Where's the solar on public buildings? (or Why the 1603 grant should be important to you)
Many of our most prominent public buildings appear to be excellent sites for solar, and there's no doubt that the agencies and organizations that own these buildings would stand to benefit from a long-term source of power at reasonable cost at least as much as the average homeowner, so why are examples of such installations so few and far between? In short, why aren't the leading institutions in our communities visibly doing more to lead the way towards a sustainable energy future?
Ecotrust's LEED Gold Jean Vollum Natural Capital Center in Portland's Pearl district. This shows portion of the array made possible with assistance of Walsh Construction, acting as the third party to leverage tax incentives. Photo courtesy of Ecotrust.
By Steve McGrath
Solar Oregon Board Member
It seems obvious. Many of our most prominent public buildings appear to be excellent sites for solar, and there's no doubt that the agencies and organizations that own these buildings would stand to benefit from a long-term source of power at reasonable cost at least as much as the average homeowner, so why are examples of such installations so few and far between? In short, why aren't the leading institutions in our communities visibly doing more to lead the way towards a sustainable energy future?
In discussing this topic, the public buildings I'm referring to are owned by local, state and federal government agencies, religious institutions of all denominations, and a wide range of non-profits, including those with environmental missions. Most of these organizations have a strong interest in promoting clean energy, as well as a practical interest in reducing their long-term energy costs, so why have so few moved forward with installing solar, when so many individuals and businesses have found it worthwhile?
The answer lies in a simple term that ties all these organizations together; tax exempt.
The Portland Habilitation Center (PHC) 858 kW array in Northeast Portland, shown under construction in 2008, was the first large scale third party solar installation for a non-profit in the Northwest. Photo courtesy of Doug Boleyn.
What do taxes have to do with solar?
Anyone who has solar, or who has considered
installing solar, knows that incentives are still essential to having an
installation make financial sense. Even as the prices of key components,
especially solar modules and inverters, have declined rapidly and steeply,
other costs of installing solar, whether PV or hot water, have remained
relatively stable. Installing solar requires a resource evaluation, a
competent and safe design, building and electrical permits, an assortment of
building and electrical materials, and hours of skilled labor, to deliver a
system that will be an asset to a home or building for a generation or more.
While much effort is now being devoted to reducing these other costs of
installing solar, a lot of work remains before most installations will make
short-term economic sense without the need of society investing, through
incentives, to push the market forward.
Some incentives, such a those provided by the Energy Trust of Oregon, are quite straightforward; for each Watt of PV capacity, a defined cash incentive is paid to the owner or the installer upon completion and inspection of the project. Others, such as Oregon's pilot production-based incentive (related to feed-in tariffs, common in Europe and elsewhere), also pay cash to the owner, but are based on the power actually produced, rather than the size of the system installed. When incentives are based on cash, evaluating a project is relatively simple, and is pretty much the same regardless of who is hosting the system; the initial investment is compared to a long-term series of anticipated cash flows and savings, and the relative value of the return on the investment can be compared with other investment opportunities after considering the relative risk.
Unfortunately, existing cash incentives have not
been designed to be sufficient in their own right. Instead they are
designed to work in conjunction with state and federal programs that work by
reducing the owner's tax liabilities through credits, deductions, and
exemptions. This is where our public institutions run into trouble; as
tax-exempt entities, they simply don't have the means to access directly these
core incentives, which simply means that installing solar costs them
substantially more than it does for someone who pays taxes.
The tax-based incentives include property tax exemptions, Oregon's residential and (former) business energy tax credits (RETC and BETC), accelerated depreciation, and the federal energy production and investment tax credits. Accelerated depreciation allows businesses to deduct the cost of installing a system much faster than they will earn value from the system, improving the time value of their investment. State and federal tax credits, however, directly reduce the amount of taxes the owner pays, dollar for dollar, so for the owner that can use them, they have virtually the same value as cash. While Oregon's business energy tax credit has been mostly eliminated for renewable energy, the federal investment tax credit still offsets 30% of the cost of an installation, which is a lot of money to leave on the table if you can't access it, making direct ownership of solar by tax-exempt institutions financially infeasible.
Why are incentives based on tax credits instead of
cash rebates? Originally, investment tax credits were conceived of as a
way to encourage industry to invest more capital into plants and equipment,
thereby creating more jobs and generally building the economy. Since the
desire was to encourage more rapid investment by businesses that were already
profitable, reducing taxes probably seemed like a reasonable incentive.
Politically, however, using tax credits in place of direct cash subsidies
had other advantages. Expenditures, such as subsidies, are treated as
part of the overall budget process, but tax credits have been to some degree
"off the books." Furthermore, by voting for a tax credit
instead of a cash subsidy, a legislator can say they've voted to reduce taxes,
rather than increase spending, even though the financial effect is essentially
the same. Clearly, this can be very appealing when elections come around!
Because tax credits are more politically attractive than budgeted cash subsidies, they came to be the preferred incentive tool for myriad purposes, including many unrelated to the productivity of the industry, such as the development of low-income housing, as well as the development of renewable energy.
This 9.8 kW system on the First Congregational Church in Salem used PGE's solar payment option, the 1603 Treasury grant and loans from members of the congregation and was completed earlier this year under Oregon Interfaith Power and Light's Solar Congregations program.
Enter the Third Party
With no tax liability to offset, governments, religious institutions, and other non-profits that sought to play a role in promoting social good, such as low-income housing and renewable energy, had to find a way to work with institutions that do pay taxes in order to leverage available funding. The tax-paying institution is referred to as the "third party," because they need not be the builder or the ultimate owner of the project, but are involved primarily to provide a means to "monetize" the tax incentives. This third party provides a share of the capital for the project in exchange for an ownership interest in the project through a legal structure which allows them to utilize all or most of the tax benefits. In the best circumstances, this can allow a civically-minded private institution, such as a local or regional bank, to invest in the betterment of their community without sacrificing ultimate return to their investors. More broadly, however, such investments have become an institutionalized part of our financial landscape, with large institutions leveraging their potential tax liability to gain favorable returns from such investments on a large scale. The complexity involved in these transactions helps drive this trend, in that significant legal and accounting resources must be deployed to craft an attractive arrangement, and only the largest financial institutions can justify maintaining the staff necessary to make deals happen. This also drives a preference for lager projects, in the tens of millions of dollars, to further spread out the costs. Ultimately, this results in a tremendous inefficiency, with much of the incentive value consumed by the costs of the work to develop the structures and the profits of the third-party participants. Furthermore, since only a handful of large institutions can play effectively, and they have a large number of potential projects from which to choose, they have strong control over the return they can expect for their investment, making projects much more expensive for tax exempt entities than they would be for profitable companies.
Third party investment has had the effect of getting
a number of projects off the ground. Investors brought much-needed
capital as well as the ability to use tax incentives, enabling installations
for both tax-exempt institutions as well as parties with insufficient tax
liability or capital. For example, one structure, known as the Minnesota
Flip, allowed Midwest farmers with good wind
resources to partner with companies like John Deere to erect large wind
turbines they would eventually own, by making use of the federal production tax
credit. As the volume of deals increased, the cost for each deal
declined, and the inefficiency was reduced (but not eliminated). While
the economy was doing reasonably well, third-party projects as well as direct
investments by businesses kept installation of renewable energy growing, but
smaller projects were usually left out of the game. Furthermore, the
structure of tax rules meant that many with the "wrong type" of tax
liability couldn't effectively use their capital to benefit projects in their
This elevated array at First United Methodist Church in Eugene was Oregon's first community solar project, with a group of members of the congregation and others in the community coming together to finance the installation at this landmark church. Photo courtesy of Energy Design.
Economic woes bring opportunity
Third-party financing was feasible as long as
there were enough larger institutions whose reliable profits gave them a tax
liability they could leverage. However, when the economy turned down,
formerly reliable institutions either became unprofitable, or became wary
enough about their future profitability that a credit against future taxes no
longer seemed like a good investment. This was also true for businesses
that wanted to directly invest in renewable energy; depending on expected tax
liabilities became a bad risk. Money for renewable energy development
dried up overnight, jeopardizing the nascent green economy.
Recognizing the problem, part of the stimulus package that was crafted included temporarily simplifying ways to access federal incentives. A key piece was the 1603 Treasury grant. This grant program allowed project developers to opt for a direct cash payment from the U.S. Treasury in lieu of the federal investment tax credit. Oregon already had in place a pass-through program which allowed developers to transfer state tax credits in exchange for a discounted cash value, but the 1603 grant allowed the project owner to claim the full cash value without discount or the need to find a third party. The 1603 grant proved enormously successful in revitalizing the renewable energy industry, enabling continued strong growth in the midst of a struggling economy. As a stimulus measure, the grant program was originally set to expire at the end of 2010, but with the economy still weak, it was extended at the last minute for another year. Unfortunately, it is now set to expire at the end of this month, unless congress can be convinced to extend it again.
So if we have now had the opportunity to get cash
instead of tax credits, why have our public buildings not blossomed with solar?
The answer is that to some extent they have; a number of new projects
have moved forward. But the larger answer is that the 1603 grant, as a
stimulus measure, did not seek to fix the core problems of the tax credit
financing system. In order to receive a grant, a party must have been
eligible to receive the tax credit! Tax-exempt institutions are not
welcome, at least directly. The grant program has enabled more third
parties to finance more projects, but a church or government agency must still
seek the help of a taxable entity to access the grant, so while more capital
became available, the inefficiencies of the process remain, adding an
especially heavy burden on smaller projects. The elimination of the Oregon business energy
tax credit had already made the economics extremely challenging, so the cost of
arranging third-party financing keeps almost all projects from being
economically feasible. Furthermore, the pending expiration at the end of
2010 and the expected expiration at the end of 2011 has meant that the 1603
grant could not be used for long-term planning; it has only been useful for
projects where developers are ready to move quickly.
A call to action
Many organizations, such as Oregon Interfaith
Power and Light and cities throughout Oregon, including Portland, have
struggled to help get solar adopted where it will do the most good, in full
view of our communities where all can see the road to the future, but have been
slowed by the cumbersome, resource intensive, and expensive nature of accessing
tax incentives as a tax-exempt institution. Congregations, non-profits,
and communities alike are eager to be leaders in demonstrating stewardship for
our planet and our communities. If you are willing to support this
endeavor, here are two steps you can take:
Sign the petition at Whitehouse.gov. Go to: https://wwws.whitehouse.gov/petitions/!/petition/enable-non-profits-local-governments-and-religious-communities-lead-adoption-renewable-energy/hhvcGMHw and sign in to show your support.
Contact your Representatives and Senators and ask for them to do three things:
1) Extend the 1603 cash grant program, so a tax liability is not needed to invest in renewable energy.
2) Expand the grant program so that tax-exempt institutions can directly access funding, without the inefficiency of third-party financing.
3) Stabilize funding by extending incentives through at least 2020, and reducing them gradually, so deliberative planning and fundraising can lead to implementation.
New efforts are also needed at the state level,
such as expanding the production-based incentive beyond the current pilot.
There's no reason that those who seek to do good in our communities should be excluded from helping to make a sustainable energy future come to fruition!