The surprising outcome of the 2016 U.S. federal elections left many in the solar energy industry unprepared for potential changes in federal law and policy. The resultant policy uncertainty has caused some concern about what the future may hold for solar energy in the U.S., a market that has been enjoying strong year-over-year growth for the past several years. When evaluating policy and legal risk factors for the solar industry, however, it is important to consider the impacts not only of federal law, but also of state and local law.
Brian J. Nese
Morten A. Lund
Prior to the election, many in the industry had hoped and expected that federal policy would provide new and extended benefits for solar energy. Those hopes and expectations were dashed following the election. The Clean Power Plan will likely be dismantled by the new administration. The establishment of a carbon tax or similar carbon policy appeared to be a possibility, but we believe that this is off the table at least until the next election.
Despite the loss of future upside, many existing federal policies remain in place. And whenever industry stakeholders discuss federal solar policy and possible changes, the first topic, without fail, is federal tax benefits for solar: namely, the federal investment tax credit (ITC) and accelerated depreciation (MACRS). These two important tax benefits can provide a tax-driven discount of 40% or more on the cost of a solar energy project.
Apart from meddling with the ITC (which was extended by Congress in 2015 and will begin to phase down in 2020) and MACRS, there are certainly other things the federal government could do that would negatively affect the solar industry in the U.S. There could be changes to the Bureau of Land Management land use policies for solar or other federal land use and permitting rules. There could be new incentives or policies favoring non-renewable energy sources. There could be changes to Federal Energy Regulatory Commission (FERC) rules or interpretations of FERC jurisdiction. But each of these is, in the grand scheme of things, relatively minor when compared with ITC and MACRS benefits, which are undoubtedly the most important federal policies for the U.S. solar industry.
The industry is just ramping up again after the recent extension of the ITC, and the common fear is that an early revocation of the ITC (or other action to reduce its value, such as changes to corporate tax rates) would send the solar industry into a steep decline. However, we contend that if the ITC disappeared, states and local governments would step in to fill the void, not necessarily through tax incentives but through other programs and policies within the scope of their powers.
We do not mean to minimize the value of the ITC or the harm that could come from its premature termination. However, current policies at the state level not only are more potent than the ITC, but in some cases, would also be unaffected by its removal. In addition, bills currently proposed in various states, as well as the overall political climate in key states, lead us to believe that states will continue to act to foster the continued expansion of solar energy.
State-level drivers
The most important state policy is the renewable portfolio standard (RPS), a powerful tool that encourages development of renewable energy projects. These laws require utilities to obtain a certain amount of energy or capacity from renewable energy resources. To date, 29 states (plus Washington, D.C., and three U.S. territories) have an RPS, while another eight states and one territory have renewable portfolio goals.
It is no coincidence that the states with the most installed renewable capacity are the same states with strong RPS policies. California has consistently increased its RPS, going from 20% by 2017, to 33% by 2020, to 50% by 2030. Recently, in what could be interpreted as a bold move by the California legislature to fill a perceived lack of federal leadership on renewable energy policy, State Sen. Kevin de Leon introduced legislation (S.B.584) that would increase the California RPS to 100% by 2045. The bill would align California with existing law in Hawaii, which passed a 100% by 2045 RPS in 2015. Similarly, proposed legislation recently introduced in Massachusetts (S.D.1932) would require the state to achieve 100% renewable electricity generation by 2035 and phase out the use of fossil fuels across all sectors, including transportation, by 2050. In Minnesota, Lt. Gov. Tina Smith recently proposed a plan to increase the state RPS to 50% by 2030.
These actions exemplify the type of impactful state law that can drive renewable energy policy in the absence of supportive federal legislation.
The most relevant feature of an RPS is that it is a pure mandate and, therefore, largely immune to specific system pricing – including price increases following a removal of the ITC. If the ITC disappeared, the cost of renewable power would likely increase, but the entities covered by most state RPS would remain obligated to purchase the more expensive power. As a result, the most impactful potential change in federal policy would have little or no lasting impact on the main state policy.
Although the RPS is by far the principal state-level policy supporting renewable energy projects, many states have also implemented state-level incentive programs over the years to support such projects. One shining example of a successful state incentive is the California Solar Initiative (CSI). The CSI was a $2 billion, ratepayer-funded solar rebate program created in 2006 with the goal of spurring the solar industry in California. Now expired, the CSI undeniably contributed to the expansive growth of installed solar capacity in California from 2006 to 2016.
State and local governments possess another useful tool for supporting renewable energy: control over building codes. Several jurisdictions have implemented revisions to building codes to require new construction to incorporate on-site renewable generation or net zero energy consumption requirements.
In 2013, for example, the City of Lancaster, Calif., became the first U.S. city to require home builders to install solar on all new homes. And if a bill recently introduced by California State Sen. Scott Wiener (S.B.71) advances, a similar requirement may be imposed statewide.
For clear proof of the power of state policy, we need only look to see where solar is – and where it is not. Despite their relatively low solar resource, Massachusetts, New York and New Jersey are among the top solar energy states in the country. This is mostly due to their favorable state-level policies, such as RPS (which can be met through tradable certificates) and virtual net metering.
Meanwhile, Florida – one of the sunniest states in the U.S. – is not a major solar market, specifically because of the lack of an RPS, coupled with oppressive state laws regarding third-party ownership.
State policy has the power to both create and destroy markets for solar energy. In fact, in some ways, restrictive state policies could be even more detrimental than adverse federal rules. For example, a recently proposed “Electricity Production Standard” in Wyoming would have required state utilities to procure 100% of their energy by 2019 from “eligible generating resources,” which were limited to coal, natural gas, net metering (under 25 kW), nuclear and oil. This “anti-RPS” did not succeed, but if it had passed, it could have quickly destroyed the solar energy industry in Wyoming.
Moreover, we note that California alone accounted for 35% of the total U.S. solar energy capacity installed in 2016. In addition to California, other states that have demonstrated their ongoing commitment to solar energy could, through state-level action, sustain the U.S. solar energy industry for years to come. In the event of a lost ITC or other negative federal policy changes, we believe it is likely that California and other states would take action to preserve and protect solar energy and the continued growth thereof.
These incentives and programs should be viewed in conjunction with general market economics. Utility-scale solar is at or near grid parity in several regions, and commercial and residential solar is well past that point in some parts, as well. Other markets, such as Texas, are teetering on the edge, ready to explode at any moment.
Losing the ITC would have the most effect on projects and markets that compete on price, but even in those markets, the effect would be limited. Losing the ITC would probably stunt the development of the solar market in Texas and other markets that are on the fringe of grid parity. Perhaps the starkest effect would be in markets that currently are, or are on the verge of, operating principally on Public Utility Regulatory Policies Act (PURPA) contracts, such as Utah, Idaho and Montana, among others. These markets would struggle. But we observe again that these PURPA markets (other than North Carolina, which until recently had a powerful state-level tax credit incentive) are relatively small. If development of utility-scale solar stopped in Montana, for example, this would not constitute a major impact on the U.S. solar industry as a whole, and development would continue on in other markets.
On the other hand, consider the impact of increased pricing on residential and commercial solar in California, for instance. The payback period would be extended (which would negatively impact the market), but residential and commercial solar in California would still be a money-saving investment for customers, and installations would continue – even without any additional boost from new or updated California state incentives. The same is true of several other states. And unlike Montana, these are the states that have been driving the industry.
In the end, this must be the conclusion: The fate of the U.S. solar energy industry likely rests with a handful of states rather than the federal government. Under a likely scenario, policies and local energy prices in those states would continue to expand the solar industry for years to come, regardless of any likely federal action. Federal policy changes may slow or hinder growth in second-tier solar states, as well as geographic expansion to new markets – but the solar industry is too mature and too well supported where it matters to be crippled by any reasonable action at the federal level.
Morten A. Lund and Brian J. Nese are partners in the San Diego office of law firm Stoel Rives LLP and practice in the firm’s energy development group. Lund can be reached at morten.lund@stoel.com, and Nese can be reached at brian.nese@stoel.com.
