My guest for this episode of Clean Power Planet is Nate Greenberg. He’s a business development manager with WGL Energy Systems. I had the opportunity to talk to him about the solar investment tax credit step down at the Solar Power Finance and Investment Summit this spring.
The solar investment tax credit (or ITC) is a 30% tax credit that was originally supposed to run from January 1st, 2006 through the end of 2007. It was extended to 2008 and then again through 2016. There are actually two different parts to the ITC. The commercial part covers utility-scale and commercial projects and residential projects that are owned by the installer rather than the homeowner. The residential part is for systems that are purchased outright by the homeowner.
The ITC has been very successful. It has played a big part in growing the solar industry. Here are a few stats to illustrate how much solar has grown since the ITC started in 2006.
- More than 170,000 American solar jobs have been created
- $66 billion has been invested in solar installations nationwide.
- The U.S. now has more than 21 GW of solar capacity, 97% of which has been installed since the ITC.
- And we are now installing a new solar project every 2-½ minutes.
But here is where the real momentum comes in. The growing demand for solar has allowed manufacturers and installers to find ways to reduce costs. In 2010, the average residential installed system cost was around $6.50 per watt. By the end of 2014 it was 45% to about $3.48/watt.
That all sounds great but that growth could slow way down at the end of 2016. That’s when the commercial investment tax credit will step down from 30 to 10% and the residential tax credit will drop to 0%. When I attended the Solar Power Investment and Finance Summit this spring the fate of the ITC was a major topic. There was a lot of discussion about what will happen to the industry in 2017 and beyond. It’s a big question. But if you are one of the many people planning, financing or building solar systems you want to know exactly what will happen on midnight, December 31st, 2016. As it stands right now any project not completed and running by then stands to lose a lot of money.
I talked to Nate Greenberg about this. He spoke on a panel at the summit. His job puts him right in the middle of this issue.
NG: I’m Nate Greenberg, a business development manager with WGL Energy Systems. We are a wholly owned subsidiary of WGL Holdings which also holds the natural gas distribution utility in the Washington, D.C. area. We’ve been investing and owning and operating commercial PV assets for almost six years now. And my role within the organization is to, we have an amount of funds each year that we want to get placed and get financed and my role is to acquire deals to place those funds.
In theory with the stepdown of the ITC from 30% to 10% any project that hasn’t hit that deadline and is, you know, under construction and is gonna be delivered late is going to take what I would consider to be a much bigger hit than a typical liquidated damages situation. Cause now you’re eliminating that 20% right off the top. And there’s a real… You know liquidated damages have been a part of our industry for a while and EPCs and others have gotten used to taking on that risk.
DB: EPC stands for engineering, procurement and construction. So the EPC is basically the contractor that designs the system, purchases the equipment and materials and performs the installation.
NG: We’re really talking about a whole, almost unprecedented level of risk that could be associated with losing 20% of the ITC up front. So, it’s become a very difficult negotiation point, you know for some of our larger projects, for projects with more complex construction terms that are getting ready to close and begin the kind of year and a half cycle of permitting and construction. It really puts a wrench in the works of typical negotiation because it’s this sticking point of who is going to take on what theoretically could be a very large risk.
DB: The ITC offsets 30% of the cost of the solar system. Unless your project isn’t up and running by December 31st, 2016. Then someone has to come up with another 20%.
NG: You can sit here and talk about, well I think they’re gonna extend it or I think they’re gonna do an in-construction policy but as we all know until that’s passed that’s not going to happen.
DB: Nate mentions two possible situations here. First, a lot of people in the industry are hoping that the ITC will be extended again. It’s hard to say what will happen between now and the end of 2016 and investors, owners and contractors can’t assume that the ITC will be extended. There is also hope that the law might be revised to allow systems under construction on December 31st, 2016 to qualify for the ITC. That would be really helpful since it is a lot easier to control the start date than the completion date.
NG: So, you have to divvy up that risk and you have to try and figure out, you know, I think coming from an investor’s standpoint your first instinct is that well we’ll find a way to put it back on the developer and the EPC but as I’ve mentioned it’s a little more than your typical liquidated damages. If you’re looking at a project that’s maybe $30 million to $50 million dollars it’s a very very significant chunk on top of perhaps other liquidated damages. So EPCs have a really hard time getting their hands around that and accepting all of that risk. As an investor you know your natural instinct is you don’t want to take any of that risk. Customers for obvious reasons, they don’t want to take any of that risk.
DB: You can see how investors and owners would want the EPC to shoulder the risk since they have more control over the timeline. But even so there are unforeseen circumstances like weather, regulators, backorders. I’m sure the contractors can’t really afford to shoulder the risk either.
NG: So, you end up with kind of a few deals that are just sort of hanging there, sort of waiting, day by day or week by week, you know trying to get someone to blink or say, “yeah we’ll take on the risk, let’s go ahead and do it,” and of course as the weeks go by you know the end of 2016 only gets closer. It’s a problem that we’ve seen with some larger deals and again with more complex construction terms now we’ll probably see more of this obviously as it goes along and as we start to move into the first quarter of 2016 and we see these issues pop up in the smaller commercial space where we typically operate, we’ll see it more and more so we’re all trying to find the solutions and frankly we’re all trying to figure out who’s gonna be willing to take on the risk. It’s a little bit of a see who blinks first game right now.
DB: So on any given project if the parties are dragging their feet trying to figure out who’s gonna stand up and shoulder the risk, that delay just makes it more likely that there is going to be a risk.
NG: Right, It’s a, I don’t know what the term for it is but it feels like a self defeating prophecy, where you’re waiting and waiting for someone to take it on and yet every week that goes by it becomes harder for all the parties to step up and take it on so it’s a weird.
DB: It’s Russian roulette maybe.
DB: Nope. Chicken. That’s the game I was trying to think of. Not Russian Roulette.
NG: Yeah, you know or again. Maybe the customer blinks and says, “alright, what’s the higher PPA rate you know but certainly it doesn’t help. The waiting game is a tricky one to try and balance.
DB: PPA stands for power purchase agreement. It is a contract that enables a company like Sun Edison to build solar systems on the roofs of Wal-Marts and charge Wal-Mart for the power produced for the next 20 years.
DB: So what sort of losses typically fall under liquidated damages?
DB: I’m sure this was pretty transparent. I was hoping that it would sound a little more intelligent than if I just asked, “what the heck are liquidated damages?” Suppose the system is supposed to be running by a certain date but it’s not finished. The contractor might have to compensate the owner for lost income for the time the system wasn’t producing power. So that would typically be a lot less than 20% of the system cost.
DB: How did you get interested in the solar industry?
NG: I used to work of course in real estate. I saw that market start to turn. Probably toward 2007, 2008 and just wasn’t kind of happy with where I was going. So I went and made the conscious decision to go back to business school full time. Before I had gone back to business school I had done a lot of sustainability related things in commercial real estate. I saw that as a growing area but in a shrinking industry, and uh, just probably, the summer of my year between your two years of business school I think I was looking for a fall internship and there was one for Washington Gas an intern in their utilities sustainability group and because of my background I said, “Ah I’ll give it a shot” and I did that and as that was, a few months into that they said “you know we’re trying to build this program out at systems and invest in solar assets and build a portfolio. Do you wanna do that. And I interviewed and took it and that was six years ago.
DB: So you like it.
NG: Yeah, it’s really, I like all the aspects of business development. The demographics of the industry from a personnel standpoint are much more different than commercial real estate and more in line with me kind of personally. So from that perspective it works well and it’s fun and exciting and I’ve gotten to travel all over the country to many places I thought I’d never go and will probably never go back but. And of course you know we really hit it right at the boom so I’m just enjoying the success that that brings with it. I think when we started the program we thought we would invest $10 million a year and as of today we’ve invested over $350 million and we’ve 120 MegaWatts so. It’s been a wild ride. It’s been fun.
DB: Can you think of a system or a project that you worked on that stands out in your mind as a really good one.
NG: It’s difficult because I’ve literally done, with the exception of the first few that they did before I was hired, I’ve done 97, we’re almost at a hundred distinct what we call deals and in those there could be various PPAs and various sites and that sort of thing. Probably the one that I like, or that stands out the most is we recently did 13 MWs which will soon be 14 MWs of feed-in tariff in Indianapolis with about 13 of those MWs located at the airport site, so that was a really, it was just unique. I’m from the midwest and to fly in to an airport like the Indy airport and you look out and you see the product of your work is pretty cool. Another one that stands out for that same kind of reason is what’s called the University of Arizona established probably ten years ago, fifteen years ago, don’t quote me on that I don’t know when they established it but they made what’s called the tech park and as part of the tech park you know it’s for research, development, anything technology related and they have a whole thing called the solar zone. It’s about 20 MWs total of different types of solar. You’ve got thin film, dual trackers, pv, we did a product out there called cogenera which is a, actually more of a, I would call it a miniaturized concentrated solar solution and even though our system was only a MW and a half it culminated or it completed the first phase of the solar zone out there so it was really a big deal for everyone to be involved with that and when you fly out of Tucson you can see it from the plane which is pretty cool.
DB: Well thanks so much for taking the time to talk to me Nate.
NG: Yeah thanks David. Let me know. Did I give you my card yet?
DB: You have not yet.
DB: Well thanks for listening to another episode of Clean Power Planet and thanks to my engineer, producer and daughter Keaton Butler.
KB: A special thanks to Daisy Helmuth from Lexington, Kentucky for this episode’s music.
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