The hell avoided by the ITC extension — lower risk, faster growth
Updated: Jan 31, 2021
According to the Solar Energy Industries Association (SEIA), the solar industry has grown by more than 10,000% since the Investment Tax Credit (ITC) was enacted in 2006. It has helped solar companies and solar owners add clean, renewable energy to the American energy mix by providing originally 30% and more recently 26% of the value of their solar installs in tax credits. When president Trump signed the bill including the extension of the ITC, many solar companies may have avoided a legal nightmare. Some may have slept through it.
What are you talking about, you ask? I’m talking about how many clients were expecting a 26% tax credit but had to settle for 22% since their installs have not happened at the end of the year. For those who don’t know, the ITC was due to drop from 26% to 22% 12/31/2020. Individually, 4% of each project is not a crippling amount of money; however, if your entire backlog of 100+ signed but not-yet-installed clients sued you for several thousand dollars a piece, that 4% adds up. For commercial projects, that number is much higher. If your contract language didn’t include protection against the unavailability of a funding mechanism, you would have built risk into your contracts.
The COVID-19 pandemic has brought some pretty lengthy delays to the solar world. Some AHJs are seeing delays over 100 days in their permitting approvals. Some manufacturers have had to cut back on production in order to provide safe work spaces. Getting all of these things to line up the way they did pre-pandemic is no easy feat. On top of that, the sales team has continued to sell and add to that backlog. You probably have way more projects pushed off to 2021 than you had expected in March 2020.
The ITC affects solar companies in several ways in several types of projects. Two of the most common transaction types are Power Purchasing Agreements (PPA) and Ownership. PPAs are when a site owner pays for the power produced from an array on their site instead of paying for the array itself. Since the solar developer pays for the array, any tax credits in these types of deals go to the developer. In ownership deals, the site owner pays for the array and gets all of the ITC.
What is risk?
Every website I went to for a definition had a slightly different variation but what they all contained was the idea of uncertain outcomes built into decisions or transactions or action. Openriskmanual.org’s definition of Legal Risk is the most appropriate here:
“Legal Risk is the risk of losses arising from an unintentional or negligent failure to meet a professional (legal) obligation to specific clients (including fiduciary and suitability requirements), or from the nature or design of a product.”
There is a common expression you may have heard: the higher the risk, the higher the reward. Every financial advisor tells you to diversify your portfolio. As you age, add a higher percentage of moderate to low-risk investments. Riskier investments have potentially huge returns; however, risky investments often tank. There’s that other expression too: the house always wins in the end. If you only make risky decisions, you will lose in the end. No one bats a thousand (last one I promise).
How do I protect myself?
Not all risk is avoidable; however, there are a few actions that would work towards minimizing your risk. After all, the extension was only for two years and this pitfall could occur again if the government passes on another extension.
Talk to a lawyer. See how you can protect yourself contractually. The following recommendations are no substitute for real legal advice and will not legally protect you.
Switch to a value oriented sales proposition and show your clients that the array is worth it without the ITC. The ITC makes the investment reach its payback a little sooner.
Temper client expectations. I’m sure you beat your sales team over the head with this phrase. Help your clients understand that the ITC cannot be guaranteed. You will work as hard as you can to get their project to qualify with the caveat that there are forces majeures out of your control that could affect the ITC’s availability.
Now, wouldn’t you expect this kind of post to come from a lawyer rather than a solar project management company? Perhaps. But Coperniq is committed to helping the entire solar industry thrive. That is why we strive to produce quality content at least twice a week, addressing the industry's most pressing problems, and showing how Coperniq can help you better organize and manage your solar enterprise. We would love to help you even more. Thanks for reading our content either way. We hope it was worth your time.
As always, please feel free to leave a comment or email me suggestions for other topics at email@example.com.
Until next time!
p.s. Neither I nor Coperniq are lawyers or legal professionals. We are solar professionals and software developers. The above piece is meant to help you start the conversation in your organization and should not be used as legal advice
#solargrowth #solar #itcreduction #solaritc #seia #ppa ##solarrisk #rolarrebates #coperniq