The Renewables Clock is Ticking

July 1, 2015

by Gary Farha, President and CEO, CustomerFirst Renewables
CustomerFirst Renewables is a corporate partner of Second Nature

As more large electricity end users – including Higher Ed institutions – are considering securing dedicated large-scale renewable energy solutions, we are increasingly asked about the timing of when they should act. The question posed is whether purchasers should execute contracts prior to federal and state tax credits going away (which is currently slated to happen for solar and wind projects at year-end 2016 when the federal tax credit for solar goes from 30% to 10% and the “grandfathering” of the expired wind federal tax credit runs out) or whether they should wait – essentially gambling whether renewable energy costs will decline fast enough to offset the cost of diminished tax incentives.  

This is akin to the question we grapple with whenever a new technology comes to market (e.g., personal computers, flat-screen televisions, smart phones). We know that prices will come down in the future at the same time that product benefits increase, which makes deciding on when to enter the market a tricky question. Particularly when, in the case of renewables, the size and term of contracts (millions of dollars, up to 25 years or more) are much more significant than buying the latest electronic gadget.

The reason the tax credit question is relevant to tax-exempt institutions like universities and colleges is that renewable project developers/owners find ways to monetize the benefits regardless of who the purchaser is and will pass them along through lower power purchase agreement (PPA) prices. This, in turn, makes the price of renewables more competitive with traditional grid-based electricity supply (the standard most purchasers use to judge the relative attractiveness of renewables).

The “easy button” is to do nothing. An inclination to wait-and-see is understandable since we don’t know whether congress will decide to extend renewable energy tax credits and under what conditions. We also can’t predict with certainty the incremental cost improvements to expect from renewable technologies and by how much this offsets the benefits of tax credits. However, the downside of this approach is that it avoids answering the key question: which strategy provides the best economic outcome for the purchaser, particularly with solar and wind technologies that are already well down the learning curve?

We have found that using fact-based analysis can be a very helpful way to inform the answer and also remove the emotion that typically accompanies doing something new. For this question, we recommend determining whether renewable costs are likely to be higher or lower over the next 20-25 years by securing renewable solutions sooner (with tax credits) or later (without them) independent of comparing the competitive outlook for renewables vs. grid power. In doing so, it helps bring clarity to the “now vs. later” and “renewables vs. grid power” questions, both of which are relevant to decision makers.

What insights emerge after completing this analysis?  As usual, there is no one-size-fits-all answer for every situation. What we can say is that when federal and significant state tax incentives are available in the same solution, purchasers are typically better off acting now than later and that these solutions can also be expected to produce significant renewable energy cost savings relative to grid power. This expected outcome emerges because the tax incentives are significant enough to produce robust outcomes over a broad range of renewable energy cost improvement and grid power price escalator assumptions. When only the federal tax credit is available, the answer depends on more detailed project- and customer-specific assumptions. In many cases, we have found that the same answers emerge for large-scale renewable solutions that have been procured smartly and optimized to customer needs. In short, “a bird in the hand is worth two in the bush.”

The implication for institutions seriously considering renewables is clear: if economics are expected to be a major factor in decision-making, now is a good time to explore your options.

Gary Farha is President and CEO of CustomerFirst Renewables, a leading renewable energy advisory services firm focused on establishing competitively and predictably priced utility-scale solutions tailored to large businesses and institutions. Prior to founding CFR in 2010, Gary was a senior partner at McKinsey & Company, where he served energy and industrial clients and co-led the firm’s global innovation practice.

Second Nature and CustomerFirst Renewables are partnering to bring exclusive pilot opportunities to signatories of the American College & University Presidents' Climate Commitment (ACUPCC), including upcoming events for institutions in PA, DE, MD, and NJ on August 3-4 in Philadelphia. For more information on these events, or to participate, please contact Janna Cohen-Rosenthal, Director of Membership Programs.