Tax Credit Extension Gives Solar Industry a New Boom

With the extension of the investment tax credit, previously set to expire at the end of 2016, solar developers get renewed incentives.

Solar subsidies have been key to the industry’s rapid growth in recent years.

The United States solar market is wrapping up the best three-month period in its history, with a total of three gigawatts worth of solar photovoltaics capacity forecast to be installed from October through the end of the year. In all, about 7.4 gigawatts of solar photovoltaics will be built in 2015, surpassing last year’s record total of 6.3 gigawatts, according to a new report released on December 9 by the Solar Energy Industries Association and produced by GTM Research.

That, however, is just a trickle compared to the flood of new projects expected to come online in 2016. GTM Research forecasts that the market will more than double next year, reaching 15.4 gigawatts of solar power installed in 2016. Worldwide, growth in solar installations is expected to rival the boom occurring in the United States. Berlin-based research firm Apricum forecasts that 54 gigawatts will be installed worldwide in 2015, with new capacity additions reaching 92 gigawatts by 2020. The largest market for solar photovoltaics will be China, with 180 gigawatts of total capacity installed by the end of 2020, followed by the U.S. (83 gigawatts) and Japan (57 gigawatts).

Prices for solar panels and other components continue to fall. But the largest reason for the expected U.S. surge in 2016 was the scheduled expiration of the federal investment tax credit at the end of the year. That changed when Congress passed an omnibus spending bill that includes a five-year extension of the investment tax credit for solar and wind power projects.

Established by the Energy Policy Act of 2005, the investment tax credit provides a tax credit of 30 percent of the value of solar projects. Annual solar installations have grown by at a compound rate of 76 percent since the act was implemented in 2006. Under the new scheme, the 30 percent solar tax credit will extend through 2019 and then decline gradually to 10 percent in 2022. After 2022 the credit will be eliminated for residential solar installations and will continue at 10 percent for commercial ones. Overall, the move by Congress will add an extra 20 gigawatts of solar power over the next five years, according to Bloomberg New Energy Finance—more than the total installed in history up to the end of last year.

The wind credit will apply to projects that have come online since the start of this year and will continue through 2019, gradually diminishing each year, before going away in 2020.

The solar industry and its supporters lobbied hard for an extension of the credit—a possibility that seemed slim up until a few months ago. Now, they are no longer racing to take advantage of the tax breaks while planning for a major contraction in the industry in 2017. In fact, the extension could have the paradoxical effect of slowing down installations in 2016 as companies prolong construction schedules beyond the previous deadline of December 31, 2016.

And it will have the complementary effect of avoiding the big drop-off that loomed in 2017. GTM Research foresaw installations in 2017 shrinking to just 5.5 gigawatts, which would be a 75 percent fall from the 2016 level. That forecast is sure to be adjusted.

The new extension has boosted the share prices of solar companies, and their prospects. But 2015’s turbulence had already forced solar developers to adapt and adjust their business models. Companies like SolarCity are moving from being strictly installers of solar arrays to providers of broad solutions that include energy storage systems and energy management tools in addition to solar panels. And North American developers are looking to burgeoning foreign markets—particularly in Asia and Latin America—for new projects as the U.S. market cools after next year. India, for example, plans to build 100 gigawatts of solar in the next seven years, much of it installed by North American developers such as SkyPower and SunEdison.

Even as prices for basic solar photovoltaic components fall, developers and utilities are adding smart inverters to better integrate solar arrays with the grid, and software to help manage distributed solar resources. Solar power, still only a small fraction of the world’s energy mix, is likely to expand in the coming decades as the world weans itself off of fossil fuels. 

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