Will the Sun Set on Solar's Tax Break?


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Solar energy contractors in Arkansas have maneuvered through the twists of the COVID-19 pandemic but fear business could “fall off a cliff” if solar power’s payoff potential declines and arrays take longer to break even for customers.

Renewable energy’s eventual place in the nation’s power mix seems assured, as corporate titans like Walmart and even major utilities like Entergy Corp. commit to employing it. And a Joe Biden presidency, which looked likely at press time, could hold vast potential for solar and wind power.

Industry leaders and observers agree that regardless of Tuesday’s vote, cleaner energy will prevail in time. Still, contractors like Shine Solar of Rogers and AEV Solar of Little Rock face more immediate stakes — including a steepening yearly decline in federal investment tax credits and attempts to chip away at Arkansas regulatory policy giving net-metering customers a 1-to-1 retail credit for power their solar systems put onto the grid.

After many years at 30% of project cost, the solar investment tax credit, first introduced in 2006, fell to 26% at the beginning of this year and will slip to 22% on Jan. 1. At the end of 2021, the credit for residential projects will end, and the benefit for commercial and utility-scale systems will stick at 10%.

“It puts a lot of pressure on installers and potential consumers to make decisions as the year comes to a close,” said John Ekdahl, managing partner of AEV. “What we would like is an extension, because in 2022 you’ll see renewables fall off a cliff in Arkansas if something isn’t done to continue supporting these renewable energy projects,” Ekdahl continued. “Businesses and homeowners need to know that if they make an investment, utilities won’t change the rules on them after a couple of years.”

What Would Biden Do?

A new administration could change the whole dynamic, he said. “If Joe Biden is elected, he has said he’ll invest heavily in incentives for solar and wind, and also in retrofitting existing facilities across the country with energy efficiency efforts. There’s a stark difference between one candidate and the other in what our industry might look like.”

A report from S&P Global Ratings last month predicted that a Biden presidency might double the annual rate of domestic solar deployment, but it also expects a pragmatic approach that won’t rock markets unduly. Biden’s goal of installing 500 million solar panels nationwide by 2025 would double the nation’s solar deployment rate, the report said, and Biden is seen as far more amenable to extending tax breaks.

“When Barack Obama was in office, it was very easy for this tax credit to be extended,” said Nick Gorden, co-founder and CEO of Shine Solar. “With President Trump, there was a shot at extension about two years ago but it didn’t go through. If President Trump is re-elected, I think the thing is going to sunset all the way. But if Vice President Biden takes office, it will probably be extended.”

The tax credit is “definitely a big deal” to customers and businesses, Gorden said. “When it comes to solar companies themselves and how it will affect them, I think it all depends on how well the business has been managed and run.”

A recent influx of out-of-state installers employing heavy marketing has actually raised awareness about solar possibilities and improved business for some Arkansas firms, Ekdahl and Gorden said. Financing has also opened up significantly.

Even if the tax break collapses, Shine Solar and AEV won’t, the two executives said. They have had time to prepare and identify savings available from falling component costs, technological developments and lean operations. Solar installation costs nationwide have fallen 70% in the past decade, and annual solar deployment has grown 50% a year for most of two decades. Still, less than 2.5% of the country’s total electric generation is solar, Gorden said, seeing a vast untapped market.

The tax credit, which Gorden concedes is a taxpayer-footed subsidy, pays off for citizens many times over by creating jobs and spurring the economy, he said. “It has been an amazing success and helped Shine grow into the business it is today.” Ending it would raise home solar prices overnight, he said.

“However, regardless of what happens, we at Shine have positioned ourselves well by diversifying into other related products and services such as HVAC systems, home energy efficiency upgrades, and battery storage,” which has particularly taken off during the pandemic, Gorden said. “If the credit isn’t renewed, Shine will continue to thrive, but this may not be the case for the industry as a whole.”
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Shine on the Rise

Ekdahl said the tax credit gives installation companies flexibility on their margins, and predicted serious belt-tightening among competitors if it lapses.

“The name of the game is how do we get the lowest cost to our clients, save them the most every month on their utility bill,” Ekdahl said. “So for all of the solar companies in the state, the main competition is always the utility company. If we don’t make economic sense, we can’t make solar accessible to a larger demographic, and there’s no way our industry is going to survive.”

Meanwhile, AEV is doing record business after a brief springtime dip when COVID overwhelmed the nation. The Little Rock company has several south Arkansas projects going, and recently made Family Care of South Arkansas, led by Dr. Robert A. Watson II of El Dorado, one of the first Arkansas clinics to employ 100% renewable power.

Gorden, whose Shine Solar has grown from 20 to 200 employees and installed 3,200 home projects in five years, described his company’s rise against a backdrop of major industry changes in Arkansas.

“When we started here in Arkansas [in 2016], I wouldn’t have called it a super friendly state for solar,” said Gorden, whose four-state territory now includes Missouri, Oklahoma and Tennessee. An early project in Rogers was so novel it brought out “the entire utility company and all the town’s firemen,” he said.

But changing state policies quickly surprised and pleased him, Gorden said. “To watch how far the state has come, the legislation that was passed last year allowing third-party ownership, it’s been encouraging,” he said, referring to legislation that lets clients get cheap power deals while contractors take the tax break.

“And then having Ted Thomas and the Public Service Commission really come out of this last series of decisions kind of siding on the renewable energy side, Arkansas has shifted from being a laggard to being one of the most attractive states in the country,” Gorden said.

Thomas, the lawyer who presides over utility regulation cases with Commissioners Justin Tate and Kimberly A. O’Guinn, pleased solar executives with rulings favoring the full retail-rate credit for net-metered power and placing a cap on how much of solar energy Entergy Corp. can offer select customers under sun energy purchase options.

Solar contractors had feared that investor-owned Entergy Arkansas, the state’s largest electric utility with 715,000 customers, might flood the market with power from two major solar plants online now and eventually two more that are in planning.

Customers for that power are the same cities, counties, water districts and schools that have formed a market for private solar contractors like Entegrity of Little Rock, Seal Solar and Scenic Hill Solar of North Little Rock and others.
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PSC Balancing Act

The commission’s rulings this year, however, have tried to balance Entergy’s rising solar capacity against the growth of third-party solar businesses, not to everyone’s satisfaction. The utilities weren’t overjoyed, but they still have the prospect of grid charges to guard against cost-shifting to non-solar households. And Entergy makes a strong case that the economies of scale that allowed it to create Arkansas’ largest solar fields also allow it to generate the state’s most economical sun power.

The private solar developers pitch the ease and speed of “turnkey” projects and the benefits that homeowners, businesses and nonprofits gain from owning their arrays or locking down low prices in multi-decade solar services agreements.

Groups like the Sierra Club and the Audubon Society, recognizing the environmental virtues of renewable energy, backed the private solar industry on recent issues before the PSC, including the “grandfathering in” of solar projects under the current credit for net-metered power, which roughly corresponds with Entergy’s retail power price.

Glen Hooks of the Sierra Club’s Arkansas chapter praised Entergy Corp. of New Orleans, parent company of Entergy Arkansas, for its solar commitment and pledge to achieve net-zero carbon emissions by 2050. He’s still worried about Entergy’s continued use of natural gas as a generation fuel, because “burning fracked gas results in significant carbon emissions.” But he praised the utility’s plans to close coal-burning plants in Jefferson and Independence counties by the end of this decade.

Hooks also applauded the Public Service Commission for “consistently supporting Arkansas ratepayers and our state’s growing solar energy industry.” He said support for net metering means that “more Arkansans can afford to invest in solar energy for their homes. That’s good for their wallets, good for clean energy jobs here in Arkansas, and good for the Natural State’s environment.”

Entergy Corp., including Entergy Arkansas, is “a national leader” in sustainability and environmental stewardship, Communications Manager Kacee Kirschvink told Arkansas Business. “In fact, Entergy Arkansas is one of three finalists for the Arkansas Department of Energy & Environment’s ENVY Award for environmental stewardship, and in 2019 was named the recipient of the 2019 Energy Excellence (E2) Award.” The company is planning more solar projects, she added.

Thomas, the Public Service Commission chairman, told Arkansas Business he was monitoring federal tax incentives and other factors in the power market. He said most new technologies get policy support “to achieve some benefits of scale before head-to-head competition with incumbent technology.” In an ideal world, he said, incentives would phase out as development reduces the price of the new technology.

“In the world we actually live in, all sides seek to reward their affiliated donors and punish the donors affiliated with the other side, often to the detriment of the public interest,” Thomas said in an email, calling last week’s election important for future energy pricing. “Flipping and flopping of policy back and forth with each change of administration increases the risk of all long-term investments.”