Charles Morand
Like Tom, 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 rooftop solar PV 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 in the US 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 hope for the solar PV industry, especially given that module prices are falling rapidly (see 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. This kind of thinking by German households, prompted by generous government incentives, drove massive amounts of capital into the solar PV industry in that nation.
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 money flow into this area. The states covered in this analysis account for about 23% of total US population, an appreciable number. Local governments and utilities have already, in some cases, scaled back incentives following the removal of the $2,000 cap, but even after these reductions households are still be looking at double-digit or near double-digit returns in certain cases.
A surge in demand driven by the residential sector would benefit primarily the silicon-oriented firms with their higher efficiencies, especially in a context where less generous local and utility incentives are counterbalanced by falling module prices.
DISCLOSURE: None
As soon as the feds uncapped the ITC, Xcel Energy cut their RES-driven rebates from $4.5/watt to $3.5/watt, which eneded up being about a break-even for a homeowner with a largish system.
Don’t count on all this money flowing to homeowners… what the federal government giveth, the local government or utility may taketh away.
The biggeste effect will probably be seen in areas where the existing rebate was small or nonexistant.
Tom:
The paper discusses changes in local incentives and the calculations include those changes (Colorado – Xcel assumes a rebate of $3.50/w).
I would really recommend reading the paper as there is much I didn’t discuss.
You also have to keep in mind that, along with utility and state incentives, the price of electricity and the cost of modules play a part.
If you buy into the thesis that module prices will remain soft for 3+ years but that electricity prices will resume their increase perhaps by year-end, then even smaller state and utility incentives might not claw back all of the additional IRR households get from the cap removal.
Even if you assume that Andy Black’s numbers are too high by 1 or 2%, some of these numbers are attractive given the risk-return profile of sticking a system on one’s rooftop.