This past year, the solar industry in the US achieved a record year – growing by 34% over 2013 and installing nearly 7,000MW of solar electric capacity. In 2014, solar energy came in second only to natural gas in terms of all new electricity generating capacity in the US. At this pace, the solar energy industry is expected to grow rapidly, with an additional 20,000MW of solar capacity projected over the next two years.
But there’s a potential speed bump on that road to growth – the upcoming expiration of the solar investment tax credit (ITC).
The solar ITC has been, and continues to be, one of the most important federal policies in support of solar energy in the US. The 30% tax credit on solar systems for residential and commercial properties has been key to encouraging home and property owners to enter the solar energy market. We’ve especially seen the impact this year on the residential side, with more and more homeowners now seeing solar panels as an affordable energy alternative and cost savings measure.
While there are some that would see this growth as a sign that the ITC is no longer needed, the truth is that it remains a key component in this drive for growth – remove it and risk slowing down the system significantly.
We’ve seen this happen before. Uncertainty over the extension of the production tax credit (PTC) was a blow to investment confidence in wind energy and led to numerous delays and disruptions in potential projects. When Congress failed to extend the PTC in 2013, new wind installations came to a halt. According to the American Wind Energy Association (AWEA), this resulted in a 92% drop in new wind projects compared to 2012 and a US$23 billion drop in private investment. This echoed similar historic drops seen in 2000, 2002 and 2004 when the PTC had been allowed to expire, creating a pattern of boom and bust in the wind industry. After a relatively steady period of growth, the PTC expiration of 2012 brought this cycle back.
Thanks to extensions late in the year in 2013 and 2014, which allowed projects to qualify by beginning construction or investment within the year and completing in 2015 and 2016, the wind energy industry is currently back in a boom growth period. But for many investors, questions remain about what will happen in the wind industry once these new projects are online. Will there be another lull in development?
Considering the importance of solar energy to the future of energy in the US, it is imperative to avoid this type of uncertainty and disruption. While there are alternative sources of financing available, the truth is that the ITC can often make the difference between a viable project and one that is not. Based on a developer’s access to tax equity, a project can expect to offset about 35 to 45% of installation costs. For solar developers, installers, manufacturers, financial institutions and other investors, the existence of long-term, reliable ITC can position solar as either a viable or fringe sector.
It’s not just direct solar industry participants that benefit from the continuation of the ITC, though. The ITC is playing a key role in shaping the future of energy in the US.
Much has been said in recent years about the need to improve the electric grid system in the US. Not only does the system need to be modernised to address management and security concerns, but also in certain areas, the strain of ageing infrastructure has begun to show under high energy demands. Distributed solar energy can help to ease some of that congestion with systems located near areas where demand is highest. As energy storage systems continue to improve, the amount of relief from such developments will only increase – providing grid operators with more flexibility on when and how to dispatch energy.
Climate change leadership
In 2010, solar energy represented just 0.1% of US electric capacity. Thanks in great part to the success of the ITC, that’s changed significantly. It’s estimated that by the end of 2016, solar energy will be generating 2% of the electricity in the US. This would offset nearly 45 million metric tons of harmful CO2 emissions – the equivalent of removing nearly 10 million cars off US roadways (saving 5 billion gallons of gas) or shuttering 12 coal-fired power plants.
Still, the US remains significantly behind European countries in the adoption and use of solar energy. This past year it was estimated that 3% of electricity in Europe came from solar energy. The share is even more significant when we consider solar energy leaders such as Germany, which saw 50% of electricity from solar use. Effective public policies are part of why solar has been so successful in Europe. And, according to International Energy Agency (IEA), given such effective policies worldwide, solar energy could be poised to be the world’s largest source of electricity by 2050.
In the past few years, the American public has begun to show that it’s ready to seriously consider solar energy options as a viable alternative to traditional energy sources. According to recent polls from research groups such as Gallup, nine out of 10 Americans support the use of solar energy. That support is being reflected in 570,000 residential installations and counting. It’s also being reflected on the business side, with more companies, municipalities and the like incorporating solar installations into their business plans – both for conservation and for cost savings.
It’s clear that solar is becoming more recognised as an energy resource by the public. It’s clear that it’s poised to play an important role in providing the US with a clean, energy independent future. Now is not the time to risk a significant slowdown of solar energy, but rather use drivers such as the ITC to establish it as an integral part of the energy mix.