Fleshing Out America’s Clean Energy Future, The ITC and PTC
On Friday, December 18, the U.S. House of Representatives passed the omnibus spending bill by a vote of 65-33, effectively insuring that the Investment Tax Credit (or ITC, for solar energy) and the Production Tax Credit (or PTC, for wind) remain part of the nation’s clean energy strategy.
The ITC, a 30 percent tax credit for solar energy installations on residential and commercial properties, first appeared in January of 2006 as an amendment to the Energy Policy Act of 2005, and has been extended by one means or another ever since. This most recent extension would leave the credit at 30 percent through 2019, and then drop to 26 percent in 2020, 22 percent in 2021, and finally to 10 percent (for non-residential and third party owned residential systems, but no credit for host-owned residential systems). The omnibus bill also includes a “start of construction” provision, allowing projects to come on-line by the end of 2023 and still qualify for larger credits.
The federal Production Tax Credit, or PTC – on shakier ground in the past, re extensions at least – will maintain the existing $0.023/kWh credit through 2016. In 2017, however, the credit is reduced by 20 percent; by 40 percent, if construction begins in 2018; and by 60 percent if construction begins in 2019.
In effect, the last-minute omnibus spending concessions were a win-win for Democrats – theoretically aligned with renewable energy environmental efforts, and for Republicans, who saw the lifting of a 40-year-old ban on oil exports. Without it, the ITC/PTC would have expired in 2016, potentially devastating industries that have seen their production and cost-per-watt approaching parity with fossil fuels.
The debate continues to rage over which side had to “give” the most. Democratic Senator Barbara Boxer of California called the ITC/PTC extension a “game changer. Senator Ed Markey (D – MA) disagreed, saying (tongue-in-cheek) that “it is a great day to be an oil company in America” as he anticipated not only the environmental impact (of both continued and increased drilling), but the effect such a move may have on the economy, national security, and American consumers.
Senator Boxer’s assessment is likely spot on, according to most analysts. Bloomberg New Energy Finance writes that the absence of the ITC would see a final massive build-out in 2016 (to capture the last of the credits), amounting to 8.4 percent in utility construction alone, with an additional 2.1 percent in residential and 1.5 in commercial solar implementation. After that, the market would slow, perhaps catastrophically, putting Obama’s Clean Power Plan at risk.
Congress’s approval of the ITC/PTC means that solar and wind could instead see a dramatic rise in implementation over the next five years – as much as a 56-percent increase, or an additional 37 gigawatts of new solar and wind capacity. William Pentland of Brookside Strategies – a law firm vested in utility regulation and energy policy – writing in Forbes, reiterated an analysis from IHS that showed solar energy declining by 10 percent in the absence of the omnibus bill, and its passage virtually insuring solar growth of between 12 to 14 gigawatts in 2016, and from 13 to 16 GW in 2017 – for a total global solar energy uptake of 70 to 73 GW.
“The silver lining in the ITC extension is that it gives rooftop solar companies like SolarCity (NASDAQ: SCTY) and Sun Run (NASDAQ: RUN) a fighting chance to survive the anti-competitive practices of monopolies hell bent on destroying them.”
Solar City already has its game face on. Selected as the company to install arrays at federal offices in Nevada and California, its stock jumped 7.15 percent on the news of the ITC revival. (The fact that it later fell is due to the company’s status as a financing, rather than a technology, company. That alone should clue investors where the hot money will be.)
GTM Research, a publication of Greentech Media, also predicts that ITC renewal will see residential solar installations rise by 35 percent, commercial by 51 percent, and add $40 billion in incremental (and peripheral) investment in solar energy between 2016 and 2020. The Solar Energy Industry Association, or SEIA, anticipates an increase in jobs by 140,000 or more.
Moreover, solar contracts are likely to offer solar energy for less than $0.04 per kilowatt-hour (kWh), or well below grid parity. For example, in Chicago electricity consumers are paying $0.15.8/kWh, even though most of that city’s electricity comes from coal and nuclear, with natural gas running a strong third.
According to analysts at Black & Veatch, wind will reach parity, if only in a small corner of Iowa, in 2016, without PTC renewal. By 2020, it will dominate North and South Dakota, Iowa, and half of Kansas. With the PTC, the sky may be the limit in states with strong wind resources.
The implications of parity are universal adoption, but disgruntled Republicans continue to argue that renewable could never reach that paradigm if not for the tax subsidies of the last nine years, and continuing tax breaks to 2020.
A Deloitte report notes:
“As for whether or not support like this should be counted as an undeserved “tax break”, one grid parity factor not addressed … is the enormous financial support that continues to pour into the fossil sector from the government, Clean Power Plan or not.”
Zacks writes that the demand for renewables is “strengthening at a rapid clip”, with extension of the ITC and PTC installing confidence in the industry over the long term. As of December 17, Zacks ranked solar energy at 16th in a field of 257 industries, or solidly in the first one-third.
The biggest gainers have been Solar City (see paragraph eight), SunEdison (NYSE: SUNE), up 25.45 percent; Sunrun Inc. (NASDAQ: RUN), up 22.55 percent; Real Goods Solar, Inc. (NASDAQ: RGSE), up 15.78; and SunPower Corp. (NASDAQ: SPWR), which added a healthy 14.29 percent.
Another winner included Enphase Energy, Inc. (NASDAQ: ENPH), which manufactures inverters for grid-tied solar power, up 38.59 percent. This phenomenal gain is another indicator of the solar peripherals market ability to win big with the ITC renewal.
The renewable energy industry will, however, continue to face several obstacles. These include so-called “soft costs” – permitting, financing, and installation, all of which the U.S. Department of Energy says are taking a bigger and bigger bite of consumer spending. This – a snaggle of bureaucracy, banking, and highly variable installation standards from state to state – is also why the U.S. lags behind Germany, even though Germany gets less sunlight on average.
In addition, the problem of energy storage – perhaps the biggest obstacle to parity and universal adoption – remains. One solution is batteries. Another is ceramic fiber able to withstand the higher temperatures needed in concentrating solar power, or CSS, to make the technology truly shine. The renewable energy industry could also expand by making technology more efficient and cheaper. And government has already done its part by passing what is being called the “largest energy-saving standard in history” – namely for furnaces and air conditioners.
Overall, institutional investors, fund managers and others with similar fiduciary obligations should consider how such standards (and future implementation of carbon emissions reductions) would affect a portfolio. Notable among such mechanisms is the U.S. Department of Labor’s clarification of Employee Retirement Income Security Act of 1974 (ERISA) guidelines, which require pension plan managers to consider the extent to which environmental and social risks could impact an investment’s performance.
Andy Kessler, writing in The Wall Street Journal, is clearly opposed:
“… with U.S. pensions at $9 trillion, this is a gross power grab that will hurt the retirees it claims to protect. Moreover, as pension funds divest, hedge funds and other managers will gladly buy up undervalued climate-challenged companies,” Kessler argues.
Those with managed pension funds might want to contact a fund manager to get a first-hand opinion on how the new guidelines will affect both current and future investments.
On a final note, Senator Markey’s assessment on the lifting of the oil export ban may be prematurely pessimistic. Analysts as varied as Stratfor Enterprises, Christopher Helman, and Turner Mason & Company, estimate that the move will have little actual impact on either exports or energy security. In the first instance, because foreign economies have slowed, effectively reducing their need for oil. In the second instance, because the U.S. economy is so intrinsic to the world economy that complete independence in terms of energy sources is impossible, and any disruption in that market would negatively affect the U.S. as well.
Companies to Watch (in addition to those mentioned above):
First Solar (NASDAQ: FSLR), a global operation working in two segments: modules (both crystalline and cadmium/telluride) and systems (the latter including everything from development to operations and maintenance.
Solar3D Inc. (NASDAQ: SLTD), another full-service solar photovoltaic company, emerged in 2010 and shows an intraday moving average of 59.24M.
8point3 Energy (NASDAQ: CAFD), also rising in spite of its newness (2014), the company operates as a subsidiary of First Solar and SunPower, but more affordably in terms of investment costs.
Jeanne Roberts is an award winning freelance writer covering the environment, sustainability, social justice, health, politics, and the natural world. She has roots in the corporate world as a California reporter and a communications specialist at a large public utility and has spent the past 10 years working as an editor for a small-cap stock site, and as an environmental/political/social justice blogger for The Panelist, Celsias,Cooler Planet, DeSmogBlog, Energy Boom, SolveClimate.com, the Clean Tech Blog,EarthTechling, and various other online publications. Ms. Roberts has written a book on alternative energy sources, sustainable home building, and environmental initiatives for homeowners available on Amazon.