Go Solar for Less than Forty Cents on the Dollar

December 20, 2006 at 11:00 am
Contributed by: Chris

Folks,

I’m catching up the blog today with some of the articles I have written for the free Angel Publishing newsletters. (If you want to read the ones I’ve written for the premium subscriptions, I’m afraid you’ll have to pony up!)

Here’s the first, about the recent extension of the federal tax credits for solar.
Originally published at http://energyandcapital.com/editorials.php?id=323

Go Solar for Less than Forty Cents on the Dollar

December 18, 2006

by
Chris Nelder, Solar Designer

Commercial solar got a new lease on life last week. It’s only a one-year lease, but it’s enough to keep business humming. As one of its final actions, the “Tax Relief and Health Care Act of 2006” or H.R. 6111, the 109th Congress extended the federal investment tax credits for solar, wind, geothermal and other projects for one more year.

The most important element to keeping it alive is a consistent set of incentives so that everybody — from customers all the way back to the refiners of silicon — has a future they can bank on.

For commercial solar this is a very big deal because the tax credit is a full 30% of the cost of the project.

The loss of an incentive that big can turn a viable project into a dead one — and I have seen it happen. It’s a tragic waste for everybody concerned, because getting a commercial solar project done usually requires a good deal of planning and work on both the vendor’s and the client’s side.

For that reason, incentives are truly a double-edged sword. When they’re in place, they can cause explosive growth in the industry. When they’re withdrawn, they can put entire companies out of business.

You see, commercial solar projects can take well over a year to complete. A typical project will cost over $1 million to install, so time and planning are needed to get it budgeted for a fiscal year. The design phase can easily go on for several months as everybody reviews the look and functionality of the system, and evaluates the financial picture. Then several months of work will be required to get the engineering done and approved. Then it’s usually another month or more just to get all the paperwork completed, contracts signed and payments collected. And possibly another month to get the building permit.

So an incentive that is assured for only one year isn’t a recipe for growth. But it does keep projects alive that are already in the pipeline, and it holds out hope for future incentives.

The 30% solar tax credit actually applies to both residential and commercial PV systems, but the residential tax credit is capped at $2000, which is far less than 30% of the cost of a residential system. So for all intents and purposes, residential systems get a $2000 tax credit and that’s it.

But for commercial systems, the tax credit isn’t capped. That 30% federal tax credit, combined with a typical 30% rebate such as we have here in California and sweetened with special depreciation, means that a business can go solar for less than forty cents on the dollar.

When you’re talking about projects that start around a million dollars and go up from there, that’s a powerful motivator. It means that the ROI on commercial systems is often 14% or better. It means that the thing pays for itself in five to seven years and then starts putting hundreds of thousands of dollars back in the customer’s wallet, year after year, for over 30 years. (Actually, today’s solar systems will still produce some power after 75, even 100 years . . . just not that much.)

So it’s very important to keep the train moving and not derail it every year, as has been the unfortunate situation in the past. Incentives may not make for a perfect free market, but they do keep a new market alive long enough to thrive and become competitive.

The solar industry has been wracked and wrenched repeatedly as incentives have come and gone and come again. The most important element to keeping it alive is a consistent set of incentives so that everybody — from customers all the way back to the refiners of silicon — has a future they can bank on.

The lack of consistency has everything to do with why the retail solar industry suddenly found itself starved for product starting about a year and a half ago. The shortage of solar panels was, in turn, the result of a shortage of refined silicon. And that shortage was the combined result of growing demand for solar plus increased demand from the recovering semiconductor industry, which was pulling out of a long depression.

Why didn’t the silicon refiners and wafer manufacturers see the growth ahead and plan to increase the supply of their products? Because a plant like that can cost hundreds of millions of dollars to build and take over a decade to pay for itself. If the solar business is booming this year and busted the next, then investors are very reluctant to go on the hook for such an expensive expansion. They’d rather wait and see if the tax credits and rebates are going to be around for another year before they commit.

In the meantime, the shelves go empty at the module manufacturers and some of the installers out in the field start to lay off workers or go out of business. Just as the business is really starting to take off.

That’s exactly what happened last year. My friends couldn’t understand why solar was all over the media, and lots of people they knew were thinking about going solar, but I was so glum. I knew that I didn’t have any product to sell them. In fact, I was starting to get worried about delivering to customers who had paid in full, up front, more than six months previously — and I still had nothing for them. It’s not a position that any salesman wants to be in, let me tell you.

The shortage that started a year and a half ago still isn’t resolved. It’s better now than it was then, but some think it will take another full year to sort everything out and get all the supply lines running full tilt again.

All of the above is true for photovoltaic solar technologies, but it’s even more so for the new concentrating solar power (CSP) technologies, which require even longer-term investments in R&D and have a longer road to travel to deployment in the field.

The solar industry is pushing for the next renewal of the investment tax credit to be not for a period of one year, but eight! That’s the kind of assurance that’s needed to keep the golden goose of large commercial solar systems laying those nice, fat, megawatt-hour-sized eggs every day. Megawatts that don’t produce greenhouse gases, don’t make any noise, don’t disturb the environment, and don’t consume anything but sunshine.

This is why solar tax credits are so critically important to the continued growth of this nascent industry. Not just because we need them to bag new sales today, but because we need everyone in the supply chain to have confidence in tomorrow.

With the current extension I predict that 2007 is going to be a blowout year for solar. A lot of business owners haven’t realized what an incredible deal solar systems are under the current package of incentives. (And in some states, like New Jersey, the incentives are even better.) But word is getting out. Potential customers who sniffed at a 100 kW design last year and decided to wait are coming back around now, eager to do 300 kW projects.

Because from a financial standpoint, if you are in a state with decent incentives, commercial solar PV is absolutely a no-brainer.

If you can come up with the cash — and most businesses can, particularly with the growing availability of innovative financing like low-cost “green building” improvement loans and third-party financing — then you really have no reason not to go solar. No other investment in your physical plant can even come close to the payoff of PV when you’re buying it for forty cents on the dollar.

Chris Nelder is a solar designer in Marin County, California and a contributing editor to GreenChipStocks.com; an investment advisory service that focuses solely on renewable energy and organic food markets. He is also a contributing editor to WealthDaily.net and EnergyandCapital.com.

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