Financing Renewable Energy: Protect the Planet, Boost your ROI

Protecting this planet’s natural resources for future generations is a moral obligation; unfortunately, moral obligations do not pay the bills.  Coal is a nonrenewable resource that causes pollution. But it’s cheap. Renewable energy is often a more expensive alternative to using coal, oil, or natural gas to produce energy. Recognizing that renewable energy must be financially viable for individuals and businesses to shift away from nonrenewable sources, the Federal Government has bridged the financial gap by implementing a 30% tax credit for renewable energy projects. As an additional incentive, for 2011 only, installers can opt for a grant instead of a tax credit, and the Federal Government will simply cut a check to the installer for the eligible expenses. Eligible projects include solar power, wind energy, biomass, among other types of renewable energy.Coupling the renewable energy tax credit with other federal and state incentives, people have the opportunity to dramatically reduce the break-even period for renewable energy equipment and increase the profit potential. One example is new market tax credit, which offers installers the opportunity to obtain an additional 39% tax credit. Not all projects are eligible for both credits, but utilizing them together for eligible projects will substantially improve an installer’s return on investment. Because of these benefits, tax laws play an important role in financing renewable energy projects.

Renewable energy projects pay for themselves in a couple of ways. First, the projects will produce “free” energy for the user. Once the equipment is in place, the only cost for the energy will be maintenance expenses to keep it in good repair. Alternatively, installers that do not want to use the renewable energy can enter into Power Purchase Agreements (PPA) with other users for the sale of the renewable energy. An example of this scenario is an entity that owns solar panels leasing roof space to install the solar panels and then selling the energy produced by the solar panels to the owner of the building pursuant to a PPA. Since PPAs often last from five to fifteen years, they create the equivalent of an annuity for the installer.

 

Second, renewable energy produces an intangible, transferable benefit called a Renewable Energy Credit (REC). A REC represents the environmental benefits of 1 megawatt hour of electricity that can be sold to Ohio utilities and service companies, which can satisfy their legal requirement to produce certain amounts of renewable energy by purchasing RECs. RECs are thus a second source of revenue from renewable energy projects.  

                                                                                                                                                                        

While many people recognize the value of renewable energy, cost remains an important consideration in choosing a source of electricity. Tax credits are a powerful tool to enable people to have the best of both worlds: higher profits and a healthier planet.

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