We’ve talked previously about the perversity of using tax credits to incentivize renewable energy production, increasing transaction costs and reducing participation in renewable energy development. But there are other perversities in U.S. state and utility renewable energy policies, especially with upfront rebates and net metering. Let’s start with rebates. Many states and utilities offer upfront rebates … Read More
If you like reading about “what we can do better” in community solar policy, check out our report – Community Solar Power: Obstacles and Opportunities – but if you like a very detailed exploration of how the three major models for community solar navigate the ins and outs of existing incentives and regulations, and a primer on how to set up a community solar project, you can’t go wrong with NREL’s Guide to Community Solar.
In less than a month, solar energy projects will see the stimulus-funded cash grant in lieu of the 30 percent tax credit expire. The change back to tax-credit-financed projects provides a revealing look at the disadvantages of energy incentives based on the tax code, thanks especially to a recent NY Times story about the shift. (For … Read More
Last week I briefly reviewed IREC’s new (almost) Best Practices for Community Solar and Wind Generation. Craig Morris provided another review this week that provides a very good perspective.
For one, Craig notes that there’s an unhealthy focus on net metering to the exclusion of other policies (like feed-in tariffs) that can provide a higher value for community projects. I think he illustrates one of the biggest problems with continuing to rely on net metering for distributed renewable energy projects:
Generally, under net-metering the utility company gets your “excess” solar power for free, say, at the end of the calendar year – solar power that offset the most expensive power on the spot market during times of peak demand in the early afternoon during the summer. You give that to your utility for free under net-metering. [emphasis added]
The report also misses a chance to highlight the global best practices for community renewables, or even the best practices in the U.S.:
Perhaps unsurprisingly, when IREC went looking for best practices, it did not look at leading global markets, but stayed within the confines of US borders. The study is typical of US analyses in that respect (see this report at Renewables International). Clearly, the dominant global policy to incentivize renewables is feed-in tariffs, especially in ramping up community projects. IREC even ignores FITs within the US, comparing policies in Massachusetts, California, and Maine, for instance, while Vermont, which has successful, but rather limited feed-in tariff scheme, is mentioned only in terms of its “group billing program.”
Craig also notes the glaring issue of ownership. The IREC report defines community ownership as “direct ownership, third-party ownership, and utility ownership.”
Which begs the question of what kind of “community” system can be owned by a utility. Certainly in Germany, a community system is by definition one owned by the community.
IREC goes on to state a preference for utility ownership, an idea I find appalling. As I noted in my review, utility-owned community solar projects have often asked community participants to pay more for electricity, at a time when most people going solar are making a return on investment.
Overall, I think I agree with Craig’s conclusion:
Given the current policy framework in the US, the report is probably useful. For instance, it discusses how community projects can avoid having to pay income tax on the power generated and how federal tax credits can be utilized. In other respects, IREC’s thinking is clearly still bound to net-metering; if you switch to feed-in tariffs, for instance, the question of “demand charges,” which seems to be an important issue for IREC, becomes completely irrelevant. In effect, the proposals basically show how progress could be made within the current legal framework without any major changes.
IREC’s report provides a good perspective of how to advance community renewables under a “business as usual” policy framework. If you agree that we might be able to find better policy, however, you might want to read [shameless promotion alert] Community Solar Power: Obstacles and Opportunities instead.
The CEO of a leading Indian solar energy firm issues a call for a U.S. federal feed-in tariff in yesterday’s New York Times:
Two things happened last month to give us pause to reflect on clean energy. First, Germany added the equivalent of nearly 1 percent of its electricity supply with solar energy between January and August. The first 1 percent took 10 years to achieve; the next 1 percent just 8 months. Second, the author of this revolution, Hermann Scheer, died.
The United States is one of the two top energy consumers in the world (along with China), so the world cares how fast America becomes convinced that there is a viable replacement to fossil fuels. The domestic American market should reach 1,000 megawatts next year. But to put that in perspective, Germany next year could add 1,000 megawatts in just 1.5 months.
To catch up, President Barack Obama needs to push for a federal feed-in tariff, or a mandate for states to have one, and fund it with a surcharge on conventional power — small enough to pass, but big enough to move solar away from cumbersome grants and tax incentives that come and go with the annual budget circus.
For two years, solar and wind energy producers seeking federal incentives have been able to take cash grants in lieu of tax credits. The stimulus act program helped keep the renewable energy industry afloat as the credit crunch and economic downturn dried up the market for reselling tax credits to banks and other investors with large tax bills.
The cash grant program is set to sunset at the end of this year, but solar and wind energy advocates are hoping it will be extended, for good reason:
In fact, the tax credits were always an awkward tool, some argue. Rhone Resch, the head of the Solar Energy Industries Association, said that many of the companies doing the installations were not making a profit either, so these tax credits were sold as “tax equity,” a secondary market, at a loss of 30 to 50 cents on the dollar to the seller. [emphasis added]
The tax credits were worth 30% of a project’s value, so the transaction costs of reselling the credits meant that renewable energy projects without sufficient internal tax liability were 13 to 21% more expensive than projects that could use the credits themselves.
This is dumb policy. Ratepayers pay a higher price for renewable energy because incentives filter through the tax code instead of the general fund.
But the cash grant v. tax credit issue is just one symptom of a larger disease affecting American renewable energy policy. Transaction costs are increasing the cost of renewable energy in nearly every state with a renewable portfolio standard (RPS).
Under most state RPS policies, utilities put out requests for proposal to acquire renewable energy to meet the state mandates. These solicitations attract thousands of developers who all have to front their project development costs. But in California, for example, 90% of projects don’t make the utilities’ shortlist for the solicitation, stranding over $100 million in development costs.
Some of those projects may eventually get online, but most of that money is flushed because the U.S. prefers to let utilities act as gatekeepers to clean energy rather than open the market to any potential producer. It’s not the only way.
There’s a renewable energy policy that’s responsible for 75% of the world’s solar and half its wind power. It has the lowest transaction costs because there’s no fiddling with the tax code and no parasitic costs from auctions or solicitations. Instead, utilities are required to interconnect and take the power from any developed renewable energy project, and to provide a price sufficient to provide a reasonable return on investment (just like the utilities enjoy in rate regulated states).
The policy is funded entirely through the electricity system, so renewable energy doesn’t have to compete with other budget priorities.
It’s called a feed-in tariff.
The U.S. can extend the cash grant program, but it merely treats a symptom of the disease. A better policy awaits.
But assuming we can agree that there’s good reason to subsidize solar power, as well as other forms of low-carbon electricity (including nuclear), you have to ask — is this hodge-podge of loan guarantees, federal funds and ratepayer support an efficient way to do so? Wouldn’t it be better to enact a steep carbon tax, and then let all forms of energy compete? Should a friend of mine who lives in upscale Los Altos and put a $35,000 solar system on his roof be subsidized by the rest of us? Is this going to lead us to a sustainable energy future, one in which we can collectively make smart choices? I don’t know. But somehow I think not.
A great argument for a feed-in tariff as well.
As with almost all major reforms, the movement to more sustainable power has been the result of actions taken by individuals and by states — Washington continues to reluctantly follow, not to lead.
Distributed generation (DG) puts energy production close to where it is consumed, often on people’s homes or in their backyards. But just having a rooftop solar module doesn’t mean that every kilowatt-hour produced from sunlight is used in the home. In fact, it’s often less than one-third, with the remaining energy production flowing out into the … Read More