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Columnists
Regulatory
Developments
Michael
C. Ford Attorney Polsinelli
Shughart, PC
Solar
Energy Climate Heats Up for Arizona Businesses
April/May
2008
Arizona
now boasts an impressive array of solar energy incentives for all
Arizona businesses (and homeowners for that matter) to take advantage of
photovoltaic and solar water heating technology to generate a portion of
their own electricity needs, reduce their utility bills, and provide a
hedge against rising electricity costs.
The
solar industry is undergoing a tremendous worldwide boom primarily as a
result of mandates and incentives overseas (Japan, Spain and Germany)
but also a number of states (led by California and New Jersey) and the
overall increased level of attention and resources being devoted to
renewable energy sources due to global warming fears. The average cost
per kilowatt hour for solar power remains substantially above that paid
by the typical retailer industry customer (12 cents), although the
technology is evolving rapidly and some in the industry predict that
photovoltaics will start to become competitive with retail electric
generation as early at 2010.1 The industry, for the time
being, is highly dependent on government and utility incentives.
At
the federal level, several key incentives were passed as part of the
Energy Policy Act of 2005. These include a 30% investment tax credit
(ITC) for capital projects involving solar energy generation, including
photovoltaic (PV) and solar thermal systems.2 The tax
credit provision is also applicable to residential projects, although in
a more limited manner. (The 30% factor applies but the total credit is
limited to $2,000 per year although it applies independently to PV
projects and solar thermal projects.)
The
ITCs are the first that have been available since 1985. The second major
incentive for commercial projects allows solar systems to be depreciated
over five years.
Unfortunately,
the federal credits were authorized only for limited time periods,
initially only available for 2006 and 2007, and subsequently extended
for one year (through 2008). The solar industry lobbied hard throughout
2007 to have the federal incentives improved and extended for at least
an 8-year period to encourage investment in the industry and ensure
long-term stability. The incentives were part of the Energy Independence
and Security Act of 2007 (EISA), but were stripped out at the last
minute as part of the negotiation process (the incentives were being
linked to the elimination of tax deductions available to the oil
industry.)
The
other very controversial provision of the EISA proposal that did not
make it into the final act was a proposed Renewable Energy Portfolio
Standard which would have required electric utilities to provide at
least 15% of their electricity from renewable energy sources by 2020 (or
purchase tradable credits). This provision thus would have
"federalized" renewable energy targets similar to those
currently applicable in Arizona (discussed below).
The
tax incentive legislation was raised again in early 2008 as part of H.R.
5351, The Renewable Energy and Energy Conservation Act of 2008. Among
other incentives, the bill would extend the 30% investment tax credit 8
more years for commercial projects and 6 more years for residential
projects, and increase the residential cap to $4,000. It passed the
House on February 27, 2008, and as of this writing, the incentive
package was expected to be heard before the Senate in March, and the
prospects for passage appeared good. A broad-based coalition of
business, environmental, and consumer groups, utilities, renewable
energy companies and labor organizations were lobbying the Senate to
pass the bill. According to their letter,
America
is on the cusp of a new, clean energy economy. The clean energy tax
incentives in H.R. 5351 would help our county make the transition to
this economy – an economy powered by low-carbon technologies that help
solve global warming, reduce energy prices for consumers and create new
high-wage jobs.3
The
most critical state-level initiative is the Arizona Corporation
Commission’s renewable energy portfolio standard, which requires
regulated utilities to generate 15% of their electricity production from
renewable sources by 2025, and a substantial portion of this must be
from "distributed" sources, e.g., solar panels on your
business’ roof top. To encourage increased use of renewable energy,
including solar, regulated utilities offer substantial incentives
designed to reduce the significant capital investment required for the
purchase and installation of equipment, including rebates that, when
combined with other available incentives, can cover up to 60% of the
system costs. The incentive funding available is limited and allocated
between residential and commercial projects.4 These
incentives also generally can be applied in addition to the other
available incentives. Businesses may also be able to take advantage of
special financing arrangements, and "power purchase
agreements" to reduce the up-front costs of "going
solar."
In
the meantime, the Arizona legislature has been active the last two years
in enacting measures designed to increase renewable energy use,
particularly solar. Arizona has a tax credit provision similar to the
federal commercial ITC that applies to solar energy systems, including
PVs and solar water heating systems. The tax credit is 10% of the system
cost, but is capped at $25,000 and applies only to non-residential
systems. The $25,000 cap applies per building, but there is a per
taxpayer cap of $50,000 per year.5 The tax credit has
currently been extended through 2012.
A
number of renewable energy related bills have been introduced in the
Arizona legislature in early 2008. Perhaps the most ambitious is the
Omnibus Energy Act of 2008 (H2766) which was introduced in mid-February.
The bill endorses renewable energy as state policy:
It
is the goal of this state to encourage the reduction of carbon
emissions by the conservation of energy and the development of
renewable and noncarbon emitting energy resources in conjunction with
maintaining reliable and low cost electric service to utility
customers in this state. This goal is that at least 15 percent of the
electricity delivered to retail utility customers in this state shall
be from renewable sources of energy.6
The
target date for achieving this standard is 2025. The Act would also
mandate a renewable energy standard for retail electricity providers not
subject to the Corporation Commission’s requirements (e.g. Salt River
Project which, by the way, has already implemented its own renewable
incentives similar to the ACC’s).
As
of this writing, several additional bills designed to encourage solar
energy production were also pending in the legislature, including H.B.
2614 which would allow renewable energy equipment to be taxed at 20% of
its normal depreciated value until 2040; and H.B. 2738 which would
establish a state grant program to fund installation of solar technology
at schools.
The
solar energy climate is changing at a furious pace – almost day-to-day
– but the activity all points in one direction: towards increasing
investment in and use of solar energy equipment to generate a portion of
our energy needs, at the building, local, state, national and global
level. It may be the right time for your business to consider the
opportunities presented by the solar energy climate here in Arizona.
Footnotes:
1
ARGUS Analyst Report, First Solar Inc. (created on March 7, 2008).
2
Because these provisions are part of the tax code, they are of course
much more complex, subject to caveats and interpretations. I am not a
tax attorney so nothing herein should be construed as tax advice. To
evaluate the potential incentives potentially applicable to your project
and their impact on your tax liability, a knowledgeable tax attorney
should be consulted.
3
http://www.seia.org/solarnews.php?id=167.
4
For more information, visit www.aps.com.
5
H.B. 2429 (2006), H.B. 2491 (2007).
6
H.B. 2766 (2008) A.R.S. Section 30-901.A.
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