By JEFF ADELSON | Staff Writer | firstname.lastname@example.org
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Mark Fonte isn’t an environmentalist. While he has an outdoorsman’s sense of the importance of conservation and a distaste for waste, one of the first things he’d say is that he’s no “tree hugger.”
About this special report
- “Giving Away Louisiana” is an eight-part series that examines the tax incentives the state gives to boost a historically sluggish economy. It’s not always clear the money is well spent, and the giveaways are growing at a much faster rate than the economy, leading to deep cuts in other state services. Click here to recap all parts of the series.
And yet, 33 solar panels adorn the roof of his home in Kenner, generating more than $100 worth of electricity a month. Though a system that large goes for $25,000, Fonte, the general manager of Dennis Automotive, paid only one-fifth of that, thanks to large federal incentives and even more generous tax credits from the state of Louisiana.
So for Fonte, the system was, essentially, a can’t-lose proposition.
“You can’t put $5,000 anywhere and get guaranteed $100 back (a month),” he said. “That was the decision-maker right there when I had all the facts.”
The Fonte residence is one of more than 15,000 homes across Louisiana that has sprouted solar panels in the past six years, bringing the promise of cleaner energy and a drastic drop in electric bills. As the panels have spread, so have the companies that install them, turning the state into a hub for renewable energy for the Gulf Coast.
The boom is almost entirely attributable to the generous state and federal incentive programs that together cover the bulk of the cost of residential solar systems.
The state alone has paid for half the upfront cost of the renewable energy systems since 2008 through a program that has cost Louisiana taxpayers $151 million. It is the most generous subsidy of its kind in America — a remarkable fact, given Louisiana’s traditional fealty to the fossil-fuel industry. Combined with a nationwide program that kicks in another 30 percent of the cost, homeowners can now install a full system for just a few thousand dollars and recoup their investment through lower bills in less than five years.
The solar energy tax credit was originally envisioned as a marginal program that would attract perhaps a few dozen customers a year. But it has grown exponentially, costing the state 122 times as much last year as the highest estimates bandied about when the measure was debated in 2007.
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In the face of that growth, the solar tax credit this year became the only state subsidy to be significantly curtailed in recent memory. In addition to immediately closing loopholes that allowed installers to skirt caps that were imposed to limit the amount individuals and businesses could claim from the credit, the changes will eliminate the state’s credits at the end of 2017.
“No other industry is subsidized like the solar industry,” said state Rep. Erich Ponti, R-Baton Rouge, the chairman of the House Commerce Committee and sponsor of the bill ending the program. “It just got out of hand and we needed to reel it in.”
The deadline has garnered mixed reactions from the state’s burgeoning solar industry, a sector that, like Louisiana’s film industry, exists largely due to the generous credits. Many point to the program as a model for how Louisiana should spur the growth of new industries: create a strong incentive to get businesses started, and keep it going until they can stand alone.
To do that, companies are branching out beyond installing panels on homes to other markets and products, both those directly related to solar power and in related areas such as energy efficiency.
“There’s a real opportunity to anchor yourself in the residential space in the solar industry here in Louisiana and expand into opportunities that aren’t part of the state incentive,” said Robert Schmidt, one of the founders of Joule Solar, a New Orleans-based company that is one of the largest installers in the state. “The way to achieve in that is to make sure we can survive in a world without tax credits.”
An eye-popping break
Even in a state brimming with corporate giveaways, the solar program is unusual.
For one, it sees taxpayers covering 80 percent of the costs, making it far more generous than similar subsidies for other industries.
It’s also different from many programs in that its direct beneficiaries are thousands of consumers rather than a handful of companies, though Louisiana customers already benefit from the third-lowest average electrical rates in the country. Of course, it has been a huge boon to the installation industry as well by massively and artificially expanding the market for solar power.
Beyond the tangible financial incentives of a lower energy bill, the solar program offers the environmentally inclined the moral benefit of using renewable energy.
Those involved in the industry stress that the state has received tangible benefits, too, from local industry and economic activity and consumers with extra money that no longer goes to utility companies and can be pumped back into the local economy. Otherwise, that money would be going to utility companies, and because electric bills aren’t subject to state sales tax, it wouldn’t add anything to the state’s bottom line either.
“The savings over time are redistributed back into the state’s economy instead of being put into tax-free electricity that goes out of state to Entergy’s shareholders,” Schmidt said.
It’s also given installers in the state a leg up. Many of the major players have expanded beyond Louisiana’s borders and beyond the residential projects that qualify for the tax credit.
“If you want to look at the true benefit not only to the homeowners but to the industry, we have a head start and that’s huge,” said Tucker Crawford, co-founder of South Coast Solar.
Without the incentive, there likely wouldn’t be much of an industry. Schmidt and his partners founded their company in the second year of the program, after meeting in a training session.
South Coast Solar, another major player, also was founded in direct response to the credits, Crawford said.
“I would not have made the initial investment if it weren’t for the credits,” said Crawford, who just finished serving as president of the Gulf States Renewable Energy Industries Association. “There wouldn’t have been a solar industry if it weren’t for the credits.”
When it was first conceived in 2007, the solar program was expected to cost the state just $500,000 a year, enough to provide systems for 40 to 100 customers.
As with many of the state’s incentive programs, those estimates quickly proved far too low, with almost $1.5 million in credits being claimed in the first year by 259 residents. By the next year, the program’s cost had soared to $8.3 million.
By its third year, which started in 2010, more than $13 million in credits went to more than 750 residents and businesses. It would continue that explosive growth in each of the ensuing years, with about $61.1 million claimed for solar systems by 1,556 residents and businesses in the state’s most recent fiscal year.
The cost, and the fact that so much of it is borne by taxpayers, doesn’t sit well even with some who support renewable energy. In that way, it resembles the state’s film program, in that its supporters tout it as a green industry of the future, while its critics decry its outsized costs.
“I like solar power, too, and I can’t support it. And I’m a liberal,” said Jan Moller, director of the left-leaning Louisiana Budget Project. Moller noted the current cost of the program is more than twice the amount the state spends on need-based financial aid for students at its universities each year, and said money from the solar and other incentive programs could be better spent elsewhere in the budget.
The solar credit is relatively straightforward. In its basic incarnation, residents who install the systems are able to claim a tax credit worth 50 percent of any system they install on their house, which comes on top of the federal government’s credit.
That means a system worth $25,000 — the maximum the program is designed to allow — would cost a homeowner only $5,000 after all the incentives were factored in.
There are 35 other states that offer solar installation tax incentives, though all either cover a smaller percentage of the cost of the system, are capped at a lower amount, or both.
Looking at just the upfront costs can be misleading, however, Schmidt said. Regulations in some other states, for instance, allow homeowners to charge utilities more for the extra electricity they put back into the grid, improving the returns for homeowners, he said.
About $30 per resident
The solar program has cost each Louisiana resident an average of roughly $30 to date.
Overall, there are now about 15,000 solar installations in Louisiana, translating to 1 percent of the roughly 1.5 million households in the state.
“The large majority of the state is funding something for a select few folks,” Ponti said.
Moreover, the benefits have not been spread evenly across the state.
The most populous and urban parishes have been the biggest winners. Jefferson Parish leads the pack, with almost $36.7 million in tax credits going to residents there since the program began; Orleans is next with about $29.4 million. Those two parishes also got the biggest bump on a per-capita basis. Only eight of the state’s 64 parishes received more benefit than cost on a per-capita basis.
During the time the program has been up and running, costs of solar systems have significantly declined.
In 2008, the solar break allowed homeowners to buy a system that would cut the average electric bill by up to $500 per year. Technological improvements, lower costs for materials and improvements in efficiency have bumped that up to $1,300 in recent years, enough that a household taking advantage of the program could be profiting from it in less than five years. The program rules haven’t changed even as the deal became increasingly attractive.
Fonte, who has carefully tracked his utility bills since before South Coast Solar installed his system last December, expects his system will be paid off in about four years and after that will essentially be generating profit. He had originally considered buying a system after Hurricane Katrina, though at the time it would have cost $85,000 and incentives weren’t available. But the technology has improved and so have the incentives, bringing a system within reach.
“This way my tax money came back to me and I could do with it what I want to do with it,” said Fonte, who also noted the program had other benefits, such as increasing his home’s value. “You’re crazy not to do it if you have the ability to do it.”
To cover the cost of the system, the installers worked with a credit union to provide an interest-free loan for a year, to allow time for the system to be installed and the credits to be claimed. The state credits can be claimed as a refund in the first year if they exceed the amount owed in taxes.
A smaller incentive probably would have meant the out-of-pocket costs for the system would have been too high, Fonte said.
“I would have got shot down by my wife,” he said.” I’ve got two daughters; one’s in Catholic high school, one’s in Catholic college. All my money goes to school, pays the house note and everything else.”
The technological improvements and the declining price tag on the systems are another argument for phasing out the credits, Ponti said.
“The cost has been able to come down enough to where the industry should be able to sustain itself at this time,” he said.\
The rapid growth of the program did not stem entirely from the steadily improving return on investment. In fact, state officials attribute most of the expansion to two factors: a loophole in the law that allowed larger and more expensive systems to be installed, and the proliferation of companies offering to lease the system to residents who could not afford the upfront cost.
The initial version of the program capped the amount that could be claimed on one system to $12,500, but it did not restrict how many could be put a single residence. As a result, some companies began placing large arrays on homes that cost more than the intended $25,000 cap, but divided those into separate “systems” to claim credits on the full amount of the project cost.
“It was legal, but it was a hole that was in the law,” Ponti said. “Never at any point in time did people envision companies getting four tax credits on a single house.”
The growth of leasing also played a significant role. Some argue it has been the major driver in the current size of the program.
For PosiGen owner Tom Neyhart, whose company is now the only major player leasing solar systems in Louisiana, that’s a good thing, because it made solar available to lower- and middle-class homeowners who can’t afford to purchase a system outright. For those people, utility bills can eat up a substantial share of the household budget.
“I believe a lot was focused on trying to give choices to people,” Neyhart said. “The third-party leasing program is a way to give choices to people that don’t necessarily have the ability to write a check for $25,000 or $30,000 upfront.”
Under a leasing model, the solar system is owned by a third party, often a financial institution, and the homeowner leases the system back from the third party and uses the electricity provided by the solar panels to reduce his energy bill. The credits, meanwhile, are claimed by the leasing company.
The company bundles the panels with measures that improve the home’s energy efficiency and charges about $750 a year for the package. Combined, those programs can reduce an electric bill by about twice that much a year, Neyhart said.
“Multiply that by a 20-year lease. Even if electricity prices don’t go up at all, that’s going to skyrocket close to $20,000,” he said. “That’s money that’s being circulated in the Louisiana economy.”
Neyhart and others pointed to a 2012 study by LSU economist Jim Richardson that concluded that the solar program, which was “not aimed at economic development necessarily, outperforms certain tax credits that were specifically targeted for economic development purposes.”
The study says the state’s film program, for instance, generates a flurry of activity in a given year, but there “is no spillover effect into future years.” Installing solar panels, by contrast, has little immediate economic impact, but the systems free up money that homeowners would have otherwise spent on utility bills. The resulting spending will allow the state to recoup about 75 percent of its investment over the 30-year lifespan of a solar system, the study found.
It’s not entirely clear how many solar installations in the state are leased rather than owned. PosiGen alone has 5,000 customers, though that includes a handful in states such as New York and Connecticut. Those installations do not qualify for Louisiana’s tax credits.
Industry officials estimate leasing could now account for up to 70 percent of the total installations, though in the last fiscal year, only about 12 percent of tax credits went to leased systems, according to data from the Louisiana Department of Revenue.
Meanwhile, the federal program is due to be scaled back a year earlier and will go from 30 percent to 10 percent of the cost of a system.
The changes also barred companies from installing more than one system on a house and tightened up the rules in other ways, such as prohibiting installations on multifamily homes. That last provision could come up for debate in a future legislative session, Schmidt said, as it bars installations on New Orleans’ large stock of shotgun doubles.
Trims to program approved
The solar program is one of only two tax credits that have seen any real trimming in recent years, even as others have ballooned, forcing difficult cuts in other areas of the state budget.
The new limits were imposed during the 2013 legislative session, as Gov. Bobby Jindal faced a backlash from lawmakers against his proposal tore place the state income tax with a significant increase in the sales tax. As that idea was debated, lawmakers, including some conservatives, began toying with the idea of reducing tax breaks as a way of staving off cuts to higher education and health care.
In the face of those conflicts, Jindal declared he would not sign any legislation that rolled back tax credits unless new credits or cuts in tax rates offset those changes, in keeping with an anti-tax pledge he signed that is promulgated by the powerful national advocacy group Americans for Tax Reform.
It is not clear precisely why Jindal was willing to allow the cuts to the solar program in light of that pledge. Jindal administration officials did not respond to requests for comment on any offsets they considered to apply in this case.
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Ponti said he had never heard any talk of balancing the solar credit. Nor did state Sen. J.P. Morrell, D-New Orleans, who sat on one of the committees that considered the reductions and is supportive of the solar industry.
Solar, perhaps, was a more inviting target than other industries.
“We are an oil and gas state, so sometimes investment in things that don’t benefit oil and gas aren’t always a positive,” Neyhart said. The industry also did not present enough of a united front in front of state officials, Neyhart said.
Industry officials said they are both looking to prevent more cuts to the solar program and, potentially, extend the credits a bit longer. Crawford said he believes the industry would benefit from subsidies that last until 2020. Neyhart said the cuts to the leasing side of the industry were “draconian.”
Ponti and other lawmakers said they weren’t interested in such an extension.
“I don’t like government intrusion into anything,” said state Senate Finance Committee Chairman Jack Donahue, R-Mandeville, who has been critical of the cost of the state’s tax incentive programs. “It bothers me that government steps in and decides what industry should be successful by the way they subsidize. If the government failed to subsidize motion pictures and they failed to subsidize solar power, and they both went away, what does that tell you?”
Staff writer Gordon Russell contributed to this report.