On the morning before election day, solar startup U.S. Green Energy Technologies held a meeting in its San Diego headquarters to outline what would happen when one of two realities came to pass: the election of Hillary Clinton, or the election of Donald Trump.
Should Clinton be elected, the five-year-old company planned to essentially maintain the status quo. Clinton is a known advocate of renewable resources, and her energy policies align closely with those of President Obama’s.
“If Trump got elected,” says Alex Saenz, the company’s co-founder and CEO, “our strategy was a stronger movement toward diversification”–a hastened entry into security systems and the connected home. As things played out, that’s now the route the company will be taking.
Why the pivot? For starters, President-elect Trump has already said he intends to cancel billions in payments to U.N. climate change programs within his first 100 days in office (the U.S. does not actually pay the U.N. billions for these programs, but regardless of the number-fudging, Trump’s sentiment is clear). He also has said that climate change, a phenomenon acknowledged by the world’s top scientists, is a hoax created by the Chinese government.
That mindset, when adopted by a presidential administration, could directly impact the 8,000 private and public companies in the U.S. solar industry. These companies fear one of the first targets Trump could pursue is the solar investment tax credit (ITC), a federal incentive that provides customers with a 30 percent, uncapped credit on solar installations and has been one of the biggest factors in the rapid expansion of the solar industry in recent years. To be clear, Trump has not indicated whether or not he wants to cut the solar credit, but his desire to slash government spending (and deny climate change) has the alternative energy industry on edge.
Much is at stake. A 2015 report from the Solar Foundation found that, in terms of jobs, the U.S. solar industry has grown by 20 percent for three consecutive years. This rapid expansion is why energy was the No. 1 industry category in the Inc. 5000 list of the fastest-growing U.S. private companies in 2016. Now the entrepreneurs who stewarded some of these standout business success stories are rethinking strategies and girding for a different kind of climate change–a political one–this time.
Stocks for solar companies, like Elon Musk’s SolarCity, plunged in the hours after the final election results came in on Wednesday, November 9. “The little we have heard out of Trump administration and his staff doesn’t bode well for anything to do with renewables or climate change,” says Ben Kallo, energy industry analyst at financial services firm Baird. “Many things Obama did were under executive order. We think a lot of those things will be immediately overturned under the Trump administration.”
The ITC, which is currently part of a bill first signed into law by Congress in 2005, is not included in that list of executive orders. But that doesn’t mean Trump won’t come for it–and entrepreneurs are worried.
An industry in danger
So will Trump repeal the tax credit, or will he not?
“That’s the million-dollar question,” says Bret Biggart, managing director of Freedom Solar Power, the largest solar installer in Texas.
It’s actually more like a $50 billion question. Part of Trump’s economic plan is to make massive cuts to the federal corporate tax rate, reducing it from 35 percent to 15 percent. Getting it there will require balancing the budget with cuts in federal spending.
Philip Shen and Justin Clare, analysts at Roth Capital, wrote last week that there is a “meaningful” chance Trump targets the ITC as a means of reducing government costs. “We estimate that the value of the ITC is $40 billion to $50 billion,” through 2021, they said, “which is a large number that could pay for a corporate tax cut.”
Angelo Zino, analyst at the equity research firm CFRA, agreed. “We believe a Trump presidency along with a Republican-led Congress poses significant risks to a potential reduction/elimination of the 30 percent ITC,” he wrote.
Trump has also repeatedly threatened to back out of the Paris Agreement, a pact between 197 countries to reduce carbon emissions. (Trump is the only world leader to openly reject climate change. In September, 376 scientists, including 30 Nobel Prize winners, penned an open letter warning of the long-term consequences of opting out of the deal, including damage to both the climate and the U.S.’s credibility.) An exit by the U.S., the world’s second largest emitter of greenhouse gases, would give the country less incentive to reduce its emissions, potentially setting the stage for eliminating the federal incentive.
Canceling the ITC isn’t Trump’s only avenue for taking a slice out of the industry. Under an act signed in 2008, solar companies are eligible for accelerated depreciation, which means they can rapidly lower the book value of their equipment, thus reducing the amount the government can tax them. Repealing that law could have a less visible but similarly drastic effect.
The Trump transition team did not respond to Inc.‘s request for comment.
“We’re hoping for the best but preparing for the worst,” says Jaymes Callinan, co-founder and president of Santa Clara-based solar system installer Vista Solar. “Trump’s general position has been one of not offering any funding for renewable resources, so we need to be ready for that.”
Boom and bust
The preparation process could include a number of things. Diversification is certainly one. Downsizing would be another.
As of October 2015, the 30 percent tax incentive was set to expire at the end of 2016. At that time, CleanSolar co-founder and CEO Randy Zechman established his startup’s plans for the next two years: Increase the company’s budget and number of employees by 100 percent in 2016 to take advantage of the incentives while they still existed, and then reduce both by 90 percent in 2017. The subsidy was eventually extended in December, but CleanSolar’s game plan paints a picture of the kind of boom and bust scenario that could play out across the solar industry if the government negates the incentive entirely.
If the Trump administration does remove the tax credit, the industry will likely see stifled growth, particularly among smaller solar companies, and even fewer entrants into the market. While the subsidy incentivizes customers to get installations at a discount, it also encourages new companies to enter the market by offering wider margins. Without the subsidies, companies would likely decrease installation prices, cutting into their own bottom lines. For young companies without much capital, that’s tough to sustain.
In all, Green Tech Media projects that repealing the incentive would cut the number of installations in half in the first year.
Another possible scenario is that Trump takes no action with the ITC, which would mean the 30 percent credit starts to step down in 2020, unless a successor comes into office and takes up the issue. As it’s currently written, the subsidy will drop to 26 percent in 2020 and 22 percent in 2021 before falling to 10 percent in 2022. By then, there may be far fewer entrepreneurs like David Murray, who, inspired by the subsidies, founded solar installer Greenspire in 2012 at age 27.
“I don’t see anyone in the White House fighting to extend it,” says Murray, whose $15 million company now performs 3,000 installations per year in California and Arizona, but likely never would have existed if the incentives weren’t in place.
Ready for a fight
Critics have argued that removing the subsidies amounts to simply making the solar industry play by the same rules as everyone else, but that’s not exactly true. The oil and gas industry is one of the most heavily subsidized in the country. Equipment is taxed at a rate about one-third that of other businesses, and a 100-year-old incentive lets drilling costs be written off as expenses. Coal companies benefit from tax breaks and allowances on deductions. The subsidies for both industries reach the billions annually, according to reports from the nonprofit Council on Foreign Relations and London-based think tank Carbon Tracker.
In a speech in North Dakota in May, Trump vowed to cancel President Obama’s executive orders restricting the burning of fossil fuels and limiting power plant emissions. “We will rescind all these job-destroying President Obama executive actions,” he told the crowd, a promise now reiterated on his website.
Supporting the U.S. solar industry makes economic sense: The sector currently adds jobs at a rate 12 times faster than the overall economy. The Solar Foundation found that the industry has doubled in size since 2010 and now employs more than 220,000 people in the U.S., more three times that of the coal mining industry. Last year, one in 83 jobs added to the American economy was in the solar industry.
That’s why startups like Washington, D.C.-based Alpha Solar Group, which trains people for work in the field of solar energy, exist. It’s also what gives some entrepreneurs hope that Trump may leave the tax incentive alone.
“I think Trump would have a hard time justifying to Congress, and justifying to the people, doing something that would undermine one of the fastest growing industries in the United States, when he says he’s all about jobs,” says Zechman, the CleanSolar founder.
And withdrawing the tax credit doesn’t mean customers will give up on solar–it makes economic sense for them, too.
“If the subsidies had been removed five years ago, that would be have been a big problem for the industry,” says Bob Hemphill, who co-founded the AES Corporation, now a $15 billion energy company, in 1981. He then went on to serve as a senior policy adviser to the Department of Energy and co-founded AES Solar Power in 2013. “But prices have gone down dramatically. Solar is now flat out cheaper than most of the other options. People realize there’s a new technology in town, and it’s just better.”
While home solar installations commonly ran $40,000 to $50,000 as recently as a decade ago, most now cost half that. With savings on electric bills, the majority of systems pay for themselves within four or five years.
And in many cases, cost is what drives customers. “Trump’s rhetoric will have an effect on the emotions toward climate change, but at the end of the day, the biggest emotions are about saving money,” says Saenz, the U.S. Green Energy Technologies founder. “That’s why we emphasize the return on investment. We have people tell us we’re wrong about global warming, and we say, ‘That’s fine. Whether you agree or don’t agree with us, look at the economic value.’ ”
Also working in the solar industry’s favor is that the incentive has seen support from both sides of the aisle in Congress. The first iteration was passed during the Bush administration in 2005, and the 2015 renewal contains compromises related to the oil industry that helped it earn Republican approval. Repealing the tax credit could prove difficult–and unfavorable.
“I think with some education, [Trump] can realize that solar is the solution to a lot of the problems he claims to want to solve,” says Daniel Sullivan, founder of San Diego-based Sullivan Solar Power. “He speaks to wanting to make the U.S. the leader in energy production, and securing the country by making us less dependent on other nations, and adding jobs. Solar power can help do all that.”
That said, there’s no predicting how President Trump might act after he takes office. Should the ITC get repealed, some are hopeful that other levels of government will step up. “If we’re going to have a laissez faire attitude at the federal level, we’re going to have to do things at the state and regional levels,” says Shelley Cohen, Alpha Solar Group’s co-founder.
The California Solar Initiative, for example, which went into effect in 2006 and offers cash back on new installations, is widely credited with helping the state become the nation’s leader in solar energy. It’s a big reason why about 10 percent of the state’s power comes from solar–10 times the nation’s average.
That’s also part of the reason why, despite their uncertain future, many of the industry’s entrepreneurs still seem optimistic. The new president might not support their efforts, or believe in climate change, but he might come to see that the industry is too compelling to fail.
“A lot of people in this community are really ready for a fight,” Cohen says. “We’ve got the science behind us, we’ve got years and years of progress behind us. We’re going to be tough to stop.”
This article was originally published in Inc. by Kevin J. Ryan