Tax Law Change Could Help 150,000 US Churches and Non-Profits Go Solar

Here's a copy of a proposal I've sent to my representative in Congress, Anna Eshoo. If you like it, please copy it and send it to your representative too.

Opportunity
1) Congress could enable 100,000 churches and 50,000 small non-profit organizations to put solar panels on their roofs in 2009-11 by a minor and temporary change to existing tax law.
2) The example these churches and non-profits set is likely to inspire hundreds of thousands of homeowners to add solar to their homes, thereby stimulating the economy and helping the environment.

Current Situation / Problem Statement
Federal incentives for solar photovoltaic (PV) systems are tax incentives. This puts churches and other non-profit entities that want to get rooftop solar at a terrible disadvantage – they have no taxes to offset.

The solar industry and Wall Street have partially addressed this problem by creating Power Purchase Agreements (PPAs). With a PPA, an investment firm buys, owns, and maintains the solar system on the roof of a non-profit in exchange for a long-term contract to sell all the power from the system to the non-profit. PPAs effectively and legally move the 30% investment tax credit (ITC) and depreciation of the solar assets from the non-profit “host customer” to the for-profit PPA provider.

However, the PPAs are not being offered for the small solar systems – the size most churches and non-profits need -- because the administrative overhead of selling and setting up a PPA is essentially the same no matter how large or small the system is. The very few PPA providers who have ever tried providing quotes for systems smaller than 30 kW found that the offers are not being accepted and have withdrawn from this market segment. As a result, there is no financially viable way for most churches and other small non-profits to install solar PV without paying for them using cash or borrowed funds.

Potential Solution / Tax Roadblock
For solar systems in the 5-30 kW range ($25,000 - $180,000 after incentives), many individuals have adequate capital to fund and own a solar system on a non-profit’s roof. In California, such an investor could earn a modest after tax return of 3-7% if two impediments in the tax code were removed. The first issue is the passive activity loss limitation which prevents most taxpayers from using the depreciation of their solar system to offset ordinary earned income. The second is the difficulty of passing the active participation tests. (If a taxpayer passes one of these tests, he or he can treat passive income as active).

Requested Change in Law

1. For a limited period (such as tax years 2009-2011)
2. For a limited class of renewable energy investments (such as solar PV and solar thermal)
3. For a limited group of eligible projects (such as 501(c) non-profit entities)
4. For a limited group of taxpayers (such as filers with AGIs less than $400,000 if married filing jointly or $200,000 if single)
5. Amend the passive loss rules to allow passive losses from leases and power purchase agreements to offset active income, not just passive income.

Example
Suppose that Jane and John Smith want to help their church go solar by purchasing a solar system that will be installed on the church’s roof. They want to recoup their investment by entering into a 15-year PPA with their church. Assume the Smiths have “modified adjusted gross income” of $155,000.

Under current law, if they invest $80,000 to buy a 10 kW solar system (a fairly typical size) they would be able to claim $48,000 of depreciation as a passive loss in the first year of ownership[1]. However, because their income exceeds the Passive Loss Allowance Limit of $150,000, they could not offset any of their non-passive income with this passive loss. Therefore, they will not be able to use this loss from a tax standpoint until the solar system’s revenues exceed its expenses many years in the future. The fact that the tax benefits cannot be harvested early in the ownership period makes this an unattractive investment for them.

Example with Change in Law
The Smiths would see things quite differently if they could benefit from the depreciation immediately. The investment would be quite attractive, and the Smiths would be willing to invest in solar for their church even though the overall IRR is modest. From their perspective, it would be like buying a bond or annuity but with an added environmental benefit. The church would benefit by getting 15 years of renewable energy with no upfront investment. The example set by the church would probably inspire many parishioners to purchase solar for their own homes who would not otherwise have done so.

Argument from Precedent
Current tax law already recognizes that some taxpayers should be able to use passive losses to offset some amount of non-passive income. That’s the whole purpose of the passive activity loss allowance, which allows taxpayers with modified AGI of $100,000 or less to offset up to $25,000 of passive losses against non-passive income. The proposal expands the existing rule to investments in renewable energy.

Scale of the Opportunity
Suppose 100,000 churches and non-profits entered into solar PPAs, with an average system size of 10 kW and price of $80,000 (before incentives). That’s one million kilowatts or 1,000 megawatts – about 600 times what Google has put on the roof of its headquarters in Mountain View. The amount of private investment leveraged would be $8 billion. These figures do not include the impact from homeowners who purchase solar systems because they were inspired by their church’s example, but their purchases could add a 3x multiplier or more.

Current tax law already allows these tax benefits to be achieved, but only by large investors who have shunned this particular market segment. The proposal opens up a new path for capital to flow to churches and small non-profits – money from parishioners who are wealthy enough to want to help their parish and their planet, but not so wealthy that they would ever consider an outright donation of solar. There are millions of Americans who fit that description.

Having a 2 or 3 year time limit on this program would spur all parties to move quickly. This sense of urgency would stimulate the economy and hasten the end of the recession.

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[1] 5 Year MACRS with 50% stimulus depreciation allows them to depreciate 60% of their investment in Year 1.

Solar Homes in Old Mountain View

Today I interviewed Bonnie Prescop for the article I am writing for the Old Mountain View Neighbhorhood Newsletter about homes with solar PV systems. There are five in the immediate area of my home. On the way back from her house to mine, I dropped off about 10 fliers at homes in the neighbhorhood that looked like they had good, unshaded solar potential.

The article will be part of the March edition of the newsletter. My current draft is pasted below. I really like the quote from Terri Petersen that closes the article.

Living La Vida Solar

There are five homes between Castro and Calderon with solar electric systems. By interviewing the solar pioneers I learned that no two solar systems – or solar families – are alike.

The first couple in the neighborhood to go solar was Philippe Habib and Heidi Cartan. They live at 526 View, and Philippe installed the 2.5 kilowatt (kW) system in 2001, which provides much of the energy needed by their family of four. They have an excellent southern exposure, but the steep pitch of their roof made the installation a physical challenge. At one time they also owned an electric truck whose batteries they recharged at night.

Julie Lovins and Greg Fowler were the next family to go solar. They purchased their 2 kW, 12-panel system in Sept. 2003 from Akeena Solar and had it installed on their east-facing roof where it catches the morning, mid-day and early afternoon sun. Julie and Greg have found that the system provides nearly all the electricity their home needs, and their annual electricity bill has been reduced to slightly more than $5/month. They note that the growth of redwood trees in neighbors’ yards is decreasing the output of the system more each year.

Steven and Bonnie Prescop at 752 Calderon were the next family to go solar in November 2003 as part of a remodel that expanded their home from 1200 to 2200 sq. ft. Their 18-panel, 2.5 kW solar array is on the south side of their addition and is invisible from the street. Bonnie runs an in-home day care business that takes a lot of electricity. Even though they nearly doubled the size of their home, their electricity bill is about half of what it was prior to their $13,000 investment in solar electricity. Steve expects the system to pay for itself in 7-10 years.

The 2.5 kW system of Jordan and Wendy Dea-Mattson (311 Jessie Lane) is also quite hard to see from the street. They had it installed by Akeena in mid-2004. Looking to the future, Jordan is very enthusiastic about the cost reductions that will occur when Palo Alto-based Nanosolar brings its new manufacturing facility in San Jose on line late this year. Nanosolar has developed a semiconductor ink can be used to make a solar cell using a simple printing process. The ink is deposited on a flexible substrate and the nanocomponents in the ink align themselves properly via molecular self-assembly.

The newest, largest and most visible solar system in the neighborhood is at 541 Bush Street, near Mercy-Bush Park. This is the home of Tim and Terri Petersen and their two daughters. Their 4.4 kW system, installed by REgrid Power, became operational on Jan. 5 of this year. Thanks to a sunny January, it produced 474 kilowatt-hours in its first four weeks of operation. The Petersens have owned their home since 1999 and paid for their system by taking some cash out when they refinanced their home last summer. Tim says that he expects the system to reduce their PG&E bills by 80-85%. The initial idea for the solar system was Tim’s, and Terri was hesitant at first. However, as Terri said when I interviewed her, “We watched An Inconvenient Truth and I stopped arguing.”

Solar Conversations at Chamber of Commerce Mixer

It's Valentine's Day, and Twana and I went to the Chamber of Commerce monthly mixer before going to dinner. Twana won a really nice gift basket with wine, dark chololate, and other treats!

Lots of people had heard about Saturday's successful meeting. Former Mayor Mike Kasperzak told me that he and his wife Lisa just got a quote on a solar system. By coincidence, the sales rep was a young man that Mike had known for more than 25 years. I like the fact that the solar industry is creating local jobs (unlike the fosssil fuel industry). Even if the panels themselves come from outside the US (some do, some don't), the sales, installation, and administration is all done locally.

Mike O'Farrell, the President of the Chamber Board, said that he would be interested in having a presentation about the Solar Buyers Group at Palm, where Mike is the VP of Facilities. I'll definitely follow up! I think that Alison Nelson, the CEO of the Chamber, is already in touch with SolarCity and planning on setting up a special info meeting just for Chamber members.

Standing Room Only at Today's Meeting!

Wow, what a great start for the MV Solar Buyers Group! I was expecting 60 people at the meeting at the Senior Center this afternoon, but 250 showed up! Jamie, the lady from the City who was staffing the door, told me that she had to turn several people away because there were no more seats available!

Almost everyone stayed through the Q&A, and there were lots of great questions. I don't know if there's any way that future meetings will top this one, but I hope they at least come close!

In one slide that Lyndon Rive (the CEO of SolarCity) showed, he said that installations could stretch out until December if the number of people signing up for the co-op is really large. Not good! I talked to him after the meeting about instituting some kind of "first to sign up, first to install" policy. He said that is a possibility. I hope so. It seems fair, and it will give people a strong incentive to take the plunge.