Why You Should Be Getting More of Your Energy from Solar Power

Why You Should Be Getting More of Your Energy from Solar Power

America is in the midst of a new solar investment boom being driven by solar financing becoming a reality for businesses of all sizes—no longer just for large global corporations. But with just months left of the current solar investment tax credit, and likelihood of the Fed raising interest rates in this time period, many are asking: is now the right time to go solar? There are four key factors to understanding why you should act now and get more of your energy from solar power.

1. Why is there a new boom and how can I benefit from it?

For the first time, innovation in technology is making the financing of smaller commercial solar projects as easy and accessible as it has been for large commercial and residential entities. That innovation in technology is driving down the cost of capital needed for mid-scale project financing. According to the 2015 Solar Investment Index, 83 percent of investors will be making an investment in solar one of their top priorities within the next five years and 32 percent will invest in solar for the first time this year.

This burgeoning demand from investors, coupled with the reduction in cost of capital for the mid-scale segment in particular, is benefiting everyone in the solar industry. But most of all it is empowering small and mid-scale businesses, such as small regional chains, non-profits and individual business owners, to finally access the ethical, environmental and financial benefits of renewable energy.

2. What big changes are coming that I need to know about?

While many are excited by this new boom in solar, some important challenges are right on the doorstep. The Federal Reserve is expected to raise interest rates, with Chair Janet Yellen’s recent remarks leaving nobody expecting them to stay as they are until 2017. Senior bankers are already reviewing long-term rate commitments, shorting up on new credit duration and preparing to make their own response to any suggestion of rate increases.

The industry will also be forced to adjust to the end of the 30 percent solar Investment Tax Credit (ITC) after December 31, 2016, when it will drop to 10 percent for commercial and 0 for residential projects. There is no doubt that since its implementation in 2006, the tax credit has been the single greatest catalyst in our industry’s growth.

3. What impact will that have upon the benefits I could unlock from solar?

If interest rates and capital costs remain the same in 2017 as they are today, the change in ITC will lower the economic value of tax equity. If the discounted value of tax benefits today provides for an allocation of 38-40 percent of the capital cost, the same discounting methodology will reduce the value so allocated to 22 percent in 2017. This 16 percent loss in the funding resource for projects will need to be offset by further reductions in project costs or higher Power Purchase Agreement (PPA) prices. These changes introduce uncertainties to the post-2016 solar market and no one can be certain of their precise impact.

4. Is solar still viable for my business after 2016?

While it is unlikely that equipment prices will decline further, there is still room for significant reductions in project cost to be realized through more efficient rooftop labor, sourcing lower cost transaction capital and improving third party transaction charges. Improving efficiencies over the coming months in project development and transaction costs can clearly deliver a $0.25/watt savings or approximately 10 percent of the capital stack. The remaining 6 percent reduction in the capital resulting from the ITC change can be made up by a $0.01/kilowatt increase in PPA prices or improvements in the cost of capital available for solar projects.

As banks, particularly the community banks, become more comfortable with the structured funding solutions for solar finance, the reduction in capital costs could clearly offset the need for increased PPA pricing—meaning for the end user, the small or mid-size company looking to benefit from solar, there will be no negative impact on the financial benefit they can realize.

The solar market will be different, it will feel an impact and we will inevitably see much more movement between now and the end of 2016 in the establishment and growth of tax equity funds, with plenty of new project inventory coming from mid-scale projects. There is a huge opportunity for those small and mid-scale businesses to unlock the environmental benefits of renewable energy while lowering their overall utility costs.

Despite the changes, the industry is poised to grow and will continue doing so, driven by the mid-scale solar project boom. Twenty-year debt financing for solar transactions, coupled with more efficient and consistent transaction processing and closing procedures, will greatly assist the new middle-market solar boom to continue thriving, realizing its full potential and not only surviving, but continuing to thrive in the face of Fed rate rises and the 2017 ITC reduction.

Nathan Homan is executive director with Wiser Capital. He oversees Wiser's communications, marketing and outreach efforts, including industry, investor and public relations. He also coordinates all project development activities among Wiser, host facilities and system integrators. In addition, Homer is responsible for the evolution of the platform as it relates to the needs of Wiser's key stakeholders. Nathan’s commentary has been featured in the Huffington Post, Solar Power World, and Wealth Management.

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