Citi's Eckhart: ITC drop 'beyond huge'

The scheduled drop in 2017 in the Investment Tax Credit (ITC) is starting to dominate conversations within the US solar sector, yet the industry remains divided over how serious an impact such a drop might have.

Mike Eckhart, global head of environmental finance at Citigroup, and a multi-decade veteran of the solar industry, is among the bears, claiming that the impact of a drop in the ITC from its current 30% to 10% would be “beyond huge” for the distributed PV sector in the United States.

Although the US solar industry is lobbying for an extension of the 30% rate, or at least “commence construction” language that would have the effect of extending it for many projects, the drop is scheduled to come into effect on 1 January 2017.

As one of the major providers of tax-equity to the US renewables industry, Citigroup has funded “every single one" of the country’s big rooftop PV installers, Eckhart claims. A drop in the ITC to 10% would “fundamentally change” how Citi approaches the sector.

“Just over 50% of our return on tax equity for a [solar] leasing product … comes from the [ITC] alone. Less than 50% is dependent on that [building owner] paying that monthly statement.”

“So we have zero risk on 50% of our return,” Eckhart said, speaking Monday at Intersolar North America. “That is very persuasive for our risk [department].”

Reduce the ITC to 10% and “now we’re back evaluating how risky is this deal”, he says. “It’s beyond huge. It will fundamentally change how we do this.”

Eckhart’s words will send chills down the spines of many in an industry still largely reliant on tax equity.

Yet many, particularly on the downstream end of the sector, disagree with his bearish views, arguing that there is enough cost reduction coming down the pipeline to keep the industry competitive, regardless of the ITC’s fate.

Despite the market’s fiery growth over the past few years, the US is still an expensive place to install rooftop solar, due to things like lengthy permitting processes and a population still relatively unfamiliar with solar energy, says Ken Schwarz, chief financial officer at Sungevity, the country’s third largest installer of residential PV systems.

The cost of delivering a rooftop solar system – including everything from customer acquisition through installation – is still “significantly lower” in places like Europe and Australia, where California-based Sungevity is also present, Schwarz says.

“Even if the [ITC] doesn’t get extended in some way, we think the cost reductions are going to be such that allow us to go beyond 2016 and still be very successful.”

David Field, chief executive of solar-finance provider OneRoof Energy, goes further, arguing that a reduction in the ITC may even prove beneficial to the sector over the long term, by eliminating market distortions.

Field, whose California-based company is backed by Korea’s Hanwha Group, argues that the ITC has created “inequities” in the industry by pitting companies capable of luring tax-equity investment against others who may struggle to do so.

“There are a lot of large-scale developers and originators that would love to have their own tax-equity fund and can’t get access to it,” Field says, railing against the windfall the ITC has delivered to tax lawyers.

Field agrees that customer acquisition, in particular, is an area with huge potential for near-term cost reduction in the US.

At present, it costs anywhere from $4,000-$7,000 for a solar-leasing company to acquire a new customer, he says. “Just like Uber has revolutionised the taxi cab business in many cities, technology will help drive down the cost of customer acquisition.”

“As that happens, you’re going to need less and less subsidies by any method.”

One likely effect of an ITC reduction would be the setting back of solar in a number of emerging statewide markets, hampering the geographic diversification the sector needs, Shayle Kann, vice president for research at GTM Research.

Would the distributed PV market disappear entirely if the ITC is allowed to fall to 10%?

“No,” Kann says.“But will we be back to a place where we’re reliant on a few key states that have incentive programmes in place, or just extraordinarily attractive economics [for solar energy]? Yes.”