Tax credit extension brightened solar ABS outlook

solar Investment Tax Credit

The solar energy market is lifted by a $35 billion spending bill passed by the U.S Congress that will provide a two-year extension of the solar Investment Tax Credit (ITC) and additional funding for research and development.

Under the proposed legislation, the solar ITC will remain at 26% for projects that begin construction in 2021 and 2022. This means investors who install a solar energy system are eligible for a tax credit that is equal to 26% of the cost of their solar installation. In 2023, it will fall to 22%, and then to 10% in 2024 for commercial projects. 

With the bill passed, companies starting construction on projects in 2021 will still have a four-year period to place their projects in service to take advantage of the ITC, with the statutory deadline for projects placed in service reset to before January 1, 2026.

As the renewable energy sector continues to grow driven by decreasing installation costs, solar asset-backed securities (ABS) has become a rising form of securitized investment opportunity. 

According to the Wood Mackenzie report on U.S. residential solar finance, 2019 was the biggest year ever for solar asset-backed securities, topping $1.9 billion. Solar ABS issuance grew to over $2 billion in 2018, with seven active issuers. In 2020 as of July, U.S. solar asset-backed securitizations have reached nearly $1.5 billion in transaction value.  

In the light of the uplifting legislative landscape, we believe investors’ willingness in funding renewables will increase thus encouraging the growth of solar ABS. 

Damon Harrison
Market Analyst, IPG Group