The financial case for solar power: understanding incentives, tax credits

by Doug Donnell
Mika Meyers Beckett &?Jones

With growing public and business acknowledgment of global warming as a current, not distant, threat to our planet, more individuals and businesses have begun exploring increased use of renewable energy sources, but not everyone understands the financial incentives and tax credits associated with solar power, or the pending deadlines.

Solar power, renewable resources and green energy are terms peppering consumers these days, as are products advertised on the basis of being “green” or “carbon free”. 
With this increased awareness and demand for renewable energy sources has come a rapidly growing research and business sector devoted to new energy technologies.  The net impact of these market forces has resulted in substantial declines in the cost of procuring and installing renewable energy sources, particularly in the areas of solar photovoltaic and wind electric generation.

In 2008, the federal government adopted a program to encourage the commercial and residential use of solar energy in the form of an investment tax credit (ITC).  The credit applies to installations from 2009 through 2016 and allows the business or homeowner to claim a tax credit for up to 30% of the cost of the equipment and installation for a solar photovoltaic system.  Unlike an earlier tax incentive for solar energy, the current tax credit has no upper limit other than a maximum of $500 per one-half kilowatt electric generation capacity.

The current 30% tax credit is set to expire at the end of 2016, and qualifying installations must be completed and operational before that deadline.  In the case of residential installations, the tax credit is available to the homeowner, but is not available for rental properties.  The commercial ITC is used for utility-scale commercial and larger multi-unit residential projects, and the company that installs, develops or finances the solar installation is eligible for the credit.

Under President Obama’s latest budget proposal, the Administration proposes to extend the ITC for solar power beyond 2016, but there remains a good deal of uncertainty with regard to this and many other portions of the Obama budget as it goes through the legislative meat grinder.  Given this uncertainty with the solar ITC’s long-term future beyond 2016, it is expected that 2015 and 2016 are likely to show a marked increase in solar installations before expiration of the current program.

While the federal solar ITC is, without question, the most widely known financial incentive for solar power installations, other lesser known financial incentives can be very important for Michigan homeowners and businesses considering solar photovoltaic cells as a long-term green energy investment.  The U. S. Department of Energy has identified over 30 such programs in Michigan, some specific to certain localities or counties and others specific to the local electric utility.  Several of these non-federal programs are briefly summarized below.

Property Assessed Clean Energy (PACE) Financing
By state statute adopted in late 2010, local governments may establish a PACE financing option which permits property owners to borrow money to pay for energy improvements and repay the loan via a special assessment on the property over a considerably longer period of time than typically allowed with private financing.  Depending upon the PACE financing program approved by the local government, this financing may be available to residential, commercial and industrial property owners.  One key component of PACE financing is the requirement that prior mortgage holders must consent to the PACE financing since the PACE loan would take priority over other private loans secured by the property.

Municipalities may choose a variety of funding mechanisms for the PACE loans, including use of federal grants such as the Energy Efficiency and Conservation Block Grants.  As of 2014, there were over 190 communities in Michigan that had approved PACE funding under the Lean and Green Michigan Program.  The leanandgreenmi.com website contains a list of the growing number of communities offering PACE financing.

Renewable Energy Renaissance Zones (RERZs)

This tax abatement program is available throughout the State of Michigan and is a means by which a qualifying “renewable energy facility” can obtain tax abatement from the state education tax, personal and real property taxes, and local income taxes, where applicable.  Taxes can be abated up to 15 years.  Unlike earlier renaissance zones established in Michigan, a RERZ can be specific to a single parcel or facility that is used to create energy directly from the sun, that does research, development or manufacturing of systems that create energy from the sun, or that researches, develops or manufactures systems or components of systems for advanced battery technology.  The application process begins with the Michigan Economic Development Corporation (MEDC) and applications are submitted by the city, village, township or county in which the RERZ is proposed, following a resolution by the local government approving the proposed abatement of taxes.  Applications then go through the Michigan Strategic Fund Board, which makes an assessment of the economic impact of the project on the local unit of government, and final approval is obtained from the Michigan State Administrative Board.

Michigan Accelerating Technologies Energy Grants (MATch Grants)

MATch Grants were begun in December 2012 as a means of assisting Michigan businesses and universities in applying for and obtaining various types of advanced energy-related federal funds by providing matching funds for the application and commercialization processes.  Some of the targeted technologies directly relate to solar electric production.  The program is funded by the MEDC.

Taking Advantage

As mentioned earlier, the solar ITC’s long-term future beyond 2016 is unpredictable. Therefore, 2015 and 2016 are likely to be crucial years for individuals, organizations and businesses to pursue solar installations before credits expire. It’s suggested that those interested in pursuing solar power take action now, not only for the environmental benefits, but for the financial incentives. 

Doug Donnell can be contacted at ddonnell@ mmbjlaw.com.