Clean, Renewable Energy Fosters Economic Development
By: Lisa Ferrell & Will Gruber
Enthusiasm is high for solar power, with new financing options and opportunity zones, featured in recent announcements, news headlines and public dialogue. But one solution worth pursuing would combine all three while facilitating economic growth in struggling areas.
First, let’s look at opportunity zones. The Federal Tax Cuts and Jobs Act of 2017 included capital gains tax benefits for investments in distressed rural and low-income communities designated as opportunity zones. Arkansas recently approved 85 opportunity zones, which will allow investors to reinvest capital gains in opportunity zone funds and defer or eliminate capital gains tax — depending on how long the investment is held.
Next are solar benefits. Act 464 of 2019 amended the Arkansas Renewable Energy Development Act to allow third-party financing or leasing of solar arrays while increasing the size limit of a solar array eligible to become a net-metering facility. Net metering allows unused energy to be transferred back to the electric grid for use by another customer. The owner or lessee of the net-metering facility is compensated for the energy transferred to the grid.
In addition, for the next several years there are investment tax credits and accelerated depreciation options to allow further cost recovery for qualifying solar developments.
Property Assessed Clean Energy (PACE) financing involves improvement districts that can authorize the financing of energy and water conservation measures, in addition to renewable energy measures. A PACE project generally includes a single encumbered property within the PACE district, versus traditional improvement districts, which normally include all the parcels in the district. PACE districts can encompass a city, county, combinations of the two, or even the whole state.
PACE provides significant benefits over conventional financing — such as longer-term financing — without the potential for loan acceleration upon default. Also, because it is an assessment as opposed to a loan, it should not be included as debt for the purposes of determining a property’s debt-to-value ratio.
How It Could Work
Despite several large solar developments in the past several years, a strong argument exists — given Arkansas’s climate and other factors — that more progress should have been made in Arkansas solar power. Opportunity Zones have created a buzz, but the number of these projects in Arkansas has been limited. While Arkansas has seen several PACE projects, it has lagged in comparison with states such as Texas.
In many instances, the cost of solar power is competitive with other energy sources and has many social and environmental benefits. The investment tax credits, accelerated depreciation, and net metering have stimulated demand for solar. But investments in solar still require a large capital outlay.
PACE can make solar an even more attractive proposition from an investment standpoint and can be of assistance with the capital outlay. Including a 15-20 year PACE assessment in a solar capital stack, typically a much longer payback period of time than conventional financing, could be advantageous considering the payback period for solar installations.
Further, while Opportunity Zones have enormous potential, they still require making sound business decisions. Many conventional real estate or business transactions in Opportunity Zones may not be feasible. The one constant in every Opportunity Zone is that there are existing industries, businesses, farms and individuals that use electricity in or near the zone. An Opportunity Zone Fund investment in a solar development could be the catalyst for investors to take advantage of the ample benefits that Opportunity Zones provide. Using money from an Opportunity Zone Fund may make the economic case for solar more viable — particularly in low-income and rural areas.
Combining the strengths of Opportunity Zones and PACE to solar developments could provide a timely tool to foster economic development while taking advantage of tax and financing benefits. But the clock is ticking.