Thinking beyond the ITC
Marc, Aaron, and Vikram attended the NPM DG Development and Finance conference in NYC last week, where industry leaders expressed some very forward thinking and optimistic views on the future of DG in the US. Conferences, when done well, can be an opportunity to step back from day to day activities and envision the future a bit more broadly and longer term. On this score especially, NPM DG 2025 did not disappoint.
Marc joined the first panel on the future of community solar and DG and raised a question about post-ITC project economics. Over the last few months, our industry has been rushing to safe harbor projects and line up development and financing timelines to lock in the ITC. The question is, after the deadlines pass and new projects no longer quality, what comes next?
This prompted discussion throughout the day of what the post-ITC regime will look like and how our industry will need to adapt. In these conversations was a thread of not just optimism but genuine excitement about how our industry will evolve. Here are a few quotes that capture the sentiment:
“IRA exuberance seemed crazy”
“At some point you look at the ITC and wonder if the juice is worth the squeeze”
“We’re not far from no-ITC deals”
“It will be a positive thing, ultimately”
“I’m not for extending the ITC”
“Build projects as if you don’t have the credits”
“Don’t tell suppliers you have ITCs or adders - they will charge you more”
“It would be nice to get the tax lawyers out of the system”
Sorry tax lawyers, and suppliers. There was excitement about removing the complexities of tax equity and increasing efficiency throughout the supply chain. But it was all built on appreciation for the fundamentals, especially rising electricity prices from the grid and the declining cost of solar panels and batteries. Over time, these trends make more and more projects pencil without the federal tax credits.
Of the many many efficiencies in projects that do not seek the ITC, perhaps the greatest is reduced transaction costs of avoiding a tax equity structure. There are contracting and legal requirements here, pricing complexity, and an extra party in the capital stack with specific needs for diligence and approvals. ITC transfers have simplified this for some deals, but most transfers still happen alongside tax equity and all of its attendant requirements.
Another efficiency is flexible procurement. Over the last few years, ITC qualification has required prevailing wages for larger projects and specific equipment for the domestic content adder. FEOC requirements increase this complexity and have created additional uncertainty about qualification. Just imagine not having to deal with all of that.
A second order impact of these changes will be more capital entering the market without the constraints of attracting and contracting with tax credit investors. Tax credits have been so lucrative for so long that we’ve organized the whole industry around them as a scarce resource. When the industry no longer relies on that resource, and project economics work without it, more debt and sponsor equity will be deployed more efficiently to fund more projects faster.
In the wake of the big bill from Capital Hill, state governments have been stepping up their support for clean energy. These programs will help bridge the gap, especially in the interim, making many DG projects feasible without federal tax credits. This is also likely to concentrate project development in the states with these programs, at least for a while.
Kudos to NPM for a great conference and this opportunity to think together about the future of our industry. The road may be rocky en route to the post-ITC regime, but there is plenty to be excited about on the other side. Now let’s all get back to moving projects over the finish line so that we can harvest these ITCs while they last. Thank you tax lawyers, we really do appreciate you!
