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SOLAR OVERVIEW
During this presentation you will:
- Learn the basics of solar
- Learn the basics of tax-related incentives for solar
- Learn the basics of new solar law in Arkansas
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Acronyms in the Solar World
- PV – Photovoltaics
- kW – kilowatts (relates to the size of the system)
- Watts – the cost of PV is usually expressed in “dollars per watt” terms
- kWh – kilowatt hours (relates to the electricity production of the system)
- ITC – Investment Tax Credit (currently 30%)
- MACRS – Modified Accelerated Cost Recovery System (depreciation)
- PPA – Power Purchase Agreement
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PV System Economic Benefits
The after tax and incentive cost of a PV
installation can be significantly less than the retail
cost per watt with the on-going savings materially
reducing the end-user’s utility bill.
Tax
Credits
Local
Incentives
Utility
Bill
Savings
-ITC
-MACRS
-State tax credits
-Utility
-State or local
government
-Net Metering
-SRECS
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Net
Metering
Definition
- For electric customers who generate their
own electricity, net metering allows for the
flow of electricity both to and from the
customer – typically through a single, bi-
directional meter. When a customer’s
generation exceeds the customer’s use,
electricity from the customer flows back to
the grid, offsetting electricity consumed by
the customer at a different time during the
same billing cycle. In effect, the customer
uses excess generation to offset electricity
that the customer otherwise would have to
purchase at the utility’s full retail rate.
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Net Metering in Arkansas
In Arkansas, net metering is available to residential customers
whose net metering facilities have generator capacity up to 25
kilowatts (or generator capacity representing the customer’s
highest residential usage in the previous twelve months) and to
non-residential customers whose net metering facilities have
generator capacity up to 1,000 kilowatts (previously 300
kilowatts).
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Energy Tax Credits (sometimes
called “ETCs”) under Section 48 of
the Internal Revenue Code are
investment tax credits which
constitute the principal federal
incentive for developing and
installing solar power.
Federal Energy
Tax Credits
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Section 48 Tax Credits
As an investment tax
credit, the solar ETC is
based on the cost of the
solar energy facility, not
on how much electricity is
produced
In contrast, Federal tax
credits for wind, biomass,
geothermal, etc. are under
Section 45 of the Internal
Revenue Code and are
based upon electricity
production)
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Section 48 Tax Credits
- For 2019, the ETC is generally 30% of the cost of the “facility”
(which does not include ancillary aspects like transmission
lines and substations, but can include a reasonable
development fee)
- The ETC is generally claimed in full at the time the solar facility
is placed in service
- Must be used by someone subject to U.S. income taxes (i.e.,
cannot be used by a tax-exempt entity like a charity)
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Section 48 Tax Credits
Credit is reduced in future years:
- 2020 – 26%
- 2021 – 22%
- 2022 – 10% (and thereafter for commercial projects only)
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Section 48 Tax Credits
- The ITC is calculated by multiplying 30% (or less in future
years)by the “tax basis,” which is the amount invested in
eligible property. Eligible property includes the following
expenses related to a solar PV system:
- Solar PV panels, solar curtain walls, and sales and use taxes
on the equipment
- Installation costs and racking
- Step-up transformers, circuit breakers, and surge arrestors
- Energy storage devices, power conditioning equipment, and
transfer equipment
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MACRS + Bonus Depreciation
- Under the federal tax code, renewable energy systems qualify for a 5-
year Modified Accelerated Cost-Recovery System (MACRS) depreciation
schedule.
- The exact benefit of this depreciation is complicated and varies
depending on a businesses’ tax rate, but typically it adds up to an
additional 25% of a solar energy project’s cost being offset by reduced tax
payments.
- To further sweeten this incentive, The Tax Cuts and Jobs Act of 2017
increased bonus depreciation to 100% for qualified property acquired and
placed in service after September 27, 2017, and before January 1, 2023.
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Act 464 was a tremendous bi-partisan success that will remove
major regulatory barriers that have slowed the Arkansas solar
market for years. Specifically this Act will:
- Allows “third-party ownership” of solar arrays.
- More than triples the maximum solar size limit for businesses – enabling
them to better capture economies of scale (from 300 kW to 1MW)
New Solar Law In Arkansas
Act 464
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Purpose Of Act 464
- This legislation was be designed to remove Arkansas’s ban on
solar leasing and power purchase arrangements, collectively
known as 3rd party financing. Arkansas was one of only a handful
of states that do not allow for individual choice in how they
finance their renewable generation. More than 40% of all
distributed solar installed in the US to date has utilized some form
of 3rd party financing arrangement.
- Without access to 3rd Party Ownership (TPO) finance structures
many willing solar adopters are kept out of the market: including
county and city governments, non-profits, churches, schools,
universities and any other consumers who would prefer to lease
solar rather than own it.
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- Cost of system - $600,000
- 2019 ITC – 30%
- Amount of electricity generated by the system a year - $50,000
- Total federal tax benefits with ITC and Depreciation – approx. $300,000
- System would pay for itself with utility savings in 6 years ($300,000) after
considering $300,000 of first year tax benefits
- Simple annual return-on-investment of just over 16 percent for remaining
life of system (25+) years ($50,000/$300,000 – 16.67%)
Example Of Benefits To An
Owner/User Of The System
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3rd Party Solar Lease Structure
The building owner (“host”) agrees to lease the PV system from
the owner of the system. No sale of electricity involved.
HOST
SOLAR
DEVELOPER
INVESTORS
TAX
BENEFITS
LOCAL
UTILITY Prepaid leases and partial pre-paid leases also exist
Monthly lease
payments
Receives
output from
PV System
Various project
structures
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www.FridayFirm.com
400 West Capitol Ave. Suite 2000 I Little Rock, AR 72201
3425 North Futrall Dr. Suite 103 I Fayetteville, AR 72703
3350 South Pinnacle Hills Pkwy. Suite 301 I Rogers, AR 72758
BRYAN W. DUKE
Mergers & Acquisitions
501-370-1560
bduke@fridayfirm.com
www.fridayfirm.com/attorney/bduke
