Do Your Financial Modeling for Solar, and Keep Your Eye on What Qualifies for the ITC

When you’re creating financial models for solar projects, it’s important to understand what qualifies for the solar investment tax credit (ITC), says Chris Lord, instructor of HeatSpring’s Financial Modeling for Solar PV course.

And it’s also critical to begin your modeling early, says Lord, who also is co-instructor of HeatSpring’s Solar Executive MBA course.

“Most people think if they can get a certain lease rate on the property, everything else will fall into place. They don’t put a priority on modeling.,” he says. “Don’t leave the modeling until the end; do it earlier so you can see the impact of every decision you make on the project’s return,” Lord says.

In a model, you’ll input into a spreadsheet the assumptions about construction and operating costs, he explains. To attract investors, it’s important to focus on cash flows, he notes.

“You’ll want to generate an income statement and cash flows, discount them back to the present to see the value to the investor,” he says. “The cost of construction doesn’t show up in investors’ calculations the same way it does with a developers’. Investors are more interested in cash flows.”

Take Stock of the High-Risk Expenditures First

Begin your modeling by looking at the big-ticket, high-risk items–all the while keeping an eye on what qualifies for the ITC, says Lord.

The ITC is a 30 percent federal tax credit that you claim for investments in residential and commercial solar energy systems. The credit steps down in phases to 20 percent for projects that begin in 2021. After 2021, the residential credit drops to zero and the commercial and utility credit remains at 10 percent, according to the Solar Energy Industries Assoc.

“Often you should work on the high-risk items first,” he says. “Prioritize them; get them as quickly as possible.”

For a utility-scale solar project, you’d start with the site costs. For a distributed generation project, you’d begin with the condition of the roof.

Be on The Lookout for Environmental Issues

“If  it turns out you have environmental remediation necessary, it might make the project completely unattractive,” he says.

The costs associated with interconnecting with the utility are also important.

“Those studies don’t qualify for the ITC,” he says.

You might begin with a rough guess of the portion of costs that qualify for the ITC, Lord says. As a rule of thumb, that might be 90 percent for a utility-scale project.

What’s Eligible for the ITC?

While solar panels are eligible for the ITC, security fencing–required by insurance companies–generally is not. Financing interest and closing costs aren’t generally eligible for the ITC; that’s because they’re not considered integral to the project, says Lord.

While you’re nailing down the costs and whether they qualify for the ITC, you’ll continually replace your estimates with more accurate numbers., says Lord.

“In the early stages, you generally don’t have enough data,” he says. “Financial modeling is a steady process of replacing estimates with finer calculations of what the numbers might be.”