In Case You Missed It, Obama Just Proposed The Solar Tax Credit Remain in Effect -- Forever

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Image source: Michael Mees/flickr.

President Obama thinks we need to take serious action on climate change, something that was on full display in his proposed $3.99 trillion budget for 2016. The president calls for an extension of the wind power Production Tax Credit, or PTC, and the solar energy Investment Tax Credit, or ITC, until, well, forever.

Both incentives have catalyzed renewable energy investment in America in the last several decades by allowing project owners to recoup a portion of their expenses. Tax credits have been instrumental to wind power's 2,700% growth in electricity generation from 2000 to 2013 and solar power's 1,600% growth from 2006 to 2013.

Although unlikely to pass into law in its entirety, Obama's proposal establishes a high starting point at the bargaining table, which could mean the PTC and ITC will be extended in some form or another when the dust settles. Are subsidies really necessary, though? And if they are reinstated, what would it mean for renewable energy companies and suppliers such as NextEra Energy , General Electric , and First Solar ?

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Solar investment bonanza
The U.S. Department of Energy wants solar energy to provide 14% of the country's electricity by 2030, representing a huge shift from less than 1% today. It may seem improbable, but solar technologies are quickly becoming more economical thanks to innovative science and financing. The International Energy Agency even outlined a scenario in which solar power provides half of the world's electricity by mid-century. Of course, the agency is quick to point out that such a future relies heavily on government policies. At the moment, the United States is doing its part.

The ITC reimburses the owner of any solar project 30% of its investment, but only if watts start flowing by the end of 2016. In 2017 the tax credit drops to 10% of solar investments for commercial projects, and expires completely for residential installations. Thus, companies have been racing to install record amounts of solar power before 2016, although many expect to see a precipitous drop the year after if the phase-out begins as scheduled.

Extending the ITC into or beyond 2017 would be a boon for First Solar, which is one of the many players racing to bring solar energy projects online before the deadline, most recently one largely dedicated to Apple. Perhaps "boon" doesn't quite underscore the importance of the timing for investors.

After falling from grace in recent years thanks to turf-encroaching competition, First Solar is clawing its way back to former levels of profitability. The company plans to raise the efficiency of its thin film cells from just 18.7% in 2013 to 23% in, you guessed it, 2017.

Image source: First Solar.

The good news is that the company is well on its way. Of course, it would help if one of the leading factors for solar investment decisions didn't expire or drop off at the exact same time. An expiration of the ITC could severely impact the renewable energy leader's ability to attract new customers at a time when its solar panels are at their best. By contrast, an extension could mean all bets are off.

A strong wind blows
NextEra Energy has been at the forefront of America's fast rise in wind power. In fact, it's responsible for a large portion of it. The company is the nation's largest generator of electricity from wind power, which comprises 16.3% of its 42,500 MW generation portfolio. It took over $16 billion in investments to get here, but this isn't the end -- especially if the PTC is extended.

The PTC provides 2.2 cents per kWh of electricity generation to the owner of wind power projects (and several other renewable sources) for the first 10 years of production. But only if construction begins in an eligible year. That last part has been frustrating for renewable energy advocates and power generators alike. Rather than enact a long-term plan or phase out of the tax credit gradually, the federal government must vote to reactivate or extend the PTC each year.

If you doubt the importance of the tax credit, then consider the following graphic detailing wind capacity installed by year. In years when the PTC has been allowed to expire, substantially fewer wind projects have been started.

Image source: NextEra Energy (link opens PDF).

While the lack of a long-term plan for the PTC adds volatility to investments made by power generators such as NextEra Energy, it's important not to forget the companies supplying the technology.

General Electric has installed over 18,000 turbines with a combined capacity of over 28,000 MW in the last two decades, and serves as one of the leading wind turbine partners in the world. The company spreads risk through international operations, but it certainly helps to have an active PTC in the United States -- the world's third largest wind market. A permanent extension of the tax credit could keep growth chugging along for General Electric's wind unit.

Will Obama's tax credit extensions stick?
The hard data demonstrate that the PTC and ITC have been very successful at encouraging investments in renewable energy. President Obama's proposed budget allocates $31.5 billion through 2026 that would be applied to permanently reinstating both credits -- a small price to pay for infrastructure that avoids carbon dioxide emissions and generates tax revenues over lifetimes that will span decades.It's important to remember that the proposal has more to do with entering inevitable compromises from a high starting point, although that could make it likely that extensions are granted, even if they aren't permanent.

While extensions of the PTC and ITC will help wind and solar growth (and the companies making the real investments), if the government had to choose just one, you could make the argument that it's more important to support solar. Why? Wind power is expected to account for over 4% of domestic electricity generation this year, but solar power will still be stuck below 1%. Then again, it would be best if America doesn't have to choose.

The article In Case You Missed It, Obama Just Proposed The Solar Tax Credit Remain in Effect -- Forever originally appeared on Fool.com.

Maxx Chatsko has no position in any stocks mentioned. Check out hispersonal portfolio,CAPS page,previous writingfor The Motley Fool, and follow him on Twitter to keep up with developments in the synthetic biology field.The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.