A Somber New Year’s Eve for Solar?

By MATTHEW L. WALD

While renewable energy advocates have long argued that government subsidies for the sector are dwarfed by those for more traditional energy industries, they have had a more poignant complaint since the onset of the recession: one of the subsidies they do get, an investment tax credit, has been rendered nearly useless by the general business downturn.

Associated PressFreshly installed solar panels in Gaston County, N.C.

Congress stepped in with a temporary fix, but it expires at the end of the year, which may make solar executives’ New Year’s Eve parties a bit melancholy. The industries are pressing for an extension, but with Congress deadlocked on higher-profile tax issues like the payroll tax cut, prospects are highly uncertain.

At issue is a complicated provision of the tax code called Section 1603, which is actually a modification of an earlier subsidy program.

Thomas P. Kimbis, a spokesman for theSolar Energy Industries Association, gave this example: a company installs a rooftop solar array that cost $100,000. Under the system that existed before the recession, the company is entitled to a $30,000 tax credit, meaning that it can subtract $30,000 from the amount it owes in federal tax in the year that the system is put in service.

But when the recession hit, profits dropped. The company finds it does not owe $30,000 in taxes and therefore has no way to use the credit.

One solution is to sell the tax credit to another company that does owe the $30,000. But typically that company will buy the credit only at a discount, so that the federal Treasury loses the full $30,000 but the company that put in the solar equipment gets, say, $25,000 or $27,000. Also, the number of companies in the market to buy such tax credits has dropped sharply.

So when the recession set in, Congress changed the rules; beginning in 2008, it allowed the Treasury to pay the $30,000 to the company that made the investment regardless.

“It’s all about reducing upfront costs,” said Rhone Resch, the executive director of the solar organization. (In the solar industry, nearly all the costs are upfront, since there are no fuel costs.)

The 1603 program applies mostly to commercial solar installations, including utility installations. It does not apply to rooftop systems owned by homeowners, which come under a separate program, but it does apply to home rooftop systems if they are owned by a third party, as is increasingly the case.

Mr. Resch spoke on Thursday at a meeting with reporters that included representatives of the hydrogen fuel cell industry, the biomass industry and the cogeneration industry. Tax credits to those industries vary, but the 1603 program converts credits for all those industries into cash payments.

The problem is that Congress was trying to tide the industries over during what it hoped would be a short recession, so it set up the program for two years. Then it renewed the program for a year. That third year is up on Dec. 31.

The renewal effort may be handicapped somewhat by the fate of Solyndra, which received a $535 million federal loan guarantee from the Department of Energy and then went bankrupt. But advocates of the 1603 program emphasize that it is structured differently from the loan guarantee program: it is for projects that produce energy, not manufactured goods, and the government pays nothing until the project is in service.

James Warner, the director of policy at the Fuel Cell and Hydrogen Energy Association, said there was precedent for extending a tax policy: the farm bill is technically an amendment and extension, every five years, of one passed in 1949.

Mr. Warner, Mr. Resch and others spoke in a conference room where a December calendar was on the wall. Big hand-drawn X’s were over each expired day, and “23 days left” was written at the bottom. But realistically it’s probably more like 10 days, because Congress is certain to go home before Christmas.

On Wednesday, 34 members of the Senate signed on to a letter calling on Senate leaders to work to extend the provision, and 88 members of the House signed a parallel version. More than 700 companies and 34 trade associations signed another letter. “This is a full-court press,’’ Mr. Resch said.

Still, extending the tax credit would cost the Treasury somewhere in the neighborhood of $1.3 billion at a time when Congress is particularly worried about money. And there is some opposition to government support for renewable energy.

In addition, the renewal effort is off to a late start because almost everyone was waiting for the so-called supercommittee to lay out its grand bargain on taxes and spending before Thanksgiving, then the panel’s deliberations fizzled.

Now the logical place for the provision is in a larger tax bill that may be delayed into early next year. Mr. Resch said it might be delayed even longer, into a lame-duck session after the elections of November 2012. That would doom a large number of projects, hurting companies that supply equipment, manufacture components or are branching out into the renewables field from areas like electrical contracting or roofing, he said.

The wind industry, meanwhile, is focusing on a different cutoff. The production tax credit, the benefit that the 1603 program converts to a tax grant, is in place for solar until 2016, but the one for wind expires at the end of next year. That means that to collect, wind farms have to be in service by the end of December 2012.

It is already too late to embark on a new project and finish it by then, wind industry experts say, so their credit has effectively expired. They are lobbying for extension of the underlying credit, not for the 1603 program.

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