There is a dirty little secret in the solar business. Solar is good for taxpayers. As businesses deliver higher levels of solar into the power grid, taxes paid to federal and state governments will skyrocket. Those taxes will continue unabated for decades.
From a government point of view, the return on their investment is huge. The government offers incentives to owners of solar assets. It also taxes the production from those assets. In the end, the government receives far more taxes than any incentives offered.
Federal incentives for business owners of solar assets amount to almost nothing. Yes, business owners can collect investment tax credits. Before they can claim credits, owners must assume all financing, zoning and construction risks, and they must produce energy.
From the point of view of business owners, federal tax credits come at a price. If owners elect to take the credit, they forfeit normal depreciation expenses. In the end, the internal rate of return of the tax credit plus the reduced depreciation expense is about 15% lower than the internal rate of return for normal depreciation expenses. The net federal incentive costs taxpayers nothing.
States are a different story. About half the states offer renewable energy credits. These credits are based on production and local market conditions. In most cases, renewable energy credits are not guaranteed, have no fixed value and are subject to changing markets.
Businesses can earn up to three lines of revenue from solar power production. The first is from the sale of energy. The second is from capacity. The third is from renewable energy credits. Let me discuss each one.
Regional transmission organizations pay everyone the same rate for delivered energy. It does not matter if energy originates from natural gas, coal, nuclear, wind or solar. The only attribute that matters is locational market prices, which vary by time and location.
When it comes to capacity, solar power usually earns less than other resources. Coal, nuclear, natural gas and oil-fired power plants usually earn 100 percent of any capacity payment offered. Solar usually earns less than half the locational market price for capacity. Keep in mind, some power markets like the Electric Reliability Council of Texas (ERCOT) offer asset owners and energy producers no capacity payments.
Solar Production Set to Climb
Nationwide, production and revenue from solar facilities are set to climb. More solar facilities are under construction. In two years, there will be a minimum 13,000 megawatts of solar capacity spread across the nation. In all likelihood, there will be more as states seek new sources.
Because solar producers use accelerated depreciation, after the third year of operations, taxable earnings grow. As was pointed out in "Smart Money Jumping to Green Energy," solar owners have minimal write-offs and no special income tax benefits. By year the fifth year of operations, owners are locked in at the maximum tax bracket, and they remain locked for the next 15 or 20 years.
The 13,000 megawatts will collectively book about $1 billion in bottom-line earnings. The federal government will haul in 39.6% taxes. New Jersey will haul in another 8.97%. Adding local and other taxes, the average solar panel will effectively pay about 50% of its earnings in taxes to governments.
Simple math suggests that the 13,000 megawatts will produce about $500 million in new taxes per year. Multiply the yearly amount by 15 or 20 years, and the government's haul is $7.5 billion to $10 billion in new taxes.
Keep in mind, the cost to the federal government was zero. The only federal incentive was to offer businesses the option to change depreciation schedules.
In most cases, the cost to the states was also nothing. While they offer renewable energy credits, those credits are usually paid by consumers, not taxpayers.
Consumers win. As was described in "Solar Power's Economic Impact Is Huge," the net cost to the consumer is also small. Since solar power displaces costly peaking facilities, solar power lowers the grid's market-clearing prices. Adding cleaner air and a new tax base, consumers' net cost is approximately zero.
Even the grid wins. Solar power is a natural peaking facility. Solar power production has no impact on loads normally served by nuclear power and large coal plants. It does displace high-cost and high-pollution plants. By shedding the most costly of plants, grids help states lower energy costs.
Given the new Environmental Protection Agency regulations and recent court decisions, it is becoming clear that solar power is a preferred solution for most states. As such, EIA forecasts are likely to be on the low side.
Other than governments, consumers and grids, the likely winners are SunPower (SPWR), First Solar (FSLR) and Sun Edison (SUNE). They are first in line as solar power industry attempts to serve growing numbers of new customers.