Pricing CLEAN Contracts – feed-in tariffs – for Solar PV in the U.S.

Date: 27 Jun 2011 | posted in: Energy, Energy Self Reliant States | 1 Facebooktwitterredditmail

The price of solar is dropping fast, opening new opportunities for community-scale renewable energy across the country.  But despite the improving economics and tremendously sunnier skies, the United States lags far behind Germany in installing new solar power.  What might happen if the U.S.  adopted Germany’s flagship “feed-in tariff” policy, responsible for 10 gigawatts of solar in just two years?  Let’s take a look at how such a program would be priced.

First, we’re marketing conscious in America, so we’ll call it something better, like a CLEAN contract, for Clean Local Energy Accessible Now. 

Then we’ll need to adjust the German prices in three ways:

  1. Convert euros to dollars
  2. Adjust for U.S. sunshine
  3. Adjust for federal tax incentives 

But before we dive in to the German solar program, let’s quickly look at the raw cost of producing solar electricity in the U.S. along with the major federal incentive.   The following map (click here for an interactive version) illustrates the so-called “levelized cost” of solar PV, the total cost of the system (minus the 30% federal tax credit) divided by its expected electricity production over 25 years, based on an installed cost of $3.50 per Watt (common in Germany, and possible for distributed solar PV in the U.S.):

Levelized Cost of Solar PV @ $3.50/W over 25 years – 30% ITC included

Prices have fallen so much, that they are comparable to or lower than retail electricity rates in selected states in the Southwest (with great sun) or Northeast (with high electricity rates).  The following map illustrates (click here for an interactive version):

Average Residential Retail Electricity Rate (Feb. 2011)

So, solar is narrowing the gap with retail grid electricity rates.

Now, back to the analysis of a U.S. CLEAN contract program.  We start with the rates the Germans pay for solar PV under their feed-in tariff.  The euro to dollar exchange rate is currently around 1 to 1.4, giving us the following starting rates for rooftop solar PV projects in U.S. dollars per kilowatt-hour:

< 30 kW

30-100 kW

> 100 kW

> 1000 kW

$0.405

$0.385

$0.365

$0.304

The Germans pay these rates to anyone who can put up a solar panel, per kilowatt-hour sent to the grid, for 20 years.  These rates may seem high, but we’re just getting started.

Next, we have to adjust these rates down to account for the significantly better sunshine in the U.S.  For illustration, Albany (NY) has 33% better sunshine than Munich (Germany), even though Munich is in the “sunny south” of Germany.  Los Angeles gets almost 70% better sunshine than Munich.  We’ll pick St. Louis, MO, for its central location and average U.S. solar resource.  The following table illustrates the dramatic drop in the price required to offer a modest return on investment for a rooftop solar project.

< 30 kW

30-100 kW

> 100 kW

> 1000 kW

$0.27

$0.26

$0.25

$0.21

As good as these values look, we’re still leaving money on the table.  Almost every solar PV project built in the U.S. will take advantage of the 30% tax credit (even if they have to let a third party skim off up to half its value).  With a full 30% discount, however, the prices for solar PV projects in St. Louis would drop as follows:

< 30 kW

30-100 kW

> 100 kW

> 1000 kW

$0.21

$0.20

$0.19

$0.16

The following map provides a look at the prices for a CLEAN contract for rooftop solar PV (< 30 kW) in each state, based on one of the state’s sunnier locations (click here for an interactive version).  Prices would be up to 25% lower for the largest PV projects (over 1 MW).

CLEAN Rate for < 30 kW Rooftop Solar PV @ $3.50/W – ITC only

In many cases, commercial developers of PV can claim accelerated depreciation in addition to the federal 30% tax credit.  With this additional discount (worth around 20% of the project cost), the cost of a CLEAN contract falls even further, as shown on the map (click here for an interactive version).  Once again, prices would be up to 25% lower for PV projects 1 MW and larger.

CLEAN Rate for < 30 kW Rooftop Solar PV @ $3.50/W – ITC and depreciation

There’s a danger to looking at CLEAN contract rates with federal incentives, for two reasons:

1) Many individuals and entities (e.g. schools, cities, nonprofits) can’t effectively use a tax credit incentive.  

2) Tax incentive programs expire or are killed by “budget hawks” (or ideologues) in Congress.  

The 30% federal investment tax credit for solar is in statute until 2016, but let’s assume for a moment that it expired or that we want to look at the CLEAN contract rates for projects not able to use any federal incentives for solar power.  We still assume an installed cost of $3.50 per Watt.  

CLEAN Rate for < 30 kW Rooftop Solar PV @ $3.50/W – no incentives (click here for an interactive version):

This chart is a more accurate representation of the state of solar economics (without incentives).  It’s also the price required for the most democratic solar incentive program, one that would not be prejudiced against participants who couldn’t effectively use the federal tax incentives.

In the end, a CLEAN program in the U.S. will likely be premised on the use of one or both federal tax incentives and pay much less than this last chart.  It will make sense for ratepayers, but will probably not have the same democratizing effect as Germany’s flagship program.

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Nova Scotia Boosts Economic Development with Community-Owned Renewables

Date: 24 May 2011 | posted in: Energy, Energy Self Reliant States | 0 Facebooktwitterredditmail

Yet another Canadian province is showing a serious commitment to the economic benefits of renewable energy development. Ontario’s “buy local” energy policy has the promise of 43,000 local jobs from 5,000 MW of new renewable energy. Now Nova Scotia is completing rulemaking for a provincial goal of 40% renewable power by 2020 that includes a 100 megawatt (MW) set-aside for community-owned distributed generation projects. The policy promises to increase the economic activity from its renewable energy goal by $50 to $240 million. … Read More

John Farrell Interviewed About “Grassroots Solar”

Date: 17 May 2011 | posted in: Energy, Energy Self Reliant States, Media Coverage | 0 Facebooktwitterredditmail

Last week, Brian Foley of the Sierra Club published an interview with John Farrell on “grassroots solar” on the Sierra Club blog, Compass.  Read the interview below, or click through to the Compass. Interview: Grassroots Solar You hear about gigantic solar and wind farms that require vast amounts of land. But what about the decentralized emergence … Read More

Nevada Senate approves feed-in tariff

Date: 28 Apr 2011 | posted in: Energy, Energy Self Reliant States | 0 Facebooktwitterredditmail

By a vote of 13 to 8, the Nevada Senate earlier this week approved a feed-in tariff to boost renewable energy develoment in the state.  The bill, SB184, now heads to the House where it is expected to pass.  Unfortunately, a gubernatorial veto is also expected, so supporters are hoping for a 2/3 majority in favor.

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Astonishingly Low Distributed Solar PV Prices from German Solar Policy

Date: 21 Apr 2011 | posted in: Energy, Energy Self Reliant States | 9 Facebooktwitterredditmail

Most renewable energy advocates are familiar with feed-in tariffs, also known as CLEAN Contracts.  They offer standard, long-term contracts for renewable electricity with prices sufficient to allow producers to get a reasonable return on investment (in Germany, it’s 6 to 8 percent). And research has shown that they tend to drive prices down more effectively than … Read More

Michigan Utility Freezes its Hot Solar PV Program

Date: 15 Apr 2011 | posted in: Energy, Energy Self Reliant States | 0 Facebooktwitterredditmail

Consumers Energy in Michigan, with a peak demand of around 4,000 megawatts (MW) just put the brakes on its pilot 2 MW solar PV program.  The program sold out very fast, but rather than expand the program to accommodate demand, the utility says it needs to study the program.

The program was modeled on CLEAN Contracts, also known as feed-in tariffs, that provided a fixed payment per kilowatt-hour over 12 years that was high enough for residential and commercial solar PV systems to earn a decent rate of return.  Similar programs operate on a larger scale in Gainesville, FL, Vermont, Ontario, and in many European countries.

A lot of local businesses were strongly interested in participating, in part for the spillover economic benefits:

“When I looked at all the businesses that benefited,” [said Mr. Draper, regarding Fluid Process Company’s] installation, “the local steel fabricator for the mounting poles, the tree remover, the ditch digging, crane, and concrete companies—Consumers would be giving the state a much-needed boost.”

For now, many solar industry and advocacy groups are trying to convince Consumers Energy to reinstate the program, especially since the utility is also trying to roll back its renewable energy surcharge from $2.50 to 70 cents per customer.

Said David Wright, of the non-profit Ecology Center, in Ann Arbor,

“We just don’t want to see the program end. It’s in everyone’s best interest to diversify power supplies, find out about cost reductions, improve the program, and support our local solar industry.”

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UK Solar Incentive Cuts May Also Distribute Solar Rewards More Widely

Date: 25 Mar 2011 | posted in: Energy, Energy Self Reliant States | 0 Facebooktwitterredditmail

A proposed revision to the United Kingdom’s feed-in tariff program may have created an uproar, but it may also help spread the economic benefits of solar more widely. 

The proposed changes, announced last week, would reduce solar payments for large solar projects (50 kilowatts and larger) by 50 percent or more, but leave payments for smaller projects largely intact.  The following tables illustrate:

Old Tariffs Price paid per kilowatt-hour
GBP USD Size
£0.41 $0.66 < 4kW retrofit
£0.36 $0.58 4 to 10 kW or <4 kW new build
£0.31 $0.51 10 to 100 kW
£0.29 $0.47 100 kW to 5 MW
 
New Tariffs Price paid per kilowatt-hour
GBP USD Size
£0.41 $0.66 < 4kW retrofit
£0.36 $0.58 4 to 10 kW or <4 kW new build
£0.31 $0.51 10 to 50 kW?
£0.19 $0.31 50 to 150 kW
£0.15 $0.24 150 to 250 kW
£0.09 $0.14 250 kW to 5 MW

The new tariffs will help redistribute more of the feed-in tariff (FIT) program revenue to smaller projects.  The most likely manner is simply by giving less money per kilowatt-hour (kWh) to the large projects, leaving more for the small projects.  The following charts will illustrate. 

Let’s assume that under the old FIT scheme, each project size tranche provided 25% of the solar PV projects under the program (see pie chart).

However, since a 2 MW project produces many more kWh than a 3 kW project, the revenues will skew heavily toward the larger projects.  For the sake of simplicity, I assumed that the midpoint of each size tranche was a representative project and that they all produced the same kWh per kilowatt of capacity. 

The revenue distribution can be seen in the second pie chart:

Essentially, all the FIT Program revenue was going to the largest projects.  Even if three-quarters of projects were under 4 kW, they would still only represent 3 percent of program revenue, with 93 percent accruing to the projects over 100 kW.

Under the new FIT scheme, the prices paid to larger solar PV projects are sharply reduced. With projects evenly distributed between the now six size tranches, much less of the program revenue goes to large projects.

The projects under 100 kW have roughly tripled their share, from 3 percent to 10 percent of revenues. 

Of course, the lower prices for large solar projects could have another impact: killing large solar projects completely.  Let’s assume that the new prices for projects over 50 kW (that experienced the steepest revenue decline) are simply too low and that all development ceases. 

The first pie chart shows the project allocation in the FIT program without any projects over 50 kW.  As described, we have an even distribution (# of projects) between the smallest three size categories, and no projects 50 kW or above.

The next chart shows the revenue allocation of the FIT program under this assumption.  Now, nearly 30 percent of program revenue accrues to projects 10 kW and smaller. 

If we assume that instead of an even allocation of projects, we have an even allocation of capacity between the size tranches (e.g. 30 MW, 30 MW, 30 MW), then the revenues would be split evenly between the remaining size categories and two-thirds of the solar FIT program would be flowing to solar projects 10 kW and smaller.

While it’s unlikely that the government plans to eliminate the large solar PV market with its price revisions, the overall effect is likely to be a transfer of program revenues to smaller projects.  The advantage in this strategy is that these revenues will be spread over a much larger number of projects and project owners, creating a larger constituency for supporting solar power and solar power policies.

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Ontario’s Buy Local Renewable Energy Policy: An Update

Date: 15 Mar 2011 | posted in: Energy, Energy Self Reliant States | 0 Facebooktwitterredditmail

In January, we released a report – Maximizing Jobs From Clean Energy: Ontario’s ‘Buy Local’ Policy – highlighting the impressive job forecast (43,000 jobs) from Ontario’s CLEAN Contract (a.k.a. feed-in tariff) program.  News from the province suggests that the program is overcoming hurdles and continuing to grow. Forecasts for 2011 indicate that Ontario could become North … Read More

Penny-wise or Pound-Foolish Policies for Renewable Energy: Auctions and CLEAN Contracts

Date: 10 Mar 2011 | posted in: Energy, Energy Self Reliant States | 0 Facebooktwitterredditmail

Toby Couture is one of the pre-eminent experts on cost-effectiveness of renewable energy policies and his comparative analysis of  auctions (such as California recently adopted for distributed generation) and CLEAN Contracts (a.k.a. feed-in tariffs) is a must-read.

By Toby Couture, E3 Analytics

In his conclusion to a recent speech at the London School of Economics, Lord Turner, Chair of the Financial Services Authority in the UK, introduced an important distinction in reference to the financial crisis: he explained that “Stability matters a lot; minor gains in allocative efficiency matter little.”

The reference is specifically to the unprecedented financial innovation that occurred over the course of the last decade, innovation that was heralded by many within the sector as a means of improving the overall “efficiency” of the financial market. Efficiency in this context means that resources (financial and other) would be allocated in a way that would better promote human welfare.

As the economy continues to reel from the effects of the financial crisis, average citizens may be excused for failing to see the welfare gains that came from all this “innovation;” indeed, two years on, it is now generally acknowledged that this innovation was taken too far, and resulted in a net loss of welfare for society, and for the taxpayers who are now footing the bill.

One of the insights behind Lord Turner’s comment is that, in such situations, it is indeed possible for us to be penny-wise and pound-foolish, to put too much faith in efficiency at the expense of market stability.

Read more at wind-works.org…

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