Creating a Flexible Financial Model that Incorporates the ITC Changes

It’s not unusual for people in a rush to hard wire some information into the formulas of their financial models for solar projects, says Chris Lord, instructor of HeatSpring’s Solar Executive MBA Training course along with co-instructor Keith Cronin.

But it’s important to create models that are as flexible as possible–especially when it comes to the federal solar Investment Tax Credit (ITC), which is a tax credit on residential and commercial solar systems. In 2015, Congress passed an extension of the credit. The incentive was a 30% credit until the end of 2019 and it dropped to 26%  for projects that begin construction in 2020. For projects that start construction in 2021, it drops to 22% and for commercial and utility scale projects that start construction in 2022, to 10%. For residential projects that start construction in 2022 or any year thereafter, there is no ITC.

Don’t Hard Wire the ITC into Financial Models for Solar Projects

If people hard wire the ITC rate into their models, they must review the model carefully each time they use it to ensure that all of the formulas with the rate in them are correct, says Lord. And, if a change is missed, it can seriously undermine the accuracy and value of  the financial project model.

“The problem is, when looking at a model where the ITC rate is embedded in formulas, it’s hard to know what rate the model is using for the project. In order to fix it, you have to search for every place it’s hard wired,” he says. “Models should have the flexibility to quickly change that percentage. Additionally, because multiple people might use the model or review it, you want to make it easy to understand and proof.”

It’s possible to build this flexibility into a model, he says. 

He teaches his students to create a cell in the model that’s identified as a variable input. Then formulas that use the ITC rate reference the input cell so that changes in the input cell flow automatically through all of the formulas correctly. 

Change Just One Box in the Financial Model

“By changing that box, just that one box, they can be confident the whole model flows through, so that any calculations that use the  ITC rate are accurate and easily updated,” he explains. The box should be labelled “applicable ITC rate” and marked as an input variable through either a color code system of highlights, or by grouping all inputs together on a single worksheet. 

“If it is marked and identified clearly and properly, model users will know they can change the ITC number so that all of the formulas in the model will look to that input box for the correct ITC rate,” Lord says.

Avoiding Financial Modeling is a Common Mistake

It’s important to create financial models of solar projects, Lord notes. It’s a common mistake to avoid doing models until very late in the development cycle. But the advantages of modeling are numerous.

“Once you model one project using input cells for the critical variables, then you can quickly and easily adapt the model to look at other projects by changing the input cells to reflect the details of each new project under development,” he says.

Modeling to take into account the changing ITC is critical because the ITC is an important subsidy, he notes.

In fact, the ITC has been one of the most important federal policies to boost the growth of solar energy in the US, says the Solar Energy Industries Association.

“Since the ITC was enacted in 2006, the U.S. solar industry has grown by more than 10,000% – creating hundreds of thousands of jobs and investing billions of dollars in the U.S. economy in the process,” the association says.

Will the ITC be Extended Again?

Given its important impact on the solar industry, will the ITC be extended again?

“I don’t see any change in the next year or two,” says Lord. “After 2022, all bets are off.”

That’s because the US needs solar to green the grid and combat global warming.

“I wouldn’t be surprised if there was a change in the ITC rates after 2022. I am not sure they will go back to 30%, but I am also not convinced they will really drop and stay at 10% for commercial and utility scale projects. I also suspect there will be an effort to revive an ITC for homeowners adding solar,” says Lord.

How to Learn More

Get expert help formulating a plan to accelerate your future by joining Chris Lord and Keith Cronin and in the Solar Executive MBA Training course. You’ll meet like-minded people and get direct access to the expert during the 6-week instructor led session. Chris will be in the course answering questions on the discussion board, reviewing and providing feedback on the required project work and hosting a weekly conference call. After the session ends you’ll continue to have access to the course materials for a full year. Enroll Today!

Leading Organizations Choose HeatSpring

Interesting in sending your team for training? See why leading organizations like the U.S. Department of Energy Solar Energy Technologies Office choose HeatSpring for Groups as their destination for team learning.