STICK IT WHERE THE SUN SHINES INCENTIVES FOR INSTALLING SOLAR FACILITIES ON COMMERCIAL PROPERTY

Transcription

1 STICK IT WHERE THE SUN SHINES INCENTIVES FOR INSTALLING SOLAR FACILITIES ON COMMERCIAL PROPERTY ACREL 2013 Valerie A. Blair Mark S. Hennigh Greene Radovsky Maloney Share & Hennigh LLP Four Embarcadero Center, Suite 4000 San Francisco, California (415)

2 SOLAR POWER INCENTIVES FOR COMMERCIAL PROPERTY I. INTRODUCTION: SOLAR ENERGY AND SAVINGS Many businesses and commercial property owners have already discovered that now is a good time to go solar. For many companies, an investment in solar energy is not only beneficial for the environment, it is also smart business. The average cost of a commercial solar installation dropped almost 14 percent between 2011 and mid In the first half of 2012, more than 3,600 nonresidential solar installations were activated throughout the United States. 2 Thanks to a record-setting 477 megawatts of solar capacity activated in the second quarter of 2012, the U.S. now has 5,700 megawatts of installed solar capacity enough to power 940,000 homes. 3 Tax savings and cash incentives provided by federal, state, and local governments throughout the country mean many property owners and operators can save money on utility bills by using self-generated solar energy instead of utility-provided electricity. This article surveys the financial incentives available to commercial property owners who make solar energy-related investments. The two most common forms of solar energy are photovoltaic ( PV ) systems and solar thermal systems. Most conventional solar panels are composed of PV cells, which convert sunlight into direct current ( DC ) electricity. An inverter inverts the DC energy into the alternating current ( AC ) energy that powers buildings and appliances. 4 By contrast, solar thermal systems use heat from the sun to produce electrical energy from steam and hot water. Because PV systems are currently the dominant technology used by most commercial solar customers, references to solar panels or solar equipment in this article mean PV systems unless otherwise specified. A commercial solar project can be expensive, especially at the time of the initial purchase. However, PV systems are reliable most have at least 10-year warranties, and are expected to last up to 25 years. 5 Solar installations have been shown to increase a building s resale value, and energy savings combined with revenue produced through performance-based incentives (discussed below) can translate into significant-long-term operating savings. Many state and 1 Solar Energy Industries Association ( SEIA ), U.S. Solar Market Insight: 2nd Quarter 2012, Sept. 10, 2012 (hereafter, SEIA Q2 Report ) Diane Cardwell, Chain Stores Said to Lead Firms in Use of Sun Power, NEW YORK TIMES, Sept. 12, SEIA Q2 Report, supra, note 1. 4 See Go Solar California, Consumer Guide to the California Solar Initiative 4-5 (2008) available at (last visited Aug. 1, 2012) for basic explanations of solar energy processes. 5 Go Solar California, Consumer Guide to the California Solar Initiative, supra, note 4. at 14. VAB/

3 federal financial incentives are designed to decrease or phase out as America s solar capacity increases, so the incentives discussed in this article will not be around forever. Throughout the United States, buildings with solar installations are interconnected with the local, regional, utility-run electricity grid. Through a process known as net metering, solar equipment producing electricity in excess of what a building consumes transmits the surplus solar-generated electricity directly into the utility grid, and the building s bi-directional energy meter (which measures the building s net electricity usage and production) runs backward. Customers are credited for the full retail value of the solar-generated energy their systems transmit to the grid, which can reduce (or, hypothetically, even eliminate) their utility bills. Whether an investment in solar equipment makes business sense depends on a variety of factors. At the outset, a business must consider its unique electricity needs, the size and layout of its buildings, and the local weather patterns to determine whether a solar installation would generate enough power to warrant the investment. PV systems can be free-standing or installed on a wall, but commercial installations often take advantage of large, unobstructed space on a building s roof or a parking lot. As a rule of thumb, power output from a solar system is roughly 1 kilowatt per 100 sq. ft. of installed PV panels, though actual production capacity depends on the climate and the orientation of the roof. 6 Commercial installations range dramatically in size, from less than 10 kilowatts to more than 1 megawatt. 7 On average, 1 megawatt of solar capacity generates enough electricity to power 169 homes. 8 Note that the information presented in this article is intended to be an introduction to solar incentives for businesses and commercial property owners throughout the United States. Nothing herein is intended to constitute tax advice and should not be relied upon as such. For tax advice applicable to your company and your region, consult with a licensed tax professional. II. TYPES OF INCENTIVES There are several different categories of financial incentives designed to spur increased investment in and production of solar energy. The following subsections lay out the general scheme of solar energy incentives. Specific incentives and statistics are discussed in more detail in Sections III and IV. 6 South-facing roofs typically offer the most annual solar energy production, but west-facing roofs can produce more power during peak energy periods when conventional electricity is more expensive. Renergy, Inc., Commercial Solar FAQ s, available at (visited Nov. 1, 2012). 7 As a point of reference, the average size of a residential system (nationwide, in the second quarter of 2012) was 5.9 kilowatts, SEIA/GTM Research, U.S. Solar Market Insight Report: Executive Summary (Q2 2012), whereas Google s enormous 1.7 megawatt solar array in Mountain View, California produces about 3 million kilowatt hours per year, Google Green, Renewable Energy, available at (visited Nov. 1, 2012). 8 SEIA Q2 Report, supra, note 1. 2

4 A. Direct Cash Incentives Direct cash incentives for solar investment, which may take the form of up-front incentives (grants, rebates, or buydowns) or performance-based incentives (payments based on electricity produced) encourage investment in solar technologies by reducing or offsetting the cost of solar installations. Direct incentives may be available at the federal, state, or local level. In practice, the specific terms for cash incentives are used interchangeably, though the meanings differ. A grant is usually a cash payment issued through a rigorous application process. A rebate is a return of part of an investor s payment for qualified equipment or service. A buy-down often takes the form of a sum paid directly to the contractor, supplier, installer of qualified equipment, with the savings passed on to the solar investor. 9 These upfront incentives are used to stimulate investment in early stages of a technology when the equipment is expensive, or to subsidize outlays during times of economic hardship. 10 Performance-based incentives, such as feed-in tariffs ( FIT ) and renewable energy credits or certificates ( REC ), are based on the energy output of a functioning solar installation. Unlike up-front incentives, they do not reduce the investor s initial outlay, but rather provide a revenue stream that can offset financing costs or contribute to profitability. A feed-in tariff is a governmentally mandated program that requires utilities to purchase electricity from renewable resources for a specified price per kilowatt-hour, usually over a fixed, long-term period of time. REC programs give solar customers a specified renewable energy credit based on the amount of solar electricity produced. The customer may then sell the REC to a utility, the government, or a private entity, depending on the requirements and restrictions of the particular REC program. 11 By contrast, net metering credits the solar electricity producer with the retail value of all electricity produced when it is delivered into the electric grid and sold to the utility, with the effect of offsetting or eliminating the solar-producing customer s electric bill. 12 By subsidizing investment in solar energy, direct cash incentives have expanded the implementation of solar technologies and contributed to the significant decrease in cost of solar 9 For example, Oregon s Solar Electric Buy-Down Program offers up to $75,000 to commercial entities who invest in solar equipment. Contractors referred by the state s Energy Trust install approved equipment to certain standards, the Energy Trust pays the contractor directly, and the contractor deducts that payment from the customer s ultimate cost. See (visited Sept. 10, 2012). 10 The Federal Government s now-expired Renewable Energy Grants, discussed below, are an example of up-front incentives intended to stimulate growth during the recent recession. 11 The AEP Ohio - Renewable Energy Credit Purchase Program gives customers one REC for each megawatt hour of solar electricity they produce. The customers may then sell their solar RECs to the Ohio utility AEP Ohio for $ each for the year. See (visited Sept. 10, 2012). 12 For a discussion of different forms of net metering and varying electricity rate structures, see Andy Black, Economics of Solar Electric Systems for Consumers: Payback and Other Financial Tests, July 2009, available at (visited Sept. 10, 2012). 3

5 installations over time. Direct cash incentives for investments in solar photovoltaics and thermal systems are available in over 20 states and at over 200 utilities. 13 B. Tax Incentives Federal and state tax incentives provide a direct reduction in an investor s tax liability to offset or subsidize the cost of purchasing or installing qualifying solar equipment. Tax incentives for solar investment include a variety of tax credits, exemptions, and refunds. At the national and state level, income tax credits have historically been and continue to be a prominent method of promoting renewable energy development by offsetting income tax, sales tax, franchise tax, or other local taxes. 14 Tax credits are most beneficial for the commercial sector, because most governments, schools, non-profits, and individuals have little or no tax liability to offset. 15 The federal government and around twenty states offer investment tax credits for solar equipment and installation. C. PACE Financing, Loan Guarantees, And Third-Party Financing Property Assessed Clean Energy ( PACE ) financing is an innovative financing method designed to help property owners overcome the financial barriers of substantial up-front costs of solar installations. In a PACE financing program, property owners borrow money from a local government to pay for solar equipment, and the amount borrowed is typically repaid through a special assessment on the borrower s real property tax bill. This allows the cost of the equipment to remain attached to the property where it is installed, rather than making the property owner personally liable for payment for the system if the property is sold. Like a long-term, fixed-rate home loan, PACE financing can make a solar investment more affordable by spreading the costs over time. Administrative costs of PACE programs are usually covered by bonds and insurance paid by participating property owners. PACE programs have traditionally been focused on residential owners, but legal actions taken by the Federal Housing Finance Agency ( FHFA ) and other regulators have put some residential PACE programs on hold, with a corresponding shift toward commercial PACE financing. 16 In fact, FHFA and the Office of the Comptroller of the Currency have issued 13 See the Database of State Incentives for Renewables & Efficiency s ( DSIRE ) explanation of direct cash incentives at its Solar Policy Guide website, (visited Sept. 10, 2012). 14 Florida, for example, has exempted solar energy systems (including equipment and hardware) from sales tax since July 1, See FLA. STAT See DSIRE Solar Policy Guide, supra, note See Lawrence Berkeley National Laboratory, Renewable Funding, and the Clinton Climate Initiative, Policy Brief: Property Assessed Clean Energy (PACE) Financing: Update on Commercial Programs, Mar. 23, 2012, at 1, available at (visited Sept. 10, 2012) (hereinafter, the Lawrence Berkeley Policy Brief ). 4

6 guidance warning lenders and government-sponsored enterprises Fannie Mae and Freddie Mac not to purchase loans involving first-lien PACE loans. 17 PACE programs are usually implemented by cities and counties, often under state approved plans or programs. A loan guarantee is a promise by a guarantor (in this context, usually a government entity) to pay a borrower s loan in the event the borrower defaults. In a tight lending market, lenders frequently require loan guarantees, especially when the loan funds are invested in new and emerging technologies. In addition to PACE financing and loan guarantees, a new financing mechanism allows thirdparty solar companies to install systems for little or no upfront cost to the owner and receive payments for electricity generated by the system pursuant to a long-term agreement; in effect a power purchase agreement ( PPA ). In the PPA model, the host customer contracts with a solar installer/developer to construct a solar array on the host customer s property. The installer/developer owns the solar equipment but sells the electricity back to the customer at an agreed-upon rate (often, lower than the rate of the local utility). This financing model allows the host customer to avoid the initial capital outlay and allows the installer/developer to capture the PPA revenues, cash incentives, federal, state, and local tax incentives, and REC benefits. The use of PPAs among commercial customers has increased dramatically over the past decade, and has become a standard practice in many states (though the PPA model is subject to legislative and regulatory challenges in some states). 18 In addition to providing a financing mechanism for purchase of a system this mechanism also provides a long term hedge against fluctuations in electricity costs. 19 Given the volatility in the energy markets and the seemingly ever increasing cost of utility provided electricity, the hedge against price increases offers another real current value to a property owner. III. FEDERAL INCENTIVES The Internal Revenue Code (the Tax Code ) contains numerous incentives designed to encourage investment in renewable energy. The American Recovery and Reinvestment Act of 2009 ( ARRA ) provided businesses with unprecedented investment incentives, and made investments in solar energy equipment more cost effective and feasible than ever before. 20 Among the federal incentives available to businesses are a 30% Business Energy Investment Tax Credit ( ITC ), a loan guarantee program, and an accelerated depreciation tax deduction. 17 BNA Environmental Reporter, Vol. 43, No. 42, pg ( ). 18 National Renewable Energy Laboratory, Solar PV Project Financing: Regulatory and Legislative Challenges for Third-Party PPA System Owners, Technical Rept., Rev d Feb See Cardwell, Chain Stores Said to Lead Firms in Use of Sun Power, NEW YORK TIMES, supra, note American Recovery and Reinvestment Act of 2009, Pub. L. No , 123 Stat. 115 (enacted Feb. 17, 2009), (codified in various sections throughout the United States Code), available at (last visited Aug. 1, 2012) (hereafter ARRA ). 5

7 A. The Business Energy Investment Tax Credit Section 48 of the Tax Code provides a 30% ITC to commercial and industrial taxpayers who invest in solar energy property. 21 The ITC was expanded significantly by the Energy Improvement and Extension Act of 2008, and again by the ARRA. 22 ITCs are available for solar equipment placed in service on or before December 31, The credit is equal to 30% of expenditures on the solar equipment and installation, with no maximum limit. Solar energy property eligible for the 30% ITC includes equipment that uses solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat. Hybrid solar lighting systems, which use solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight, are also eligible. 23 To qualify for the ITC, the taxpayer must either (1) complete the construction, reconstruction, or erection of the energy property or (2) acquire and become the original user of the energy property. The property must also be depreciable or amortizable, and must meet the Department of Energy s performance and quality standards in effect at the time the property is acquired. 24 In the ARRA, Congress gave solar energy property more favorable treatment than several other categories of renewable energy property. Whereas several other categories of renewable energy are bound by a more limiting termination date (before 2014) or a lower percentage-ofbasis credit amount (10%), solar energy property enjoys the relatively generous combination of a January 1, 2017 credit termination date and a credit equal to 30% of cost basis. 25 Prior to the enactment of the ARRA in 2009, a taxpayer s eligibility for the ITC was reduced if that taxpayer received subsidized energy financing, (defined as financing provided under a Federal, State, or local program a principle purpose of which is to provide subsidized financing for projects designed to conserve or produce energy ). 26 The ARRA repealed the subsidized energy financing limitation for all projects placed into service after December 31, It is important to note that, now, commercial taxpayers can take advantage of the 30% ITC in See 26 U.S.C. 48. See ARRA U.S.C. 48(a)(3)(A)(i)-(ii). The main exclusions from ITC eligibility, passive solar systems and solar pool-heating systems, are generally not relevant to the commercial retail sector. See 26 U.S.C. 48(a)(3)(A)(i) U.S.C. 48(a)(3)(B), (C), and (D). 25 U.S. Treasury Dept. Grant Program Guidance, available at 11%20revised%20(2)%20clean.pdf. The termination date is the date the property must be placed in service See 26 U.S.C. 48(a)(4)(A)-(C). See 26 U.S.C. 48(a)(4)(D) (as amended in 2009). 6

8 addition to other valuable energy finance subsidies as specified by the Internal Revenue Service. Moreover, unused commercial credits can be carried forward for up to 20 years. 28 B. Additional Federal Incentives: Past and Present 1. U.S. Department of Treasury Renewable Energy Cash Grants Until December 31, 2011, the U.S. Treasury Department offered Renewable Energy Grants to commercial taxpayers. 29 The grants, offered as an alternative to the ITCs, were designed to encourage investment in specified types of energy during the recent recession. 30 It appears to have worked: construction on solar installations soared during the latter part of the grant term, and contributed to an 85 percent increase in solar installations in the first quarter of At the time of this writing, the federal grant program has unfortunately expired. 2. Energy-Efficient Commercial Buildings Tax Deduction Tax Code section 179D(a) provides a tax deduction for energy efficient commercial buildings. 32 The deduction, established by the Energy Policy Act of 2005, applies to qualifying energyefficient commercial buildings and systems placed in service on or after January 1, 2006 but on or before December 31, This tax deduction can provide commercial building owners and tenants with tax savings of between $0.30 and $1.80 per square foot, depending on the nature of the installations and the identity of the taxpayer (i.e., owner versus tenant; commercial versus government sector). Energy efficient commercial building property is defined in Tax Code section 179D(c)(1). 34 The tax deduction is taken in the year that the property is placed in service See 26 U.S.C. 39(a)(1). 29 Unfortunately, the grants were only available for projects where constructions commenced before See U.S. Treasury Dept. Grant Program Guidance, supra, note 25, at See ARRA: H.R. 1, Div. B, 1104, 1603 (2009). Matt Daily, U.S. Solar Installations Jump in First Quarter, REUTERS June 12, U.S.C. 179D. See id. (as amended by the Energy Improvement and Extension Act of 2008, H.R. 1424: Div. B 303). 34 As provided in 26 U.S.C. 179D(c)(1), energy efficient building property is property: (1) for which depreciation is allowable, (2) which is installed on or in a building in the U.S., within the scope of Standard of the American Society of heating, Refrigerating and Air Conditioning Engineers and the Illuminating Engineering Society of North America, (3) which is installed as part of the interior lighting systems, the heating, cooling, ventilation, and hot water systems, or the building envelope, and (4) which is certified as being installed as part of a plan designed to reduce the total annual energy and power costs for the interior lighting, heating, cooling, ventilation, and hot water systems of the building by 50% or more in comparison to a reference building that meets the minimum requirements of Standard , using methods of calculation specified by the Internal Revenue Service. For more information and answers to frequently asked questions, see the website of the Commercial Building Tax Deduction Coalition, available at (last visited October 20, 2010). 7

9 3. The Modified Accelerated Cost-Recovery System (MACRS) Under the Modified Accelerated Cost-Recovery System ( MACRS ), codified in Tax Code section 168, certain investments in solar power and other types of projects can be recovered through accelerated income tax deductions for depreciation. The federal Economic Stimulus Act of 2008 included a 50% bonus depreciation provision for eligible renewable-energy systems acquired and placed in service in The bonus depreciation provision was extended through the 2009 tax year by the ARRA, and renewed in September 2010 by the Small Business Jobs Act of In December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 extended bonus depreciation through 2012, with solar property placed in service before 2013 eligible for 50% bonus depreciation. 38 For more information on the federal MACRS, see IRS Publication 946, IRS Form 4562: Depreciation and Amortization, and Instructions for Form U.S. Department of Energy Loan Guarantee Program The Department of Energy ( DOE ) is authorized to issue loan guarantees for projects which avoid, reduce or sequester air pollutants or anthropogenic emissions of greenhouse gases; and employ new or significantly improved technologies as compared to commercial technologies in service in the United States at the time the guarantee is issued, with a goal of making financing available for innovative clean energy technology that may otherwise have difficulty obtaining private funding due to risks associated with the new technologies. 39 At the time of this writing, Section 1703 of the Energy Policy Act of 2005 makes loan guarantees available for commercial solar investors See 26 U.S.C. 179D U.S.C. 168(k). The effect of the bonus depreciation for qualifying property means a first-year deduction is 50% of the adjusted basis of the property. DSIRE explains that in the case of the % first year deduction, the remaining 50% of the adjusted basis of the property is depreciated over the ordinary MACRS depreciation schedule. The bonus depreciation rules do not override the depreciation limit applicable to projects qualifying for the federal business energy tax credit. Before calculating depreciation for such a project, including any bonus depreciation, the adjusted basis of the project must be reduced by one-half of the amount of the energy credit for which the project qualifies. See (visited Sept. 10, 2012). 37 Small Business Jobs and Credit Act of 2010, Pub. L. No: , 124 Stat (enacted Sept. 27, 2010), (codified in scattered sections of the United States Code), available at (last visited Sept. 10, 2012). 38 H.R. 4853, enacted Dec. 17, 2010; IRS Rev. Proc See 42 U.S.C et seq., as amended by the Energy Policy Act of 2005 and extended by the ARRA of See also U.S. Dept. of Energy, Loan Guarantee Program website, available at (visited Sept. 10, 2012). 40 The ARRA reauthorized and revised the loan guarantee program in 2009 by adding section 1705 to the Energy Policy Act. Section 1705 expired September 30, 2011, but section 1703 of the Act still provides loan 8

10 The DOE loan guarantee program gained notoriety after the federal government lost more than $500 million of guarantee funds when solar manufacturer Solyndra ceased operations and filed for bankruptcy in To date, the $35 billion loan guarantee program has provided loan guarantees to 4 U.S. solar panel manufacturers. 41 In September 2012, the Republicancontrolled U.S. House of Representatives passed the No More Solyndras Act which would curb the DOE s ability to make renewable energy loan guarantees. Although the Act highlighted public outrage over the Solyndra debacle during the 2012 election season, it is expected to stall before reaching the President. 42 IV. STATE AND LOCAL INCENTIVES Solar energy markets vary widely across the United States. Nearly every state in the union offers some type of renewable energy investment incentive. As a result, across the country, the cost of a commercial solar installation depends not only on the political and policy climate, the business climate, and of course, the weather but also on the locale s incentive regimes. Table 1 provides a snapshot of the states and territories participating in a variety of incentives and renewables policies. Incentive/ Policy Tax Credits for Renewables Sales Tax Incentives Renewable Portfolio Standard Policies with Solar/ Distributed Generation Provisions Rebate Programs for Renewables Public Benefits Funds for Renewables Property Tax Incentives Net Metering Policies Loan Programs for Renewables Grant Programs for Renewables Energy Efficiency Resource Standards Third-Party Solar PV Power Purchase Agreements Table 1: 50-State Snapshot (All Sectors) 43 Number of States and Territories Participating 24 total, 22 with corporate tax credits 28 states + Puerto Rico 16 states + Washington, D.C. 16 states + Washington, D.C. and Puerto Rico 18 states + Washington, D.C. and Puerto Rico (total: $7.8 billion by 2017) 38 states + Puerto Rico 43 states + American Samoa, Guam, Puerto Rico, and the US Virgin Islands 36 states + the US Virgin Islands 16 states + Puerto Rico and the US Virgin Islands 20 states Authorized in at least 22 states + Washington, D.C. and Puerto Rico This Section offers an overview of state and local policies, providing several noteworthy or representative examples from various jurisdictions. A comprehensive analysis of each state is beyond the scope of this Article, but the reader is directed to the DSIRE USA website, for state-specific information. guarantees. For more information visit the DOE s website, supra, note Nichola Groom, U.S. Poised to Hand Over $197 Million to San Jose Solar Panel Startup, SAN JOSE MERCURY NEWS, Sept. 24, Meg Handley, No More Solyndras Act Takes a Beating from All Sides, U.S. NEWS, Sept. 14, Data obtained from DSIRE Solar Database, available at (visited Sept. 12, 2012). All data is from June through September,

11 Recently, many states, including New Jersey, New York, and Arizona have enacted important solar energy investment policies; however, California has long been on the cutting edge of solar development and investment incentives, and has served as a model for other states and localities interested in boosting solar energy production. A. A Brief Discussion of the California Solar Initiative California s solar installations produce over half of the nation s solar power. 44 California s widespread investment in solar energy is due in large part to a favorable taxation scheme, which gives strong economic incentives to taxpayers, including businesses, to invest in solar energy. In 2006, the California Public Utilities Commission ( CPUC ) adopted the groundbreaking California Solar Initiative ( CSI ), a statewide program designed to provide financial incentives for solar energy projects. Today, California has 130,275 solar projects, and 1,370 megawatts of installed solar capacity. 45 For systems larger than 10 kilowatts, the average cost is $6.22 per watt. 46 The aim of the CSI was to achieve 3,000 megawatts of solar capacity by the year through a series of expected performance-based buydowns, or EPBBs (paid based on the verified size and location characteristics of the solar energy system), and performance-based incentives, or PBIs, consisting of a flat cents-per-kilowatt hour payment for a customer s output. 48 Table 2: Determining CSI Incentive Structure for Commercial Projects 49 Type of CSI Incentive Payment Structure Size Category 2012 Incentive Payments (Commercial) 50 Performance Based Incentive (PBI) Payments based on the $/kwh produced over 5 year term 30 kw $ $0.025 /kwh 44 See Larry Sherwood, U.S. Solar Market Trends 2009, Interstate Renewable Energy Council, available at (visited Sept. 14, 2012) Go Solar California, (visited Nov. 1, 2012). Id. 47 Legislative Digest of S.B. No. 1 (Aug. 21, 2006) (approving California Solar Initiative), codified at CAL. PUB. RES. CODE et seq. 48 CPUC, California Solar Initiative Program Handbook 4 (Sept. 2012), available at (visited Nov. 1, 2012) (hereinafter, the CSI Handbook ). 49 Information selected from CSI Handbook, Table 4 at 5 and Table 9 at These numbers are based on CSI s incentive step level for commercial customers of California s three main utilities, PG&E, SCE, and CCSE, as of November CSI Statewide Trigger Tracker, Updated Nov. 1, 2012, available at (visited Nov. 1, 2012). 10

12 Expected Performance Based Buydown (EPBB) One lump sum based on $/Watt < 30 kw 51 $ /Watt The CSI was designed to start out with high incentive levels to boost initial investment, and to gradually reduce the incentives as solar capacity approached target levels and as solar installations became more affordable. The incentive payments decrease over a series of 10- steps, based on the volume of megawatts installed in each investor-owned utility territory. 52 Currently, non-residential incentives are at or approaching the 10th step, as illustrated in Table Although California was, in many ways, a pioneer of solar innovation, states around the country are quickly catching up. Recently, many states have enacted important solar energy investment policies and seen great leaps in solar development. The following subsections survey some of the ways different states have implemented solar incentives programs. B. State and Local Cash Incentives More than 20 states offer direct cash incentives for solar investment and production. States began offering direct incentives for solar investment in the 1990 s through the establishment of public benefits funds ( PBF ) created in the midst of a wide-scale restructuring of public utilities. Funding for some states PBF-funded incentives programs has dwindled or run out, while others have received additional funding through legislative action. Still, the bulk of cash incentives are implemented at the state level with funding from PBFs, government reserves, and federal ARRA funds. 54 State performance-based incentives, which are sometimes considered cash incentives, are discussed in a later subsection. Florida Power and Light s Solar Rebate Program makes $15.5 million available annually for solar installations. For commercial producers, the rebate is currently between $1 and $2 per DC watt. 55 The City and County of San Francisco, California implemented a rebate program in 2007 which offers businesses that install solar equipment a capacity-based rebate of up to $1,500 per kilowatt of production capacity, with a maximum of $10,000 per commercial installation. To qualify for the San Francisco solar rebate, businesses must have first received approval for an As of January 1, 2010, PBI is required for all systems 30 kw. Id. See CSI Handbook at 35, 45. CSI Trigger Tracker, supra, note 50. DSIRE Solar Policy Guide, supra, note See Florida Power and Light, Solar Rebates Program website, available at (visited Sept. 10, 2012). 11

13 incentive through the statewide CSI program. Companies that receive both the San Francisco rebate and state incentives are also eligible for the federal tax credit. 56 C. State and Local Tax Incentives 1. Tax Credits Twenty-two states provide investment tax credits to the commercial sector. Tax credits vary significantly from jurisdiction to jurisdiction but generally range from about 10% to 50% of project costs. For a table summarizing each state s solar PV tax credits, visit Iowa has two different renewable energy tax credits applicable to the commercial sector: a production tax credit based on the taxpayer s energy output as well as a sizeable tax credit applied toward the cost of energy-producing equipment. Iowa s production tax credit, enacted in 2005, offers eligible companies up to 1.5 cents per kilowatt hour of solar power flowing into the grid. 57 Iowa s commercial tax credit for solar investment, enacted in 2012, provides businesses with a tax credit of up to $15,000 applied to the cost of solar equipment and installation. 58 Also in 2012, Florida passed HB 7117, providing a corporate production tax credit for electricity generated by solar PV and other technologies through Georgia s Corporate Clean Energy Tax Credit is equal to 35% of the total cost, including installation, of a nonresidential solar system. In June 2011, Georgia extended this tax credit by two years, to 2015, and raised the aggregate credit limit from $2.5 million to $5 million. 60 Louisiana s unique tax credit provides residential uses up to 50% of the first $25,000 toward the purchase and installation of a solar system located on a residential property. The credits can be applied to personal, corporate, or franchise taxes, and the state will issue a refund for any credit amount which exceeds the taxpayers tax liability Other Tax incentives A number of states and municipalities have enacted other tax incentives, such as sales tax exemptions or refunds, which reduce or eliminate the sales tax burden attached to the purchase of solar equipment and thus reduce the capital cost of the overall investment. The rationale for sales tax incentives is that, unlike consumption of fossil fuels, consumption of solar energy SAN FRANCISCO CITY ORD. No (enacted Jun. 8, 2008). IOWA CODE 476C. SEN. FILE 2342 (enacted May 25, 2012). FLA. STAT (as amended on Apr. 13, 2012). The credit is currently $0.01 per kilowatt hour. GA. CODE ANN LA. REV. STAT. 47:

14 requires substantial upfront capital investments which are subject to sales tax. Through sales tax incentives, governments aim to reduce this barrier to investment in sustainable energy resources. The value of sales tax incentive varies significantly with state and local tax rates. Sales tax rates vary by state and municipality: 45 states impose sales tax on solar equipment, and local sales taxes are imposed in 37 states. 62 As of mid-2012, state sales tax rates ranged from 2.9% in Colorado to 7.25% in California. 63 Combined state, county, and local sales tax rates ranged from 4.35% in Hawaii to % in Tuba City, Arizona. 64 Currently, about 20 states provide sales tax incentives for solar investments, most of which take the form of full exemptions from sales tax. 65 California law generally requires that a property be reassessed for property tax purposes each time there is a change in ownership or new construction on the property. California Revenue and Tax Code section 73 excludes active solar energy systems and related solar equipment from the definition of new construction, for the purpose of reassessment. The section 73 exclusion applies to specified solar equipment installed between January 1, 1999 and December 31, 2016, and allows qualifying building owners to avoid reassessment. 66 In 2005, Florida made permanent its sales tax exemption for solar energy property. 67 Corporations in Texas can deduct 10% of the amortized cost of a solar energy device from their state franchise tax (the Texas equivalent of a corporate tax). 68 The City of Boulder, Colorado has implemented a rebate program in 2006 whereby system owners receive a rebate, or tax refund, of about 15% of the sales and use tax paid on their solar installations. 69 D. PACE Financing and Loan Guarantees As of March 23, 2012, 24 states, the District of Columbia, and a handful of municipalities had authorized Property Assessed Clean Energy ( PACE) programs. 70 Currently PACE programs 62 Five states, Alaska, Delaware, Montana, New Hampshire, and Oregon, do not collect state sales tax. 63 Scott Drenkard, State and Local Sales Taxes at Midyear 2012, (Tax Foundation) July 31, 2012, available at (visited Sept. 12, 2012) Id. DSIRE Solar Policy Guide, supra, note 13. CAL. REV. & TAX CODE 73. See FLA. STAT TEX. TAX CODE (effective 1982). 69 See the City of Boulder, Colorado website regarding Solar Rebate and Solar Grant Programs, available at (visited Sept. 14, 2012). 70 Lawrence Berkeley Policy Brief, supra, note 20; DSIRE Solar Policy Tax Guide, supra, note

15 are operating in 8 states: California, Colorado, Florida, Maine, Michigan, Missouri, New York, and Wisconsin. 71 Berkeley, California paved the way for PACE financing at the municipal level, with many cities following suit. 72 The City and County of San Francisco is among the municipalities offering PACE financing to commercial property owners. As discussed above, PACE programs give property owners the chance to borrow money (up to 10% of the assessed value of the property) from the local government to fund their solar investment in exchange for a special assessment on their property tax bill paid off over a 20-year term. 73 However, in extending the PACE program to commercial property owners, San Francisco has encountered the same controversy that affected residential PACE programs; namely, mortgage lenders discomfort with being subordinated to the PACE program loan. A statewide alliance of governmental and environmental groups is working on solving this issue. 74 INCLUDE DISCUSSION OF LOAN GUARANTEES AND 3D PARTY FINANCING E. Performance-Based Incentives Because direct incentives require an explicit funding mechanism, they are often less politically palatable than performance-based incentives. As the U.S. moves out of recession, performance-based incentives, and feed-in tariffs in particular, have been increasingly taking the place of direct incentives Feed-in Tariffs A feed-in tariff ( FIT ) program requires utilities to purchase energy from renewable sources at a fixed rate per kilowatt-hour. A FIT program is a performance-based incentive in that customer payments are based on a guaranteed fixed price for electricity produced (often at favorable rates). With the passage of Assembly Bill 1969 in 2006, California was the first state to enact a feed-in tariff. As amended, the California FIT legislation provides a mechanism for smaller solar generators, up to 3 megawatts, to sell power to their utility companies pursuant to 10- to 20- year contracts. 76 The prices are based on the Renewable Market Adjusting Tariff or Re- 71 DSIRE Solar Policy Guide, supra, note The City of Berkeley s Berkeley FIRST PACE program, established in 2008, is, like many other residential PACE programs, currently on hold due in part to challenges from the Federal Housing Finance Authority. See Lawrence Berkeley Policy Brief, supra, note SAN FRANCISCO ORD (enacted Feb. 2, 2010). Eric Young, S.F. joins lending program for PACE, SAN FRANCISCO BUSINESS TIMES, Jun. 15, DSIRE, DSIRE Solar Policy Guide: A Resource for State Policymakers 9-10 (Dec. 2011) (hereinafter, DSIRE State Policy Guide ). 76 See CAL. PUB. UTIL. CODE (as amended); see also Cal. Pub. Util. Comm n Feed-In Tariff (FIT) Program Website, available at (visited Sept. 13, 2012). 14

16 MAT, a weighted average of auction prices paid by the state s three investor-owned utilities for renewables. In May 2012, the California Public Utilities Commission ( CPUC ) estimated that the 2012 starting price for energy sold through the FIT would start at $89.23 per megawatthour. 77 In 2009, Oregon, Vermont, and Hawaii implemented FIT programs. In the years since, dozens of other states have followed suit. 78 Oregon s FIT program (referred to as the Pilot Solar Volumetric Incentive and Payments Program) is part of an emerging trend to model performance-based incentives after net metering. 79 The pilot program has a statewide cap of 25 megawatts, and limits individual systems to 500 kilowatts. Rather than a floating price-perkilowatt hour, the incentive program establishes a price at the time the system is put into service, and pays that price over a 15-year contract period. The super net metering aspect of the Oregon pilot program is available only for systems up to 100 kilowatts. Super net metering differs from conventional net metering by paying residential and commercial energy producers for the amount of electricity generated, up to the amount consumed, even if the owner/producer consumes the energy itself. By contrast, most net metering programs pay producers only for the excess electricity flowing out to the grid Solar Energy Purchasing Policies/ Renewable Energy Credits Nevada s Energy Portfolio Standard currently requires that at least 15% of the electricity which state electric utilities sell to consumers be derived from renewable sources, and at least 5% of that must be derived from solar energy. The total renewable requirement will jump to 20% in Nevada credits renewable energy system owners with 1 portfolio energy credit ( PEC ) for each kilowatt of renewable energy produced, but boosts the solar PV pay-off to 2.4 PECs per kilowatt-hour. The system owner can then sell the PECs to the utilities at the thenmarket price New Jersey SREC Program The New Jersey SREC program is mandated by the solar provisions of the New Jersey 1999 Electric Discount and Energy Competition Act of 1999 (N.J.S.A. 48:3-49 et seq.) ( EDECA ), as amended by laws enacted in 2010 and earlier this year. The 1999 EDECA required that the New Jersey Board of Public Utilities ( NJPBU ) adopt a renewable energy portfolio standard CPUC DECISION , enacted May 24, 2012, at 46. DSIRE State Policy Guide, supra, note 75, at 11. Id. See OR. PUB. UTIL. COMM N ORDER NO ; see also DSIRE State Policy Guide, supra, note 75, at 81 NEV. ADMIN. CODE et seq.; NVTREC website, available at (visited Sept. 12, 2012). 82 Id. 15

17 ( RPS ), requiring that by January 2012, 4% of the electricity sold in New Jersey by each electric power supplier be from renewable energy sources including solar and wind. The 2010 Solar Energy Advancement and Fair Competition Act extended the solar RPS requirement 15 years to 2026; set a gradually increasing schedule for meeting the solar RPS measured by a State solar gigawatt-hour (gwhr) purchase requirement for electric power suppliers between 2011 (306 gwhrs) and 2026 (5,316 gwhrs); and required electric power suppliers to meet the solar power purchase requirements either by SREC acquisition or Solar Alternative Compliance Payment ( SACP ) payments. The July 2012 EDECA amendment (S-1925/A- 2966) sought to fix the SREC problem (an oversupplied New Jersey SREC market resulting in a dramatic drop in the SREC price), by seeking to drive up the SREC price through a ramp up of the solar RPS requirement intended to revitalize the solar market. The 2012 amendment accelerates the near term rate of increase of the solar RPS requirement beginning in June 2013, while changing it from a fixed statewide gwhr requirement to a percentage of the electricity sold in the State. The 2012 Amendment also included provisions regulating the entry into the market of large SREC heavy grid supply projects. V. CONCLUSION As the nation s solar capacity continues to grow, investment incentives remain plentiful. The desire to do good for the environment is no longer the main reason why so many businesses decide to install solar arrays. Solar, with its wide ranging incentives, makes good business sense. 16