Because non-profits tend to be cautious, don’t focus on tax credits, and move slowly, they have been an underserved market, says Cronin.
The federal solar tax credit – which is also known as the investment tax credit (ITC) – is a 30 percent credit on the cost of installing a solar energy system. Right now, the ITC is 30 percent of the cost of a system, but beginning Jan.1, 2020, it will drop to 26 percent, followed by 22 percent in 2021 and 10 percent in 2022.
Because non-profit organizations don’t pay taxes, they can’t directly use the credits. That’s one of the reasons they’re not rushing to install solar, says Christopher Lord, managing director of CapIron and co-instructor, along with Cronin, of the free course Solar PV Finance for Non-Profits: Things You Need to Know Before You Pitch to Your Clients.
How Non-Profits Can Take Advantage of Tax Credits
However, with the right contracts with investors, non-profits can take advantage of the credits and acquire less expensive solar systems. But they need to understand the importance of moving as quickly as possible to capture the benefits of the tax credits.
“The challenge with non-profits is they are not taxpayers, so they can’t use the tax benefits,” says Cronin. “You need to have a service agreement between the non-profit and the owner of the system for the owner to use the tax benefit,” he says.
This service agreement is typically a power purchase agreement (PPA). Solar leases aren’t appropriate for non-profits because depreciation can’t be passed on to the solar system’s owner. A PPA, however, allows non-profit organizations to benefit from the tax credits–without claiming them directly.
The Advantages of a Power Purchase Agreement
Under a PPA, the system is owned by a third party or investor, and the non-profit organization repays the third party via payments, generally less expensive than the cost of utility electricity. The third party uses the federal credits to lower the cost of the system and the electricity.
In an optimal scenario, the non-profit and third-party owner agree to either a price less than the current market rate for the power or a flat rate over a long period – up to 25 years. This could save the non-profit money over the long-term if utility power prices increase, which is likely.
Keep an Eye on Local and State Regulations
In addition to helping non-profits become aware of the benefits of PPAs, contractors and solar installers should educate non-profit organizations about what’s happening in their local markets, says Lord. Changes in local regulations or state incentives can compound the effect of the phase-out of the solar tax credits.
For example, New Jersey’s solar renewable energy certificate (SREC) may be phased out in the next two years. An SREC is part of states’ renewable portfolio standards (RPS), which dictate utilities are required to provide a designated percentage of their power from renewable sources. The electricity they buy is represented by the SREC.
Also, in Hawaii, local tax credits are often at risk on an annual basis, explains Cronin. Six committees examine the tax credits each year to decide the fate of solar tax credits that year. In the last few, for example, they considered a storage credit and every year in May, it didn’t get out of conference committee. Often, non-profit organizations aren’t aware of such efforts and are unlikely to understand their consequences. There is less urgency for many non-profits because they often pass along operational expenses to their constituents.
While it can take time to educate non-profit organizations about the solar industry and the benefits of the solar tax credits, there’s plenty of potential for growth. But it’s not so easy to entice churches, hospitals, foundations and other organizations to take the leap, says Cronin.
“I think the urgent message is that the tax credit will go down in 2020,” says Cronin. “While companies like Google and Apple get involved in solar, the underserved market is non-profits.”