What the US fiscal cliff deal meant for solar

The fiscal cliff deal was cheered by markets, but it is also good news for the US renewables sector.

Several weeks ago, we wrote on the potential implications of the ‘fiscal cliff’ for the US solar industry if Congress and President Obama failed to reach an agreement to prevent dramatic tax increases and spending cuts, which would have taken effect January 1, 2013. 

Sequestration would have led to a reduction in the value of 1603 cash grants by 7.6 per cent, and we hypothesized that overall the poor economic climate and high degree of uncertainty caused by a fiscal cliff would likely hurt the supply of tax equity available for solar projects, although the contraction would not be as detrimental as in 2008.

Since then, the US House of Representatives passed the American Taxpayer Relief Act of 2012 257-167, after it had passed the Senate 89-8 on December 31. This deal reinforced the Bush-era tax cuts for individuals making under $400,000 and families making under $450,000, while increasing the  marginal income tax rates, the tax on capital gains and dividends, and the estate tax for those making over this $400,000/$450,000 level. These measures should raise around $600 billion in additional revenue.

The deal also extended 2009 stimulus tax breaks for low-income Americans for another 5 years, and extended temporary business tax breaks (including the wind PTC) for one year. It did not extend the payroll tax holiday or solve the sequestration issue, and although financial markets have reacted positively, it is impossible to know how beneficial this deal will be for the US economy. Moreover, the deal did not solve the long-term deficit issue.

The deal also had significant effects on the solar industry. First, the bill extends the 50 per cent accelerated bonus depreciation to qualifying solar projects that are placed in service before January 1, 2014. Solar projects with a commercial operation date (COD) in 2013 were already being modeled without this accelerated bonus depreciation, and this change will therefore will lead to a bump in the returns on solar project tax-advantage investors.

Second, the bill delays the sequester for two months, meaning there will be no immediate reduction in 1603 cash grants from the Department of Treasury.  However, this 1603 reduction can still happen on March 1, 2013 if Congress does not enact another extension or strategy to avoid sequestration. 

Finally, the bill extended the production tax credit (PTC) for wind projects for one year – to the end of 2013.  Furthermore, the language for PTC eligibility was actually altered. This means that now a project must only have begun construction by the end of 2013, essentially giving wind projects a two year extension to achieve commercial operation. This is good news for the US renewable industry and highlights the importance of attracting enough tax equity for both solar and wind projects in the US over the next couple of years.

Finally, in the last article, we tried to predict the supply of tax equity if the fiscal cliff caused another recession for the US economy.  We concluded that less fiscal uncertainty was the best solution, as this would allow potential tax equity investors to generate more profit, as well as have confidence in their net income. However, although a deal was reached, fiscal uncertainty remains. Treasury Secretary Timothy Geithner informed Congress that the US has hit its debt limit and will only avoid default for an estimated two months through the use of emergency funding solutions. Therefore, there will be another looming ‘cliff’ at the end of February. To avoid this looming cliff, Congress will need to raise the debt ceiling, as well as address the sequestration issue. 

Failure to address the debt ceiling would lead to default and likely downgrade the US credit rating, potentially creating an economic reaction that will once again threaten the supply of US tax equity for renewable projects.  Finally, there is still the underlying need to find a way to reduce the deficit, something that the fiscal cliff deal failed to do.

In conclusion, there are a few specific effects that the American Taxpayer Relief Act of 2012 will have on the solar industry, most notably in regards to the extension of accelerated bonus depreciation. Moreover, the deal may still affect the supply of tax equity available for solar projects. Therefore, this bill is likely just a temporary solution before another ‘cliff’ once again threatens the US fiscal position.

This article was originally published by Sol Systems. Republished with permission.

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