GeoGenix, LLC
Rooftop solar can save dramatically on energy costs, but it is important to start planning now to benefit from incentives.
Many retail facilities have large, flat roofs that are ideal for the deployment of rooftop solar. The installation of solar can result in dramatic savings on energy costs, as well as function as a source of revenue for years after the payback period in states that offer production-based financial incentives in the form of Solar Renewable Energy Certificates (SRECs), or their equivalents.
In addition to state incentives, the federal government is also offering valuable incentives, such as the Section 1603 Treasury Grant Program and the new 100% bonus depreciation allowance, that make 2011 an ideal year for installing solar. By taking advantage of these two programs, retail businesses can recoup more than 60% of the upfront cost of a solar system in the first year.
Moreover, you don’t even need to own a solar system to benefit from the advantages if you feel you are not in a position to make an investment now or simply have no interest in ownership. In many states, the incentive landscape is so attractive that the roof of your building becomes an asset that can be leased to a third party investor in exchange for a long-term, low-cost source of electricity.
In order to take full advantage of these financial incentives, however, there are two important matters to keep in mind. The first, given the fact that a large solar system may take as long as 8 months to design and install, is the need to start planning now in order to meet the bonus depreciation allowance requirement that a solar system be in service by the end of the year.
The second is to make sure your roof is suitable for solar. Some roofs may not be able to take the additional load of crystalline solar panels, while others may be too old: there is no sense in putting a new solar system on an aging roof that will have to be replaced years before the 25-year lifespan of a solar system comes to an end, thus requiring costly decommissioning and reinstallation.
But back to the need for speed. The sooner you start planning for solar, the better. If 2010 was any indicator, the industry is likely to see a bottleneck in the supply chain toward the end of the year as customers, fearful that the incentives won’t be extended, rush to beat the deadline. And, unlike supermarket shoppers who find that a sale item is sold out, the government isn’t issuing rain checks.
The federal incentives take two forms: the Section 1603 Treasury Grant Program and the new 100% bonus depreciation allowance.
The Section 1603 Treasury Grant Program, which was extended last December through the end of 2011 as part of the tax relief act of 2010, provides a cash grant for 30% of the cost of a solar system. The grant money is wired directly into a business’s bank account. Although the solar industry is lobbying to extend the Treasury Grant Program through 2012, an extension is by no means a certainty.
In order to qualify, businesses must demonstrate that work began in 2011, which is defined in two ways — either as the beginning of physical work “of a significant nature” or the execution of a contract for the manufacture of solar components. The latter definition is what led to last year’s supply bottleneck as solar customers sought to beat the deadline by purchasing solar components.
The 100% bonus depreciation, which is new, allows businesses to depreciate 100% of the eligible basis in the first year, instead of over 5 years. The eligible basis is equal to the cost minus one-half of the 30% cash grant. In the case of a $1 million solar system, a business could thus depreciate $850,000 in the first year, which at a tax rate of 35%, means a savings of about $300,000.
Between the 30% cash grant, which in the case of a $1 million system would be $300,000, and the bonus depreciation of about $300,000 the owner of the hypothetical $1 million system would recoup about 60% of the cost in the first year — and that’s not even not counting the savings on avoided electricity costs and the revenue from state incentives.
The timeline for the 100% bonus depreciation is even stricter than for the Treasury Grant Program, however. In order to qualify, a solar system must be in operation in 2011.
Many states also offer production-based financial incentives in the form of Solar Renewable Energy Certificates, or SRECS (although some states call them by other names). These states require utilities to generate a certain amount of their power from renewable energy. In order to satisfy this requirement, utilities may buy SRECs, which represent the environmental benefit of solar, from solar suppliers.
SRECs, each of which is the equivalent of 1,000 kilowatt-hours of electricity, are traded on the open market. New Jersey has the nation’s richest SREC incentives, which have contributed to an astonishing solar growth trajectory. The Garden State is now a national leader in solar, second only to California in installed solar capacity and first if calculated on a per-capita basis.
The combination of federal incentives, SREC revenues and savings on avoided electricity costs makes solar an attractive investment, especially in states with generous incentives. But the anticipated sunset of the federal incentives could set off a “dash for cash” as it did in 2010, with the result that latecomers will be unable to meet the deadline due to the high demand for solar components.
Although 2010’s latecomers were saved by Congress’s last-minute extension of the Treasury Grant Program, there is no guarantee that will happen again, especially with Congress in a budget-slashing mood. With summer right around the corner, therefore, it is time to start thinking about harvesting the power of the sun, and reaping the benefit of an unprecedented incentive landscape into the bargain.