Tuesday, June 12, 2012

How to fund solar for churches and non-profits

I was invited to make a 5 minute presentation at the SunShot Global Summit in Denver on June 14, 2012. I sent a PowerPoint presentation with embedded audio. The narrative that goes with the PowerPoint is pasted below. I've posted the PowerPoint (without audio) on SlideShare.

[Title Slide] Good afternoon, everyone. My name is Bruce Karney and I'd like share an idea that I began working on 3 years ago at SolarCity.

At that time SolarCity was best known for its community-wide solar discount programs. As Community Program Manager, I met several individuals who were looking for an affordable way to get PV systems for their church or favorite non-profit agency.

[Slide 2 - Photographs] By the way, throughout this talk I'll use the abbreviation CNP to mean church or non-profit.

I was impressed by their passion, and worked with them to find a financial structure that would meet their needs. Some groups wanted to lend money to the CNP and be repaid by the electricity savings. Others wanted to form a partnership to own the system and to capture the tax and depreciation benefits.

But as we examined the cash flows and tax laws, we could not find a viable investment model. Just as with residential solar in the days before PPAs and leases, only the wealthy or truly environmentally committed CNPs ended up installing solar, and they did not benefit from any tax incentives.

[Slide 3 – Current Situation] The core issue, of course, is that Federal solar incentives are tax incentives, so CNPs pay at least 30% more for solar than for-profit businesses do.

The large-scale investors that fund residential and commercial PPAs have avoided the CNP segment due to low profitability and perceived risk. There is a lot of overhead involved in each and every PPA. Most CNPs need systems that are too small for commercial PPAs to pencil out. The financial stability of CNPs is another barrier. CNPs don't have credit scores. Despite the fact that many have long histories of financial stability, disinterested third party financiers do not find their risk profiles appealing.

That being said, there are a huge number of churches and non-profits. With one simple change to federal tax law, I think it is possible to get 10% of them to go solar in the next 4 years.

[Slide 4 – Proposed Change in Tax Law] Since 1986, US law has only allowed losses from passive investments, such as real estate partnerships, to offset passive income. Passive losses cannot be used to offset active income, such as wages. Before 1986, passive losses could offset an unlimited amount of active income, but this was deemed to be an abusive tax sheltering strategy. Interestingly, and as a partial precedent for my proposal, a $25,000/year exception was carved out for low and middle-income taxpayers with passive losses.

I propose adding another limited exception for passive losses of up to $50,000 per year for solar systems owned individually or through a partnership. This exemption would only apply if the system is installed at a church or non-profit and placed in service between 2013 and 2016. Active participation in the management of the system would not be required for the investors to qualify for this exception. As tax changes go, this is truly a modest proposal. It is limited in amount, duration, and scope. It is not targeted at any special group of Americans. It is an opportunity available to any American taxpayer.

To unleash the expected tsunami of solar deployment, it would also be necessary to have standard legal documents for partnerships and PPAs, and simple software tools for partnership administration. These could easily be open-sourced and made available at very low cost.

[Slide 5 – Expected Results] I predict that this simple change could lead to the installation of 100,000 small solar systems in the next 4 years, averaging 20 kilowatts, but totaling 2 gigawatts.

While some people will invest six-figure amounts, the vast majority of investments will be just a few thousand dollars. Someone who invests four thousand dollars for 5% ownership of a 20 kilowatt system would get a $1200 tax credit and the modest amounts shown on the slide as passive depreciation losses in the first three years.

One very important attribute of the kind of investors who would support solar for their CNP is that their required hurdle rate is exceedingly low. Potential CNP investors have always told me that they just want to break even or earn a very small return. Instead of looking for 10% after-tax returns like Wall Street investors, they would be happy with 2%.

[Slide 6 – Conclusion] In closing, let me focus on political viability. This idea has bipartisan appeal. It will create tens of thousands of jobs, yet all of the funding is from voluntary investments of private capital.

Republicans will like that it will help American solar installers, which are usually small local businesses.

Democrats will like the rapid scalability, the environmental benefits, and the creation of 2 million new solar advocates.

I believe that the current Congress would approve this tax law change.

Please join me in urging it to do so.