Tax credit for solar energy installation generates treasury deficit | Iconic stories

The Legislative Assembly’s Office of Budget (OPAL, in Spanish) estimates that the state treasury would lose nearly $80 million if a new tax credit were granted for the purchase and installation of solar panels, as proposed in the legislative measure.

This data corresponds to the latest report analyzing the tax impact of House Bill 2041, which proposes providing a new nonrefundable tax credit for equipment purchases and labor costs for installing solar panels and energy storage systems on a taxpayer’s principal residence.

If the measure is approved, OPAL estimated the tax impact for fiscal year 2025 at $79.2 million. Additionally, given the nature of the measure, under which taxpayers can claim a non-refundable credit up to a maximum of $5,000 for a maximum period of five years, the tax impact of the measure is expected to total $811.2 million through tax year 2029.

“It is important to emphasize that the electrical system is incredibly unstable and the more residential subscribers have photovoltaic systems, the more this contributes to the stability of the system. “Certainly this incentive would help many people subsidize these systems because $5,000 is still significant in this country,” said economist Ramón Cao.

The report highlights that the total cost of acquiring and installing solar panels, including an energy storage system, ranges from $27,000 to $30,000, with an average of $28,500. This data was obtained by OPAL in the Final Report of the Puerto Rico Electric Grid Resilience and Transition to 100% Renewable Energy (PR100) study.

As for the interest rate at which these loans will be obtained over the next five years, the office estimated that it may range from a rate of 9.5% in 2025, gradually decreasing until it reaches an average rate of 7.7% in 2029 .

It is worth mentioning that the latest economic projections published in March 2024 by the US Federal Reserve were used to determine the interest rate at which this non-repayable loan will be granted.

“While the United States is projected to reduce interest rates by almost two percentage points by 2026, we anticipate that the reduction in Puerto Rico’s solar loan rates will be less significant due to the island’s macroeconomic uncertainties as federal recovery funding declines.” we read in the report.

Unlikely to be approved

When asked about the likelihood of this project being implemented, the economist stated that “the biggest problem is not that the legislator will approve it, but that it must be approved by the Board of Supervisors (FOMB).

According to Cao, this report could constitute the “coffin” of the project if the FOMB does not agree to stop collecting the said amount.

For his part, economist José Caraballo Cueto said that “the Fiscal Audit Office applies double standards when it comes to initiatives that are inconsistent with economic ideology… Given the history of so many years, it is very likely that it will object.

Similarly, CPA Kenneth Rivera Robles said the Council was unlikely to approve the bill unless it included a proposal to replace revenue that would no longer be earned because “that’s what the budget plan requires.”

In this regard, Sylvette Santiago, FOMB spokeswoman, told this newspaper that “the Oversight Board will be better able to evaluate the measure once the legislative process is completed.

The questioned econometric model

Cao, on the other hand, questioned the method used to calculate these estimates, which in this case was Arima, a time series model that combines three elements: autoregression, differentiation and integration, and moving averages to predict future values ​​based on past data.

OPAL said that as of last January, a total of 109,462 homes had installed solar PV and energy storage systems, according to data published by the U.S. Energy Information Administration (EIA) in its latest measurement update in Puerto Rico. The data shows that after summer 2022, an average of 3,059 new systems will be installed per month.

“I would prefer to estimate the demand function for subscriber-based residential photovoltaic systems. This is because while it is true that growth occurred well before Hurricanes Irma and Maria in 2017, 2020 marks a very large turning point. Therefore, the number of observations is very limited when using the Arima technique,” explained the economist.

The demand function model is an economic tool that describes the relationship between the amount of a good or service that consumers are willing to buy and the price of that good or service in a given market.

Caraballo Cueto admitted that while this model is one way to achieve this goal, it is not the only one, so he would prefer they use more than one method for estimation.

“It is quite difficult to estimate how many other people will be connected and beyond that who will apply for the loan. Another thing is that the savings that will result from limiting the use of portable generators are taken into account, among others. other expenses that the government may contribute,” he said.

On this issue, OPAL Executive Director Luis F. Cruz defended the use of the Arima model.

“Although, as you mentioned, the trend has been increasing in recent years, using historical data, such behavior is already taken into account in the projection. Why not use a demand function model? Basically because this model is used to look at external factors. In other words, it identifies the influence of an external variable on the estimate. We could have used interest rates, for example, and seen what effect interest rates would have, but we used this model (Arima) because we rely on historical information. Cruz noted.