Removing the $2000 Investment Tax Credit Cap

Like Tom Konrad, I attended part of the Solar 2009 conference last week. One of the most interesting presentations I heard was by Andy Black, CEO of OnGrid Solar, on the potential impact on residential solar installations of removing the $2,000 ITC limit (link to the actual paper). Prior to changes in October 2008, ITC tax credits for solar installations were capped at $2,000. In the author's own words:

This paper presents revised and expanded financial analyses of residential cases [...]. It will look at Internal Rate of Return (IRR) only (for simplicity of cross comparison) [...] accounting for the increase in the ITC and brought up-to-date with current electric tariffs, incentives (federal, state & local) and, as applicable, Solar Renewable Energy Certificate (SREC) values. The paper then expands coverage to additional US states (NJ, NC, CT, AZ, HI, CO), and also performs a couple of “what if” scenarios to illustrate the effects of changes in individual variables.

The following two tables sum up the author's findings.

There are certain caveats to these results that are discussed in the paper. But if Andy Black is within a 100 basis points of IRR in most cases, we're looking at some very interesting numbers. Residential installations currently account for about 35% of installed solar capacity so this segment is material to the industry.

Ground-mounted and commercial installations will most likely account for the majority of incremental capacity added over the next few years. Credit difficulties, however, are hitting both segments particularly hard (especially ground-mounted). Residential might thus represent a glimmer of light at the end of the tunnel for the solar PV industry, especially given that module prices are falling (the second table).

With the meltdown in equities that occurred in the wake of Lehman Brothers' failure last fall, resulting in a "lost decade" (read: flat for those who bought and held) for the S&P 500 and the Dow, many households are seriously rethinking the wisdom behind putting one's savings in equities. Cash is a lousy asset class, especially in a world where the price of energy will drive crippling inflation, and bonds often provide mediocre real returns.

If households, because of aggressive incentives, are able to generate pre-tax IRRs of upwards of 10% for 10 to 20 years in a nearly riskless venture, I wouldn't be surprised to see some serious capital flowing in that area. The states covered in this analysis account for about 23% of total U.S. population, an appreciable number. Governments are likely to scale back incentives that result in excessive returns, but even after scaling back we could be looking at double-digit returns.

A surge in demand driven by the residential sector would benefit primarily the silicon players with their higher efficiencies, especially with falling module prices.

DISCLOSURE: None