Exploring the Economic Value of EPAct 2005's PV Tax Credits

Abstract

Berkeley Lab and the Clean Energy States Alliance C ASE S TUDIES OF S TATE S UPPORT FOR R ENEWABLE E NERGY Exploring the Economic Value of EPAct 2005’s PV Tax Credits Mark Bolinger and Ryan Wiser, Berkeley Lab Edwin Ing, Law Offices of Edwin T.C. Ing Introduction CONTENTS Introduction 1 Taxation of State Grants and Interaction with Federal Tax Credits........ 2 Analysis 6 Discussion 7 The market for grid-connected photovoltaics (PV) in the US has grown dramatically in recent years, driven in large part by PV grant or “buy-down” programs in California, New Jersey, and many other states. The recent announcement of a new 11-year, $3.2 billion PV program in California suggests that state policy will continue to drive even faster growth over the next decade. Federal policy has also played a role, primarily by providing commercial PV systems access to tax benefits, including accelerated depreciation (5-year MACRS schedule) and a business energy investment tax credit (ITC). With the signing of the Energy Policy Act of 2005 (EPAct) on August 8, the federal government is poised to play a much more significant future role in supporting both commercial and residential PV systems. Specifically, EPAct increased the federal ITC for commercial PV systems from 10% to 30% of system costs, and also created a new 30% ITC (capped at $2000) for residential solar systems. Both changes went into effect on January 1, 2006, and – absent an extension (for which the solar industry has already begun lobbying) – will last for a period of two years: the new residential ITC will expire, and the 30% commercial ITC will revert back to 10%, on January 1, 2008. How much economic value do these new and expanded federal tax credits really provide to PV system purchasers? And what implications might they hold for state/utility PV grant programs? Using a generic (i.e., non-state-specific) cash flow model, this report explores these questions. 1 We begin with a discussion of the taxability of PV March 2006 Download other clean energy fund case studies from: http://eetd.lbl.gov/ea/EMS/cases/ or www.cleanenergystates.org For an application of this model, and the concepts included in this report, to California, see Ryan Wiser and Mark Bolinger, “Federal Tax Incentives for PV: Potential Implications for Program Design” (http://eetd.lbl.gov/ea/emp/reports/Wiser_ Bolinger_CPUC_PV_Tax_03_2006.pdf) and Mark Bolinger and Ryan Wiser, “Calculating After-Tax Parity Under EPAct 2005: Potential Implications for the California Energy Commission’s PV Rebate Levels” (forthcoming from the California Energy Commission).