The cost of solar photovoltaic (PV) installations has declined some 30 percent over the past twelve months and continues to decrease dramatically, with some predicting the cost of solar to decrease by an additional 50 percent over the next decade. A key element of this decline is the role federal and state tax credits play in helping reduce the costs of purchasing and installing PV systems thus increasing volume. However, even with the decrease in upfront cost, many businesses are not embracing solar as they

do not recognize the benefits available to them through renewable energy tax credits and state incentives, or they are unable to monetize the incentives due to their status as a nonprofit or government entity. However, it’s important that companies invest the necessary resources into evaluating the fiscal benefits of solar, as prices associated with traditional energy sources can fluctuate significantly.

Dollar for Dollar Federal Tax Credits
The federal government offers an Investment Tax Credit (ITC) for the purchase of commercial solar systems. The ITC allows a dollar-for-dollar reduction in a company’s tax payment.  The ITC effectively refunds, as an income tax-credit, 30 percent of the total cost of a solar project and applies that to any project developed prior to December 31, 2016. In addition to the ITC, federal tax incentives also provide valuable accelerated depreciation benefits. The depreciation benefits further reduces a company’s taxable income by enabling it to claim an expense deduction over a shortened timeframe.

In order to steer clear of the complicated processes related to utilizing federal incentives, many companies engage with a partner, such as a solar developer.  In this scenario, the solar developer will own the system and manage the incentive process. The solar developer then finances and owns the solar project, while the company hosts the system on their property and purchases the energy generated at an agreed price. This allows companies to avoid the hassle of applying for federal incentives themselves, particularly if they don’t have sufficient tax appetite, while still benefiting from the savings on their energy costs. The solar developer will typically work with a bank and develop an ownership structure for the solar project that efficiently takes advantage of the tax incentives; the benefits of which are passed onto the company through a reduced price for the energy. This option is also attractive to nonprofits and government agencies, as solar developers can pass the savings from tax credits to the nonprofit entity that would otherwise be ineligible for these savings.

The 3 Types of State Incentives
In additional to federal tax credits, many states offer solar incentives as well. While each state’s incentive program is unique, they tend to fall into one of three broad categories:

• Solar Renewable Energy Certificates (SREC)
• Performance Based Incentives (PBI)
• State Tax Credits (similar to federal tax credits)

In order to understand what makes each category distinct, it is helpful to use real-world examples as a guide.   The following case study shows how Sun Edision worked with DDR in multiply states to realize maximum incentives.

Ohio-based DDR owns and manages an extensive portfolio of shopping centers in 41 states across the continental United States, as well as Puerto Rico and Brazil. As a self-administered Real Estate Investment Trust (REIT), DDR has a limited ability to take advantage of tax incentives due to its company structure and limited tax liability. In order to complete an industry-leading solar program and take advantage of available credits, DDR partnered in 2009 with Maryland-based SunEdison, a global provider of solar energy services. 

To date, SunEdison has installed more than 15 systems at DDR shopping centers across the country in states with different incentive programs. Together, they have installed projects in Colorado and New Jersey, and are in the process of developing installations in California, Puerto Rico and other regions of the U.S. Through these installations, DDR has reduced its energy expenditures for the common areas of its shopping centers, and realized environmental benefits for the surrounding communities by minimizing pollution and greenhouse gas emissions. In many locations, DDR has also benefitted from increased lease income, as SunEdison pays for the use of DDR’s roof. As the owner and operator of the system, SunEdison is able to take advantage of the different tax incentives available in the various states where DDR has property, and then passes the savings to DDR via decreased electrical rates and increased lease income.

Solar Renewable Energy Certificates  (Northeast States)
State administered SREC programs are similar in nature, in that they grant solar owners tradable certificates that represent the solar attributes of the electricity generated from their solar system. Solar Renewable Energy Certificate (SREC) programs are used extensively in the Northeast including New Jersey, as well as Maryland, Massachusetts, Ohio and Pennsylvania.  In New Jersey, the partnership between SunEdison and DDR has seen 13 systems installed since December 2009. The demand for these certificates is driven by the state’s electricity utilities, which are required to purchase SRECs annually in order to adhere to renewable energy generating requirements. Typically, companies with solar installations participating in a SREC program will register the project with the state, which awards them energy credits that can then be traded or sold to the utilities at negotiated market rates. SRECs are a popular public policy tool because they can be used for compliance with a set renewable energy generation goal, but enable incentivized parties to compete, thus lowering the overall cost to all involved. However, the SREC market is risky and the market price for SRECs can be volatile.

For companies whose solar opportunities are in a SREC market, engaging with a solar developer can be a good choice since the burden of compliance falls on the solar company, as does the SREC marketing. A partner with experience in the SREC market, who can navigate the risks associated with it, is extremely valuable. Companies such as DDR can benefit from the system installed on their roof by purchasing the energy generated by the solar installations, without having to navigate and monetize the state incentive program features itself.

For example, New Jersey requires owners of solar projects to register their projects in the SREC Registration Program (SRP) prior to the start of construction to determine the project’s eligibility for SRECs. For each megawatt-hour (MWh) of solar energy produced in New Jersey, the owner of the system is awarded a certificate. Once approved by the New Jersey Office of Clean Energy, the certificates can then be sold or traded separately from the power, providing owners a source of revenue to help offset the cost of installation. In the case of DDR, SunEdison remains the owner of the solar installation, uses SREC derived revenue to offset project costs and sells energy to DDR, or to DDR’s tenants.

Performance Based Incentives (Western States)
Performance Based Incentive (PBI) programs are commonly used in western states including Arizona, California, New Mexico and Colorado, and provide payments to solar owners based on the energy generated. The value of the incentives in these states is set by the utility, and the owner of the solar project is paid a fixed amount for every kilowatt hour generated over a defined period of time. Qualified installers are familiar with local incentives and the permitting process, and can provide credible guidance for obtaining the performance based incentives. Typically, these are obtained through an application that is submitted to the utility or in some cases the state, with the specific details and deadlines varying state to state. While the income from PBIs is more predictable than in SREC markets, it is still variable, depending on the performance of the solar project over an extended period. By partnering with a specialist solar installer, using an agreement that incentivizes the maximum energy generation, companies can benefit from PBIs with minimal risk.

The completed solar projects at DDR’s Colorado properties were part-financed with twenty-year PBIs; in addition these projects benefitted from up-front rebates from the utility, Xcel Energy. As with the projects in New Jersey, DDR agreed to purchase the energy from SunEdison, and SunEdison is responsible for acquiring and administering all of the utility incentives. SunEdison used the incentives to fund the projects and passed the associated cost savings along to DDR, while making lease payments for the use of the roof.

State Tax Credit (STC)
The third broad category of state incentives are state tax credits (STCs), which frequently work in a similar manner to the federal ITC. STCs are used in states such as North Carolina and Hawaii, among others.  As with the federal tax credit, DDR is less able to benefit from tax incentives than a solar developer. By working with SunEdison, DDR is able to take advantage of the available incentives, while relying on an experienced partner to manage the process.

Beyond these basic categories, each program has unique elements particular to its state. For an owner of a diversified real estate portfolio such as DDR, working with a specialist solar developer provides the ability to work in different states simultaneously without having to reconcile the separate incentive programs.

Having a trusted partner in deploying a solar energy solution is crucial to properly navigating the federal and state incentive environment.  In addition, a strong solar development partner can provide attractive capital structures that maximize the value of a solar installation, and simplify the installation process. For those unable to take advantage of tax incentives, working with solar developers can enable them to deploy a reliable renewable energy system they would otherwise not be able to afford. The growing trend to make renewable energy more accessible nationwide is increasing the deployment of solar, and through that has the potential to help companies stabilize energy bills, generate additional lease income and become better stewards of the environment.

Written By Rich Gilliam, Global Policy Advisor for SunEdison.