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By Yann Brandt
The investment tax credit (ITC) is currently the lifeline of the solar industry, much like the tax benefits available to wind, natural gas, refineries and other energy sources. With solar, the ITC is a percentage based incentive which allows for the tax credit value to be dynamic based on cost of the system installed, the basis. The basis is the our proverbial envelope that is pushed by some to the limit and by a few over the line. As an industry, we must realize that if anyone goes too far with their basis inflation, it can cause a backlash that will be felt industry wide. Pundits will view egregious or false inflating of the basis as a reason to come out against solar and push for the elimination of the ITC.
Solar professionals must do everything possible to stop ‘schemes’ companies in the solar industry are offering. They don’t always have to be illegal to cause harm to all of us. Please keep in mind that I am not an attorney or tax professional, so my opinion is only based on my own views as I see them. From my view, there are two groups that use basis inflation: third party owners (IPPs) and end customers (cash buyers).
Independent power producers (IPPs) typically add some form of developer fee, upfront and deferred, to the total value of the basis. The development fee is justified by the cost of the IPP to get the project to the point of financing and construction and is paid out by the project cash flow during the first half of the project life. Different IPPs increase the basis by different values, with industry consensus is about 15% of the cash cost. Some IPPs have been able to justify higher developer fees and others have been more conservative about it. The key with IPP inflation of the basis is if the IRS disagrees with their valuation and cuts the basis value, any repercussion falls back on the IPP. This is an important point because the same entity that took the decision reaps the reward or the risk. IPPs are also well versed in the nuances of solar tax laws and well represented by attorneys and accountants and can therefore make a wise business decision.
End customers or cash buyers of systems vary in their knowledge of ITC related rules and regulations. Especially one-time, first-time buyers of small scale solar projects can fall victim to aggressive sales techniques. We heard at SPI from SEIA President Rhone Resch that Consumer Reports is advising consumers of solar scams. Rhone was right that we must self enforce our industry before we become another talking point for political gain.
One new tactic that we are seeing released recently is a distributor ‘rebate’ for buying systems from them. A distributor offers a sort of ‘mail in rebate’ to the end customer if an integrator buys the product from them. Of course the logic is that the customer total invoice for the installation will be higher by the ‘rebate’ amount in order to get a higher tax basis for ITC and depreciation. The customer will show the invoice to the IRS to receive the ITC and receive any other rebates available such as utility or State incentives. The customer will then also benefit from the distributor ‘rebate’. From the outside this may seem just as reasonable as the utility rebate and legal. It may very well be legal, but let’s call it for what it is, a refund. Unlike the utility rebate the end customer paid for a product from the distributor and could very well have received a discount at the time of purchase. In my opinion, this is skirting the edge of the law and targets customers that are have limited legal and accounting representation and trust the integrity of their integrators and suppliers.
Did Solyndra do anything wrong? No, it did not but it had a significant public image impact on the solar industry. We must, as an industry, preserve and protect the long term value that solar represents to the overall economy. Overinflating our basis may be good for some today, but it could hurt us all tomorrow. Call out questionable offers, proceed with integrity and we will all prosper.
Brandt is the president and chief executive officer of Braya Solar, a consulting and project management firm which continues to lower the project costs while representing the PV system owner. Ensuring the needs for risk, bankability, longevity, schedule and budget of the project are met, Braya’s leadership delivers customized project solutions to developers and investors. He blogs at www.yannbrandt.com and is on Twitter @yannbrandt.