Two keys to an effective solar policy are to engage private capital and to serve the nonprofit sector; including universities, schools, churches and hospitals. Investment in the grid and solar development creates jobs and makes Iowa more efficient in producing energy.
Solar arrays derive big benefits from government incentives, much like oil and gas. I see gas and oil coexisting with energy alternatives for many years. Without pipelines to transport it, we will continue to flare natural gas as a wasted resource, adding enormously to atmospheric hydrocarbons. Even if you are skeptical of the solar revolution, under the right circumstances there are profits, and emerging federal policies guarantee they will increase. Doing well for yourself and doing good for nonprofits and the environment can be complementary.
I am a businessman, and I don’t profit from the sale of solar products. I don’t work for utilities. Fundamentally, I believe in hedging my bets and diversifying my portfolio so I’m not solely dependent on stocks, bonds and real estate.
I have developed eight solar arrays over the past 10 years, five for nonprofits. A typical residence uses solar arrays of between 15 and 25 kilowatt hours (KwH). It depends on house size, usage and how much power must be offset. My arrays range from 20 KwH to 156 KwH. The average return depends on tax savings. Additional benefits come from selling power to the nonprofit. Remember, it’s not how much you make, but how much you keep.
There are barriers. Utilities want to retain market share. They have done so successfully with huge wind farms. They have developed huge solar farms as well. But solar is more suitable to small investors and owner users. Securitize this arrangement much like a mutual fund engages the smaller investor. Ask your financial planner.
The flip side is to make sure nonprofits gain adequate incentives. Since most of these incentives are dependent on taxes, the nonprofit world has been unable to benefit. Enter power purchase agreements, or PPAs which allow private investors to buy the array, retain the tax benefits and make a profit from the sale of energy. It’s a case of doing well while doing good. How much good depends on the arrangement and what kind of incentives devolve to the nonprofit. So where is the money coming from, and where does it go?
Investment tax credits. The federal government returns 26% of your original cost for 2021 in tax credits. In addition, the state allows a tax credit of up to $20,000 for a single building. Tax credits from the state for 2021 ran out last year in November of 2020, so you may have to wait a year or two. In 2023 the federal investment tax credit declines to 22% from the initial 30%.
Depreciation. You can depreciate 85% of the investment in the first year. But this is subject to recapture in year six. In year six, I expect the capital gains tax to be about the same as ordinary income. So does my accountant. But for many years, real estate investors have benefited from tax deferred exchanges. Why not extend this to solar arrays?
Opportunity zones. These can save you additional money by reducing the recapture. Opportunity zones are dimly understood and hard to use. In order to engage the private investor, you need to eliminate or streamline the requirements. Put simply, if you comply with all the guidelines, after 10 years your capital gain may be expunged. If capital gains taxes increase as expected, it may be worth it.
How can the nonprofit benefit? Reducing the buyback in year six by half the federal investment tax credit is a start. Charging rates below what the utility charges. Giving them the array after reasonable profits have been made. You could facilitate much of these incentives by allowing tax deferred exchanges on solar arrays and securitizing the investment.
Benefits accrue to both rural and urban interests, farmers and small business, conservative and liberal. Building new infrastructure will revitalize our economy and encourage an electric economy with solar leading the way. We actually have common ground to build upon if we care to use it.
Casey Cook is a local appraiser who has been studying development patterns in Johnson County for over 30 years.