Shaking Up the Residential PV Market: Implications of Recent Changes to the ITC

Abstract

Berkeley Lab and the Clean Energy States Alliance C ASE S TUDIES OF S TATE S UPPORT FOR R ENEWABLE E NERGY Shaking Up the Residential PV Market: Implications of Recent Changes to the ITC Mark Bolinger, Galen Barbose, and Ryan Wiser (Berkeley Lab) Introduction CONTENTS Introduction 1 Recap of Previous Findings 2 Implications of the Revised Residential Credit 3 Conclusions 11 On August 8, 2005, the Energy Policy Act of 2005 (EPAct 2005) increased the Section 48 investment tax credit (ITC) for commercial photovoltaic (PV) systems from 10% to 30% of the project’s “tax credit basis” (i.e., the dollar amount to which the ITC applies), and also created in Section 25D of the Internal Revenue Code a new 30% ITC (capped at $2,000) for residential solar systems. Both changes went into effect on January 1, 2006, for an initial period of two years, and in late 2006 both credits were extended “as is” for an additional year (through 2008). In early 2006, Berkeley Lab published an LBNL/CESA case study that examined the financial impact of EPAct 2005’s solar tax credits on PV system owners, in light of the $2,000 cap on the residential credit, as well as the fact that most PV systems in the U.S. also receive cash incentives from state-, local-, or utility-administered PV programs, and that these cash incentives may reduce the value of federal tax credits in certain situations. That case study was subsequently revised in February 2007 to reflect new Internal Revenue Service (IRS) guidance. The findings of that case study, 1 which are briefly recapped in the next section, remained relevant up until October 2008, when the Energy Improvement and Extension Act of 2008 extended both solar credits for an unprecedented eight years, removed the $2,000 cap on the residential credit, and eliminated restrictions on the use of both credits in conjunction with the Alternative Minimum Tax (AMT). 2 These significant changes, which apply to systems placed in service on or after January 1, 2009, will increase the value of the solar credits for residential system owners in particular, and are likely to spur significant growth in residential, commercial, and utility-scale PV installations in the years ahead. In light of these substantial changes to the solar ITC, this report takes a November 2008 Download other clean energy fund case studies from: http://eetd.lbl.gov/ea/EMS/cases/ or www.cleanenergystates.org “Exploring the Economic Value of EPAct 2005’s PV Tax Credits” by Mark Bolinger, Ryan Wiser, and Edwin Ing: http://eetd.lbl.gov/EA/EMP/cases/LBNL_59928.pdf Less-relevant to this case study, the Act also removed the prohibition on utility use of the Section 48 credit.