The Solar Tax Credit Extension has been granted! The future of solar power has always looked bright, given its cost-effectiveness and ability to be deployed in all 50 states.
But the rising popularity of solar power has been boosted by the Investment Tax Credit (ITC), which provides tax credits to everyone who installs solar systems in their homes or businesses.
The 30% Solar Investment Tax Credit catapulted the solar industry to the heights we know today.
The ITC was set to expire at the end of 2016, but in December 2015, it was extended by another five years, with December 31, 2021, the new expiration date.
Congress is now poised for another extension, for 10 years this time.
Let’s look at what this means for the future of solar and how you can prepare for its long-term success as an investment option.
The Inflation Reduction Act of 2022: What It Means For The Solar Tax Credit Extension
On July 27, 2022, Senator Chuck Schumer of New York and Senator Joe Manchin of West Virginia announced they had reached an agreement on a new reconciliation bill.
If passed, the bill called The Inflation Reduction Act of 2022 (IRA) would reintroduce incentives for new wind and solar projects over the next decade.
The bill has already been passed in the House of Representatives and is currently being debated in the Senate. It promises to change how solar energy is created and purchased in the US.
Under this new law, which would have to be ratified by 2022 in order to take effect, the tax credit for installing solar panels would be extended from 2022 to 2032. With an initial 30% tax credit, it decreases to 26% in 2033 and 22% in 2034.
This means if the bill passes, anyone who installs solar energy from the start of 2022 will be eligible for these credits retroactively.
Changes In Current Solar Tax Credit
Production Tax Credit (PTC)
Under Section 45, tax credits based on the amount of energy generated and sold to unrelated parties during a period of 10 years are retroactively extended.
The provisions of the PTC apply to any facility built and put into service after 2021. Projects placed in service before 2021 will not receive a PTC rate increase.
Investment Tax Credit (ITC)
An ITC is calculated as a percentage of a project’s cost. Construction before 2025 will qualify for extended credit. The ITC for solar projects is 6% or 30% of the cost of the energy property for the taxpayer.
This is generally effective for projects commissioned after 2021. By the end of 2021 or earlier, all projects in service do not benefit from any increased ITC rates.
No Refundability Clause
The bill does not contain a “refundability” clause, which would have resulted in a cash refund if the tax credit value exceeded the taxes owed.
Due to the absence of this provision, the credit has less value for some individuals. However, the credit can be rolled over into the following year.
A Brief Background On The Bill
To encourage the development of renewable energy sources, the PTC was first ratified as part of the Energy Policy Act of 1992. And indeed, studies show it has been the main factor driving wind and solar investment over the last three decades.
PTC provides a credit per kWh of electricity created with qualified energy resources, and this credit can be claimed over ten years.
As of December 31, 2021, the credit will have expired, and renewable energy projects starting after this date will no longer be eligible to claim it.
For qualified facilities, the IRA is proposing to not only restore the tax credit but also increase it considerably. However, additional criteria will have to be met during construction.
Impact Of IRA On Homeowners
The IRA would be a huge win for residential users, as the ITC is a key driver of solar adoption.
For homeowners who have installed solar panels, the IRA could mean significant savings on their initial investment in solar. If passed, it’s estimated that by 2034 over 90% of new residential installations will be on homes with existing solar systems.
Moreover because it is now possible to retrofit a battery to a solar array and take advantage of the 30% credit whether the battery is co-located or installed as a standalone energy storage system.
One of the only threats to lowering the IRA would be a change in net metering like what California is proposing for NEM 3.0
Impact Of IRA On Businesses
Likewise, the IRA will have a significant influence on businesses, particularly those in the solar energy industry.
These are the additions that would guarantee growth for entrepreneurs:
Adders. Similar to bonus credits, the values of adders depend on the type of organization, domestic product use, and project location. The tax credit can reach as high as 50% for some projects if the right adders are applied, according to investment bank Roth Capital Partners.
Direct Pay. This provision allows developers with low or no taxes owed to deduct the entire amount of the credit as a taxable overpayment. This means they would be entitled to a cash refund of that amount.
Transferability. The IRA includes this brand-new transferability feature, which was not part of any renewable-energy-related legislation introduced this year or previously, allowing taxpayers to sell their tax credits to an unrelated party for cash. This particular change would start being implemented sometime in 2022.
Businesses can view this proposed bill as an incentive. It rewards those that spend more efficiently, provides fair wages to laborers and mechanics during construction, and goes by some stricter rules.
In fact, the credit will be increased by 500% if a qualified facility meets any of the following three conditions:
- The maximum alternating current output of the facility is less than 1 megawatt.
- Construction begins within 60 days after the Secretary publishes the guidance on prevailing wages and apprenticeship requirements.
- A facility fulfills the said requirements.
Impact On The Solar Industry
The IRA could positively affect the solar industry as well. When enacted into law, it will encourage more businesses to invest in solar energy.
According to Wood Mackenzie (formerly Greentech Media), the tax credit extension will allow more than 11 GW of new solar projects across America by 2030, providing a much-needed boost to the solar energy industry.
Additionally, ITCs would be available for new technologies such as microgrid controllers, energy storage with a minimum capacity of five kWh, and linear generators. ITC provisions related to these sectors apply to projects placed in service after 2022.
Solar companies can create well-paying jobs throughout the country with the long-term incentives provided for in the IRA.
The Bottom Line
As early as the week of August 1, 2022, the Inflation Reduction Act of 2022 is expected to progress in the Senate.
While there is no guarantee that this bill will pass, if it does, it would certainly help solidify the future of solar power in America.
This is big news not just for the impetus it affords those keen on investing in solar power. The benefits of the IRA 2022 will be felt across the nation, from residential users to industrial enterprises, and especially, the environment.
So if you’ve been waiting for the right incentive to go solar, the IRA would be it!