Without the blue wave, ROTH Capital, Onyx Renewables see ITC extension being shorter than SEIA'S push

Since its inception, much debate has been held about the merits of the solar ITC and how long it will be necessary to drive the market forward. SEIA itself has gone back and forth on the issue, though it has recently firmly entrenched itself in the position of supporting further extensions. But does the industry still really need it?

With a Biden Administration incoming and some evidence of growing bipartisan support for renewables, another ITC extension seems likely. Ja Kao, President and CEO of solar developer Onyx Renewables, says that even if Democrats fail to capture the Senate through Georgia’s two runoff elections in January, an extension of the solar ITC is possible.

“There’s a path to an extension even without Democrats taking the Senate thanks to red states who have supportive senators that have renewables in their backyard,” Kao said. “For them, it’s a job story rather than a green or environmental story.”

Roth Capital Partners Managing Director and Senior Research Analyst Phillip Shen agrees, noting that Senate Majority Leader Mitch McConnell did send a bill to the Trump Administration last year that included both ITC and PTC extensions. It was Trump himself who line item vetoed the ITC extension, not congressional gridlock.

“I think it’s reasonable to think that McConnell could send another bill to the White House with an ITC extension,” Shen said. “Without the ‘blue wave’ it will be difficult to get the 5-year extension that SEIA is trying for, but I think we will see an extension at a minimum of one year at 26 percent.”

Shen and Kao are not alone in their optimism. Stephen Sung, the Managing Director of Energy Finance at CIT Bank notes that unlike in past years when the future of the ITC remained in question, solar development has not slowed down in the lead up to 2021.

“In the past when there has been uncertainty about an ITC extension, we’ve seen project development slow down until investors had more confidence,” Sung said. “We’re not seeing that this time which I think is indicative of the general sentiment that we will see support for the ITC going forward.”

Where exactly such a tax extenders bill could fit into the legislative agenda is less clear. There is the potential for such a provision to be included in a COVID relief bill or omnibus spending bill before the end of the year, but Shen thinks that the probability for that is low. Instead, he expects to see movement on the ITC next year after the stepdown to 22 percent that may be retroactively bumped up and extended.

But while momentum behind a solar ITC extension appears strong, the question remains whether it is necessary for the market, which has survived not only a drop off but a global pandemic. From the perspective of many developers like Kao’s Onyx Renewables, it’s actually state level legislation that has become more critical than federal tax credits.

“Those state level and sometimes county level incentives are key for so many projects,” Kao said. “They drive markets. Until the pandemic, I think most developers were planning on an ITC stepdown. Tax equity still remains important for a lot of projects, but more and more are getting priced without it.”

Sung, meanwhile, says he speaks for many in the investor community that wouldn’t mourn the death of the ITC altogether.

“I’m sure most people would be happy if the ITC became fully refundable and eliminated the need for tax equity entirely,” Sung said. “But it seems like there is momentum to get it extended, so it’s something we’re going to have to deal with.”

While Shen expects the market to benefit from an ITC extension, he does project that it will continue to grow, albeit at a slower rate, once the ITC stepdown does inevitably continue.

“We expect to see very nice growth in 2021, especially if there is an ITC extension,” Shen said. “But I’ve asked many of my other investor contacts about how they view 2022 if there is no extension and they still think that the demand and growth could be very nice. I think we’re looking at about a 25 to 30 percent growth from this year to 2021 and then another 10 percent growth from 2021 to 2022.”

On the other hand, Sung says the storage industry and the growth of merchant debt deals serve as the blueprint for the industry going forward in a future without tax equity.

“An area where we spend a lot of time is taking merchant risk on financings,” Sung said. “We’ve also been involved in a lot of battery deals that haven’t had the benefits of tax credits at all. Merchants are making things work in ways that tax equity cannot accept. We expect to see that continue as developers continue to find ways to make things work. So, it doesn’t seem like the market is going to slow down even if there is an ITC stepdown. The market continues to be quite robust either way.”