, and therefore these gains will not be negated. The cost of solar has plummeted, due in part to the economies of scale that the ITC has helped facilitate. As the market grows, it becomes more attractive for companies to invest in innovation. These innovations have manifested themselves in the form of more efficient equipment and installations. A higher volume of implementation means that each unit of a given category is less expensive than ever before.
This is true for solar panels, inverters, and the racking equipment needed to mount the panels. In the same way, installation companies have been able to increase their efficiency thanks to a healthy amount of practice, as well as more innovative electrical configurations and interconnection options.
All of these factors combined show that the solar industry is in a much better place than it was before the ITC. Solar has gained a foothold as one of the fastest-growing businesses in America, and more innovation is sure to come. Although the ITC has been crucial in terms of achieving this level of progress, the benefits of solar will continue to far outweigh the costs, even as the tax credit program tapers down.
Savvy consumers will certainly be aiming to take full advantage of the ITC while they still can, but even those who choose to wait will still see the financial benefits of stable electricity costs and protection from volatile utility rate structures. As we move forward through 2020 and beyond, solar energy will continue to play a vital role in our transition towards a clean energy economy.