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Solar panels

Solar panels at Consolation Farms' solar farm in Crofton, Ky., in Christian County. (Photo by Steve Patton, University of Kentucky College of Agriculture, Food and Environment)

 

On-farm solar energy production

 

University of Kentucky College of Agriculture, Food and Environment

Solar energy production has sparked interest within Kentucky agriculture. While farms have always been reliant upon solar energy in crop production, harnessing this power and selling the produced electricity is gaining interest on several Kentucky farms. Why solar energy? Why now? Why on farms?

Solar energy is energy that is produced by the sun; most noticeably is the heat produced. Technology has been available for many years to harness this energy and convert it to electricity through the use of solar panels. You may have seen these panels on the tops of buildings or other areas where they receive direct sunlight. The production of solar electricity does not use any fossil fuels, nor does it cause pollution. More recently, the cost of the solar panels has dropped significantly, making it an economically viable opportunity for people who were not willing to accept the cost for the ecological benefits alone.

Currently, there are several incentives for “green” energy production. Solar electricity production fits in this category.

30 Percent Energy Investment Tax Credit

  • This is a federal tax credit. It is a non-refundable credit, meaning that it will offset any tax owed.
  • This credit can be carried back one year and carried forward for up to 20 years.

 

Depreciable Expense

  • Qualifies under the 50 percent bonus depreciation allowance.
  • Eligible expense under Code Section 179.

 

Grant Opportunities

  • USDA REAP Grant
    o Provides up to 25 percent of the cost of the project in grant funds.
    o REAP Grant funds are diminishing and may already be allocated or may not be available.
  • KY GOAP Grant
    o 25 percent cost share up to a maximum of $11,250.
    o You must qualify as a farm to receive this grant.

 

TVA Electric Production Incentive

  • TVA customers currently can sign an agreement to receive a $0.09 premium per kWh of electricity produced. This is above the price paid for electricity. If the price of electricity is $0.10/kWh, then the producer would receive $0.19/kWh.
  • This incentive is paid based on a 10-year contract with TVA.


Rising Electricity Rates

  • Rates for electricity have risen in recent years and are expected to continue to increase.
  • Solar electricity production allows a producer to hedge against this rising cost of electricity.


Farms have been especially interested in solar electricity production for several reasons. Over the last several years, we have seen record high net farm incomes for Kentucky farms, providing funds for new projects. Only farms qualify for the energy grants. Many farm types, especially those with large quantities of grain storage, contract poultry, or hog production use large quantities of electricity. These farms may also have large tax liabilities and will be able to benefit from the tax incentives (30 percent tax credit and depreciation). Farms may also not be limited on space to construct these solar panels, free of interference from the sun.

 

While solar electricity has many perceived benefits, it is important to fully assess the project before construction. Many of the companies selling these solar energy systems will provide the producer with a payoff analysis. It is important for the producer to meet with their tax professional and lending institution before entering into a contract. The tax professional will be able to advise on how long it will take the individual producer to take advantage of the full tax credit, and whether the individual will be able to take advantage of the accelerated depreciation opportunities. Many producers, unless they have a high level of income, will not be able to use both of these tax savings methods in the first year, thus spreading out the payoff for the project. Any financing charges for the project must also be added to the payoff analysis. The lender will need to be willing to loan money on this project and will be able to provide estimated interest expense.

Solar electricity production should be analyzed as a money-making venture, not simply offsetting electricity usage. In most cases, the electric company will provide a check to the producer for the electricity produced, and the producer will pay for the electricity used. The income (both grant and electric production) and tax savings should be used to calculate the expected payoff period for the project and the accumulated returns. These returns will help you determine if this is a good business venture to pursue.

This article was written by Jennifer Rogers with the Kentucky Farm Business Management Program at the University of Kentucky College of Agriculture, Food and Environment.. The article first appeared in the June edition of the Kentucky Farm Business Management Program state newsletter.