Guide to On-Site Renewable Energy Incentives in the Energy Policy Act
Power-Gen RE 2006 -- The Energy Policy Act of 2005 has several provisions to encourage investment in distributed generation and other uses of solar energy for commercial, industrial and residential projects. It extends a business tax credit, creates a residential tax credit, among other measures. In addition to these federal incentives, some states are responding with changes to their own incentives, and others are considering new programs.
April 12, 2006
WEDNESDAY -- The Energy Policy Act of 2005 created or expanded federal tax incentives to encourage investment in solar energy by businesses and consumers alike.
The goal of the incentives is to make solar energy financially more viable in the short run, thus increasing adoption. More installations lead to economies of scale that would theoretically reduce the cost of solar energy products, making them more viable in the long run.
Expands business tax credit
"The Energy Policy Act has created several tax incentives that improve the economics of solar," says Rhone Resch, Director of the Solar Energy Industries Association.
The Act expanded the existing Investment Tax Credit from 10 percent to 30 percent. The tax credit applies to all costs -- design, engineering, equipment, and installation -- of a solar energy system for a business.
"This business tax incentive covers all solar technologies," says Resch, "including concentrated solar power, solar thermal, solar water heating for industrial and commercial applications, photovoltaics, and even fiber-optic lighting systems."
Creates residential tax credit
The Energy Policy Act created the first residential tax credit for solar energy in over two decades.
"This is substantial," says Resch, "because for 20 years, since the Reagan administration, there has been nothing to encourage consumers to invest in solar."
The residential tax credit is applicable to 30 percent of the equipment cost, up to $2,000 per home. It applies to photovoltaics and solar water heaters.
"It improves the economics enough to reach a tipping point for consumers to make the decision to invest in solar," Resch explains. "Installers tell us consumers have been waiting for something, that little sweetener. It's only $2,000, but it's a signal."
Resch gave an example of a residential 3 kW photovoltaic installation. The solar power provides almost half of the home's electricity. Installed cost was approximately $7.50 per watt. Without the tax credit, the payback period at current electric rates is 13.5 years. With the $2,000 tax credit, the payback period is shortened to 10 years.
Other provisions will help the solar industry
The Energy Policy Act created several other provisions that will be beneficial to the solar industry by encouraging investment or advancing research. They include:
- Government photovoltaics purchase program to install 150 megawatts of solar power on government facilities, although it has yet to be funded.
- Requirement for states to consider net metering, interconnection, and time based rates.
- Clean and Renewable Energy Bonds Program.
- Federal loan guarantee program that Resch thinks will be used very widely by the concentrating solar power industry.
- R&D provisions totaling $250 million annually.
States are responding
"The Energy Policy Act, in and of itself, was not enough," says Resch. "It was a start, but states need to step up and do their part to ensure that renewable energy technologies are implemented widely."
Eleven states have created new programs, or adjusted their existing incentive programs, to account for the new federal tax incentives in some way.
"States reacted to the Energy Policy Act provisions for solar," Resch says. "Maybe they reduced their incentive levels a little to leverage them across more installations. We expect this trend to continue, and we see new states willing to make the commitment to solar incentives, now that they see Congress making a commitment."
Guide to on-site renewable energy incentives
The Solar Energy Industry Association recently published the SEIA Guide to Federal Tax Incentives for Solar Energy. The guide covers tax credits and other incentives for commercial and residential solar energy. It is free to download in return for nominal personal information. (For SEIA purposes, most of our readers are "Solar Consumers;" the section marked "Solar Businesses" is for companies who make or sell solar energy products.)
Comments
Selling Renewable Energy (Solar Etc.) Without Incentives
In short, we need to market solar as an investment that will save money while you own it and return most or all of your investment when you sell the building it's sitting on.
Chances are, as natural gas and oil prices go up, there will be a corresponding jump in your monthly electricity bill. So, instead of promoting a solar power system based on today's savings in electricity, we need to have easily understandable projections on what the savings will be over the life of a system. These numbers need to reflect what's really happening to the cost of energy!
Here are some ideas I'd like to share. First, we need to find a way to make renewable energy economically competitive without the tax incentives. We do this by answering the question: "What is the opportunity cost of not using solar to decrease your energy bill?"
There's something interesting I've found. There's a direct correlation among electrical rates, the cost of air conditioning a building, the heat index and the amount of sunshine on any given day. In other words, on the hottest, sunniest days, we use more electricity that costs more per kilowatt. So, why do we continue to promote average hours of solar production, when in fact (at least down here in California), we produce far more solar power per day during the heat of the summer when energy costs are highest, than we do in our temperate winter months when energy costs are lowest. A sound marketing approach would be to evaluate solar energy in "dollars" of production per year instead of in kilowatts. I'm sure there are some smart people out there who can match kilowatts of solar production on any given day of the year to what the rates will be (based on the projected costs of electricity).
Secondly, we should stop trying to sell a solar package as a "cost." In real estate, there is a principle that says anything affixed to real estate becomes an integral part of the real estate. Once a solar package is installed, it immediately increases the value of a property. So how can you predict how much more a building will be worth in 5-10 years with a package as opposed to without one? In the real estate appraisal business, there are three approaches to appraising a property. The market approach (what are comparable properties selling for), the reproduction cost (the cost of creating an identical building at current construction and material prices) and the actual original cost adjusted for inflation. In all three methods, there's a strong case that a system installed today will make the building worth more today and in future years.
We need some realistic numbers to predict how much more a property will be worth in the years following installation. I believe that if you sell a building 5-10 years after installing solar, you should recoup all of your investment in the system plus an added bonus. If the rumors are true, a residential system (using the market approach) adds $20 of value to a home for every $1 it saves on the electric bill.
For commercial appraisals, you would divide the income (savings) by a cap rate (which was about 9% at last report). A system that saves $2000 a year then would be worth $40,000 on a home or $25,000 on a business. But if the cost of electricity goes up (if that is remotely possible), then wouldn't the value of the solar power system increase as well? In reality, we are not selling something that costs — we are actually offering a financial investment that grows comparably with other forms of energy.
In short, we need to market solar as an investment that will save money while you own it and return most or all of your investment when you sell the building it's sitting on. In commercial real estate, they use a "Cash Flow Analysis" form as the tool to evaluate a building's value using the income approach. We need a similar tool for putting a value on solar. If solar makes sense with this approach, then just think of how much better the systems look when you add the tax advantages!
This approach also applies to the cost of Energy efficiency implementation.
Reducing operational costs increases the value of the business and or property.
Compiled by Jay Draiman, Energy analyst
12/1/2007
Posted by: JaJy Draiman, Energy Analyst | December 13, 2007 11:55 PM
BOYCOTT ALL CARS THAT ARE LESS THAN 100 MPG
Do you want to see a quick resolution to the energy crisis?
The public should boycott from purchasing any vehicle that is less than 100 mpg.
That is surely to grab the automobile industry attention worldwide to produce an energy efficient car that does 100 mpg or better on alternative energy – the vehicle must be pollution free.
“The ‘big three’ is not the ‘big three’ anymore,” Iacocca told National Public Radio, referring to the falling sales of General Motors, Ford, and Chrysler. “[They] didn’t adapt quickly enough to the energy problem in this country [and were] not ready with the right kind of cars.”
Any big corporation that is too bureaucratic and cumbersome to quickly react to changing market conditions is doomed to failure.
In today’s fast moving market conditions and technology – you must be innovative, utilize the cutting edge of technology and produce a quality and economical product.
The public has a short memory, all they care is what have you done for me lately.
In life we must always live in hope.
Jay Draiman
Posted by: Jay Draiman, Energy Analyst | June 19, 2008 08:48 PM