How Domestic Content Affects ROI for Commercial Solar Projects
Commercial solar projects represent significant investments with complex cost, planning, and management considerations. Developers and stakeholders have many viable ROI management options, including using inverters with domestic content.
Here’s how domestic content could affect your commercial solar project outlook. This does not constitute tax or financial advice.
The Basics of Domestic Content
Two major U.S. federal tax credits can help mitigate the costs of renewable projects:
- Investment Tax Credit (ITC) Section §48E): This credit provides a base amount of up to 30% of a project's qualified investment if you meet the requirements.
- Production Tax Credit (PTC, Section §45Y): This credit incentivizes clean energy production at a base amount of 0.3 cents/kWh, adjusted for inflation.
Chart of Domestic Content Requirements
Chart of Domestic Content Requirements
While entities may not claim both the §48E ITC and the §45Y PTC for the same project, both may be eligible for an additional 10% Domestic Content bonus credit amount.
The Domestic Content Bonus Credit
The domestic content bonus credit increases the available PTC/ITC by 10% if domestic content requirements are met. To meet these requirements, 100% of the structural steel and iron, along with certain percentages of manufactured products in the qualified facility, energy project or energy storage technology must be manufactured in the U.S.
The Economics of Commercial Solar Installations
Commercial solar project stakeholders incur many capital expenditures, such as the costs of building PV panel systems and purchasing associated equipment like inverters. Effective project planning and maintenance strategies balance these upfront costs with ongoing savings.
At a minimum, upfront costs include equipment, installation, permitting, engineering, and interconnection fees. Some projects may also incur financing costs.
Common Commercial Solar ROI Analysis Factors
- Payback period: The amount of time required to break even on the initial investment with the system's savings. Payback periods often vary with a project's location, shading conditions, maintenance requirements, size, and typical consumption rates. A common estimate is roughly 5 to 7 years, significantly shorter than the typical 25-year lifespan of projects built using a multi-level reliability approach.
- Net present value (NPV): The difference between current cash inflows and outflows over a given timeframe. The NPV helps determine an investment's profitability.
- Internal rate of return (IRR): The annual return needed to make the NPV equal to 0. In other words, the IRR signifies the rate of return required to break even.
The Economic Impacts of Using Domestic Content
Commercial solar stakeholders may use a variety of strategies to boost lifetime ROI.
Domestic Content for Project Owners
Tax credit eligibility is a major incentive for using equipment that provides domestic content. The extra 10% bonus helps offset investments for companies.
Tribal authorities, universities, nonprofits, and other public-sector organizations may also benefit from the 10% adder through direct pay monetization.
Next Steps for Developers
The Domestic Content bonus credit can help offset project costs, contributing to sustainable ROI. Developers have multiple options to achieve thresholds, including combining hardware. Start by:
- Talking to your tax adviser or financial manager.
- Learning to track domestic content with SolarEdge technology in this webinar series.
To discuss your next project, schedule a strategy meeting.
*SolarEdge does not provide tax and/or legal advice. The forward-looking statements are provided as of the date herein and are subject to change. You should consult with your own legal and/or tax advisor(s) regarding the eligibility of your project for the ITC or PTC, including the 10% Domestic Content bonus, to determine how the applicable rules apply to your project.