Get SMART on Massachusetts' New Solar Incentive

As policymakers across the U.S. continue to refine their methods of valuing solar energy development, several strategies have bubbled to the top.  Some policies emphasize a market approach that, in theory, benefits both utilities and solar system owners (e.g. New York’s Value of Distributed Energy Resources (VDER) Tariff).  While a market approach is advantageous because it incentivizes solar development based on the benefits that solar systems bring to a specific area of the electrical grid, this strategy may result in less predictable project economics. Other policies, such as Feed-In Tariffs, incentivize solar development by making project returns as predictable as possible, but conversely may over-incentivize solar development in less valuable areas of the electrical grid.

With the upcoming Solar Massachusetts Renewable Target (SMART) incentive set to debut in Q2 2018, Massachusetts will move towards balancing both of these approaches.  Massachusetts has been a solar industry leader and has a goal of reaching 3,600 Megawatts of solar energy by 2020. The SMART incentive is structured to support the procurement of approximately 45% of this goal.

The aim of the program is to encourage solar development in space-constrained locations, such as rooftops, parking lots and landfills, as opposed to large, undeveloped swaths of land.  The program accomplishes this by providing greater economic compensation for specific types of solar projects, such as solar carport systems and ground-mounted systems on landfills.

Solar projects under SMART will receive payments through one of two structures:

  • “Behind-the-meter” projects will receive a flat incentive payment per kWh of solar energy produced in addition to the electricity savings. This incentive structure will apply to many typical on-site renewable energy projects, such as commercial rooftop solar systems.
  • “Standalone” projects interconnected under a new utility service will receive a fixed rate per kWh produced, inclusive of both energy and incentive payments (similar to a Feed-In Tariff). This incentive structure will apply to most off-site solar projects, such as remote net-metered or community solar systems.

The differences in payment structure are illustrated in the chart below.

SmartChart2.png

SMART Rates will be set according to the following methodology:

  • Base” Capacity Rate – has been established via a competitive auction and varies by utility, ranging initially from $0.143 to $0.170 per kWh
  • Size-Based Rate Factor – incentivizes smaller systems, which receive up to 150% of the base rate depending on AC system size
  • Location-Based Adders – incentivize rooftop, brownfield/landfill, water-floating, canopy/carport and agricultural solar systems (as well as a subtractor for systems located on undeveloped “greenfield” land)
  • Offtaker-Based Adders – incentivize solar projects with community solar, low-income and/or public entity offtakers
  • Capacity Tranches – the SMART rates decline at capacity milestones specific to each utility (tranches) at a 4% discount per tranche

Based on the official numbers released last week, we believe that commercial solar systems in Massachusetts will enjoy some of the best project economics in the country.  If you are a Massachusetts business owner with rooftop or parking space, now is the time to explore what solar can do for you.  If you are interested, call us at 888-225-0270 or email us at info@entersolar.com for a complimentary, no-obligation financial analysis for your site.

The U.S. Tax Overhaul: What Does It Mean for Corporate Solar Projects?

For better or worse, the U.S. has historically relied on federal tax incentives to foster renewable energy deployment. For solar energy, the 30% Investment Tax Credit and beneficial MACRs depreciation treatment have allowed solar projects to compete with the massively subsidized (and politically entrenched) forms of traditional electricity generation in the U.S., namely coal, natural gas and nuclear.

Whether U.S. businesses elect to own solar systems (and directly utilize the available tax incentives) – or choose to purchase the solar energy through a Power Purchase Agreement (PPA) or via a solar operating lease (and indirectly benefit from the tax incentives) – in all scenarios, the tax aspects are critical drivers of project-level economics.

So now, with the first major overhaul of the U.S. tax code in over 30 years, these changes to tax policy are having a significant impact on the feasibility of companies “going solar” in the U.S.

Key Impacts of the Tax Overhaul on Corporate Solar Projects:

  1. (+) Corporate Entities will have Additional Capital to Invest – the dramatic reduction in the corporate tax rate, which was lowered from 35% to 21%, will yield substantial cash tax savings that can be re-deployed for accretive capital investment opportunities, such as solar projects. Similarly, businesses that are structured as pass-through entities, such as S-Corps or LLCs, will also typically be subject to significantly lower effective tax rates.

    Another source of incremental corporate capital available for investment will be the significant cash brought back to the U.S. as a result of the repatriation provisions of the Tax Overhaul. 
     
  2. (+) Full & Immediate Expensing – despite the 25+ year useful life for solar, under the new tax rules, businesses will be able to immediately expense the cost of a solar project. This 100% immediate expensing treatment will apply for all projects completed through the end of 2022, after which the amount that can be expensed immediately will be reduced by 20% a year through 2026. 
     
  3. (+) Reduced Project-Level Tax Rates – as a result of the lower tax rates (from 35% to 21% for C-Corps or the 20% deduction for pass-through entities) the tax burden on solar project operating cash flows will be reduced. This reduction will result in higher after-tax returns for businesses. For example, in states with SREC markets (e.g. NJ, MA, CT, MD) or specific solar incentives (e.g. NY, IL, CO), the income taxes associated with receipt of these incentives will be reduced significantly.
     
  4. (–) Reduced Value of Depreciation Shield – the reduction in tax rates has an adverse impact on the value of the cash tax savings attributable to the depreciation expense for solar projects. For example, a C-Corp that owns a solar system would receive a smaller depreciation benefit with the new 21% rate versus the previous 35% rate.
     
  5. (+) Investment Tax Credit Maintained – oftentimes what doesn’t change is just as important as what does change, and in this case – despite a lot of speculation to the contrary – the primary 30% solar Investment Tax Credit (ITC) was essentially unchanged as a result of the Tax Overhaul. The owner of a solar system will still be eligible for a dollar-for-dollar reduction in income taxes owed in an amount equal to 30% of the total system cost – for all solar projects placed into service prior to the end of 2019 (after which the 30% level will begin to step down).

In addition to the abovementioned tax changes, there are several “second-order” tax provisions, including the new base erosion anti-abuse tax (“BEAT”) and certain limitations on the deductibility of interest expenses deductions, that may selectively impact specific solar project economics.

Overall, the net impact of the Tax Overhaul on U.S. commercial solar project economics will be substantially beneficial for most projects. Even so, the facts and circumstances for each individual solar project can differ dramatically, and as a result, we suggest that businesses select experienced solar power partners to help them navigate the complicated (but often rewarding) solar alternatives available to U.S. businesses today.

EnterSolar is a leading provider of solar photovoltaic solutions to the commercial marketplace. Although we are not Accredited Tax Consultants, we closely monitor the dynamic legislative environment to provide clients with guidance in order to best leverage financial incentives at the regional and state levels.

Solar Power Purchase Agreement: The Right Decision for the Right Customer

The solar industry saw rapid growth with the advent of the Power Purchase Agreement(PPA), a method of financing a solar photovoltaic (PV) system.  A PPA is an agreement in which a solar developer manages and executes the design, permitting, finance, installation, maintenance and monitoring of a PV system on a customer's property or roof at little to no upfront cost. The solar developer or another third party is the system owner that sells the power generated directly to the host customer at a fixed rate—usually lower than the local utility’s retail rate. With annual price hikes by local utilities and energy price volatility, customers find a predictable energy cost attractive.

There are several key distinctions that make a PPA the optimal way for certain customers to go solar as opposed to ownership options. Yet depending on the company type and its needs, there are advantages to both a PPA and buying a PV solar system.

Advantages of a PPA

  • Little to no upfront cost

  • Reduced risk: A third party owner is responsible for system monitoring and maintenance

  • Lower energy costs: Can save 10-30% off utility electricity prices

One type of organization that would benefit from a PPA is a not-for-profit. Oftentimes, it is difficult for not-for-profits to access or raise the money required for an upfront solar installation. The PPA mechanism easily and immediately allows those organizations to go solar—letting them utilize renewable energy while saving money on their utility bills. Examples of customers well-suited for a PPA are schools, universities, houses of worship and businesses with limited capital.

Advantages of Ownership (Buy)

  • Maximize the financial payback of installing a solar system over the life of the system

  • Federal and state tax deductions: The federal investment tax credit (ITC) is a credit for 30% of the cost of a solar photovoltaic system that reduces federal income taxes

  • Accelerated depreciation (MACRS): With MACRS, the owner of a solar system can expense the solar system’s depreciable value within the first five years of initial investment

While the PPA model is attractive for many customers, it may not be the most prudent method for every company wanting to go solar. The market for commercial solar is booming at the moment due to the federal ITC, and for-profit businesses are capitalizing on the attractive tax breaks. Many companies are also recognizing the long-term savings from owning a solar project. Depending on location and usage, the typical payback period is 4-5 years, after which the company benefits from fuel-free electricity for 20 or more years. While the PPA option allows a customer to put little to no money down and immediately save on their electricity bill, companies that buy commercial systems often can sell renewable energy credits for the electricity produced in exchange for a steady revenue stream. The upfront expenditure for a solar installation, with the discounts from federal and state tax incentives, is an investment that provides a rapid payback in addition to clean, renewable energy.

If your company is interested in evaluating solar, EnterSolar can provide a tailored analysis based on your portfolio, energy usage and available incentives. EnterSolar is agnostic to project finance structures and provides a turnkey solar solution for commercial and corporate entities. We offer flexible financing and help our clients find the optimal pathway to solar. To learn more about which solar options are available for your company, contact us here or give us a call at 888-225-0270.

Solar Energy and Storage

As the fastest growing fuel source globally in 2016, solar power is expected to lead the transition to clean, renewable energy (Bloomberg). Solar technology has already proven its efficiency and competiveness with other fuel sources, and the implementation of batteries and methods of energy storage is becoming increasingly important. Battery technology in conjunction with a solar photovoltaic (“PV”) system enables the energy produced by the PV system to be used when solar irradiance is reduced on a cloudy day or eliminated at night. 

There are many types of existing solar battery chemistries (e.g. sodium-sulfur, metal air and lead-acid batteries), but the most common are lithium-ion batteries. Although the barrier to entry for battery storage has mainly been high capital costs, these costs have been rapidly decreasing in recent years. Additionally, the Investment Tax Credit(“ITC”) can be applied to the cost of the storage system under certain circumstances when solar systems are paired with storage. The ITC serves to reduce the initial capital outlay and increases the economic feasibility of a linked PV and battery storage system. 

Companies operating a combined solar PV and battery storage system often find that one of the greatest financial benefits results from peak shaving. Electricity users pay for their power in terms of their electricity usage and the resultant demand charges, which are based on their highest usage within a billing cycle. These demand charges account for spikes in usage and often constitute more than half of a commercial or industrial end user’s bill. Peak shaving is accomplished by supplementing the power from the utility with solar power stored within a battery when the onsite energy demand is at its highest. The reduction in peak energy usage decreases demand charges, and in turn, can greatly decrease the user’s monthly bill.

End users can also take advantage of time of use (TOU) charges. Utilities employ TOU charges to encourage users to reduce their energy consumption during times of peak electricity demand.  Users can leverage their solar PV and storage system to generate energy at a fixed minimal cost and use it at times with the highest TOU charges. This strategy is known as time of use arbitrage; in using this “free” electricity when the TOU rates are the highest, the end user can maximize the profits from the solar PV system.

Additionally, a solar PV system with energy storage can provide an additional level of resiliency. For users that rely on a continuous supply of electricity, such as hospitals or cold storage facilities, energy storage may provide an invaluable measure of added security when the grid goes down. 

If you are interested in learning more about storage and solar system options, please reach out to info@entersolar.com or 888-225-0270. 

Achieving a Balanced Approach to Distributed Energy Incentives

With the rapid development of the solar industry over the past decade, policymakers, utilities and other stakeholders have increasingly tried to pinpoint the most accurate compensation mechanism for solar energy generation. Feed-In Tariffs, Performance-Bonded Incentives, SRECs, net-metering and community solar programs are an example of policies designed to spur development in renewable energy and/or accurately compensate the owners of these systems for the benefits they bring to the electrical grid.

Many of the programs to date have done an excellent job of driving economic growth. However, some of these incentives have drawn criticism from electric utilities who stand to lose a portion of their market share. Achieving a balanced policy that benefits both solar system owners and power market stakeholders requires a nuanced approach.

New York is the latest state to attempt to mitigate these issues.  After several years of policy discussions and working groups including solar industry leaders, New York State has begun to implement the Value of Distributed Energy Resources (VDER) Tariff.  Through VDER, the state aims to compensate solar system owners for the full range of benefits that solar energy brings to the grid by recognizing a “stack” of values per kWh of electricity generated.

The components that make up the value stack include the following:

  • Energy: The standard monetary value of energy generated and injected into the electrical grid. This stack is based on day-ahead, location-based energy prices and varies hourly, compensating for the location and time the energy is generated.
  • Environmental: The societal value of generating clean energy, based on Tier 1 renewable energy credit (REC) prices published by the New York State Energy Research and Development Authority (NYSERDA).
  • Installed Capacity: The solar energy system’s ability to produce energy at times of peak grid demand.
  • Demand Reduction: The solar energy system’s benefit to the local distribution system; energy produced in congested, high-demand areas of the grid are incentivized at a higher level than energy produced in rural, low-demand areas.

The New York Public Service Commission (PSC) believes that the VDER tariff will stimulate the market by incentivizing solar developers to install systems in high-demand areas and work toward a more stable, clean, resilient and reliable electrical grid.

As the #1 Commercial Solar Developer in New York State, EnterSolar can help you navigate this changing policy market and yield the highest possible returns for your business. If you are a New York business owner interested in going solar, please call 888-225-0270 or email us at info@entersolar.com.

EnterSolar Goes to Washington

EnterSolar’s Technical Director, Edgar Lim, went to Washington D.C. for the Northeastern States Federal Lobby Day that took place on September 28, 2017. With his expertise in solar project development and equipment procurement, he joined the Solar Energy Industries Association (SEIA) in educating U.S. Senators and Representatives about the impact of the solar industry on energy, jobs, trade issues, taxes and the economy.

During their time there, Edgar and other leaders from the solar industry met Sen. Jack Reed (RI) and Sen. Sheldon Whitehouse (RI) to encourage congressional support for clean and renewable energy. They also spoke with the staffers of Sen. Elizabeth Warren (MA)Sen. Christopher Murphy (CT) and Sen. Richard Blumenthal (CT) to discuss solar’s positive effect on U.S. job growth among other topics; in 2016, the solar industry provided more than 260,000 American jobs and is expected to add at least 26,000 more this year (SEIA).

At EnterSolar, we aim to keep our Members of Congress updated about the job creation opportunity of solar in their states. As industry experts, we want to ensure that our political leaders are equipped with the latest information on solar employment, technology and financing to make informed decisions that will benefit both the U.S. economy and the environment.

If you are interested in learning more about the solar system options available, please reach out to info@entersolar.com or 888-225-0270.