From renewable portfolio standards to net metering, solar energy progress has always been driven at the state level. Still, here are a few federal level trends to watch.
Since the departure of Commissioner Norman Bay, the Federal Energy Regulatory Commission (FERC) lacks a quorum to issue major decisions. To address this until a replacement can be confirmed, FERC issued an order to delegate more authority to staff. But, in the interim, could this leave several key solar decisions hanging in the wind?
For example, FERC is investigating transmission charges in the ISO-New England, which are much higher than other regions, and twice as high as PJM. Similarly, will key decisions on PURPA move forward during this limbo period? Notably, we have had our eye on North Carolina, where Duke has reduced contract terms for some larger qualifying facilities (QF) to five years. While a complaint has been filed at the North Carolina Utilities Commission, will this ultimately be in the hands of FERC to decide how long a contract term is required to be “financeable,” and if so, could this set a precedent for other states?
The natural gas industry is less than enthused about the lack of quorum too, as pipeline approvals have slowed significantly.
2. Border tax?
Border taxes – or a border adjustment tax – has been getting play within Congress and the White House. NPR reports that “a 20 percent tax on all imports would produce an estimated $1.2 trillion over 10 years, enough to offset much of the loss in revenue from the big reduction in tax rates that Republicans want, including dropping from a 35 percent rate to 20 percent for corporations.”
Is the discussion of a possible border tax affecting solar equipment prices? In short, no, uncertainty regarding a tax on imports has not driven up pricing of modules, trackers, inverters, or any other technology. Price declines persist given increased supply and competition from rest of world manufacturers. As we have written about at length, we expect these price declines to continue. However, given the amount of Chinese steel and inverters, modules, and other materials that the U.S. solar industry consumes, a border tax will be cause for concern if passed and signed into law.
3. Interest rates
Investors continue to watch to see if the Fed will raise interest rates. If they do, the cost of capital will rise for infrastructure projects, including solar. U.S. Federal Reserve Chairwoman Janet Yellen mentioned that the Fed could make a decision during upcoming meetings.
Lenders have already responded to the Fed rate increases from late 2016 with an increase in their expected interest rates. We expect this practice to increase in light of expected gradual increases from Fed.
4. Tax reform
As we discussed last month, tax reform will take time, and we are of the opinion that any tax reform is unlikely to impact 2017 or 2018 tax liabilities. Still, the uncertainty regarding tax reform – mainly, how much tax liability will remain in the market after a large rate reduction – rather than tax reform itself, is the real risk. This is impacting tax equity deal structures and has created uncertainty in pricing, as well as discouraged certain new tax equity investors from entering the solar market.
The uncertainty after the election led some potential new solar investors to question whether now was the time to make the leap into solar. In our experience, we have found that the initial post-election shock is over. While uncertainty regarding tax reform looms, many investors’ concerns are easing as they better understand the relevant tax equity structures. And, we have found that developers with sophistication and access to capital are moving forward with business as usual.
Want a refresh on tax reform? Check out the Letter from our CEO from January, and follow SOURCE for our upcoming white paper on this topic.
This is an excerpt from the February 2017 edition of The SOL SOURCE, a monthly electronic newsletter analyzing the latest trends in renewable energy based on our unique position in the solar financing space. To view the full Journal, please subscribe or e-mail email@example.com.
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