Why tax credits make lousy renewable energy policy

Date: 17 Nov 2010 | posted in: Energy, Energy Self Reliant States | 0 Facebooktwitterredditmail

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.

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Renewable Energy Economies of Scale are “Bullshit”

Date: 11 Nov 2010 | posted in: Energy, Energy Self Reliant States | 0 Facebooktwitterredditmail

I had a conversation with a wind developer yesterday and was talking about the difference between putting together large projects (over 80 MW) compared to distributed generation wind projects (80 MW and under).  I mentioned that we have a deep interest in understanding the economies of scale of renewable energy projects and he replied, “economies of scale are bullshit.”  He noted that large wind projects require significant development costs that smaller projects don’t encounter (including many more landowner negotiations and permits) and that installation and maintenance services are sufficiently widespread for any sized project to find services. 

It’s not entirely true that bigger projects have no economies of scale, but these two charts illustrate the larger point: Most economies of scale in solar PV and wind power are captured at a relatively small size.

The first chart is from the California Solar Statistics website, and draws on data from over 70,000 solar PV installations in California since 2005. 

Clearly, solar PV installations of 10 kW have captured more of the economies of scale for solar PV.  Costs may fall slightly for much larger projects, but the smaller number of projects makes it hard to see trends (interesting note: there seem to be as many > 100 kW solar projects costing over $10 per Watt as there are under $8 per Watt).

The second chart comes from the 2009 Wind Technologies Market Report by Ryan Wiser and Mark Bolinger (which is a must-read). 

The wind data is even more striking, with the lowest average project cost found in the projects with just a handful of turbines (5-20 MW of capacity), with costs steadily rising for larger projects.  Certainly there’s an advantage to having more than one turbine, but less so for growing the project much larger than 10 turbines. 

This data should inform renewable energy policy.  If modest-scale, distributed renewable energy projects capture most (or all) economies of scale, then the opportunity to place these projects close to load may reduce the need for new, long-distance, high-voltage transmission lines.   It means more renewable energy can come online faster and with fewer political battles. 

These smaller-scale projects are also the appropriate size for local ownership (which provides twice the jobs and 1-3 times the economic impact of absentee ownership), allowing more the economic benefits of renewable energy development to accrue to the host community.

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Hawaii Feed-in Tariff Pays Less Than Net Metering for Solar PV (and that’s ok)

Date: 10 Nov 2010 | posted in: Energy, Energy Self Reliant States | 0 Facebooktwitterredditmail

On Monday we posted a news story about the launch of Hawaii’s feed-in tariff program, and in a review last night we found an interesting anomaly: the price paid for power for residential solar PV (projects smaller than 20 kW) is lower than the residential retail electricity price on most of the Hawaiian islands.  On the most populous island, Oahu, the price paid under the feed-in tariff is three-tenths of a cent per kilowatt-hour (kWh) higher than the retail electricity price, but it’s as much as 11 cents per kWh lower on other islands including Maui, Molokai, Lanai, and the Big Island.

Why pay less than the actual retail electricity price? 

First, Hawaii has a very strong solar resource.  A typical rooftop crystalline silicon PV array could produce nearly 1,600 kWh AC per year for each kW of DC capacity.  This is a capacity factor of over 18%.

Second, the state of Hawaii provides a personal tax credit for the lesser of 35% of the system cost or $5,000.  This is on top of the federal 30% tax credit.

So what does a Hawaiian solar producer need to make a reasonable return on their solar PV investment (8%)?  The following chart illustrates the prices needed for three different system costs.

While a typical individually contracted solar PV system will have a total cost of $8 per Watt or higher, group purchasing of solar PV systems (as discussed in this earlier post) has dropped installed costs down to as low as $4.78 per Watt in a group purchasing program in Los Angeles.  At that upfront price, Hawaiians that go solar would only need $0.15 per kWh to make an 8% return on investment!  Based on the actual FIT price of $0.21 per kWh, a Hawaiian group solar purchase could offer participants a 13% return on investment!

Note: You may wonder at the choice of installed costs for the chart.  These are based on Solarbuzz’s solar price index and our previous analysis of distributed solar PV prices.

Note 2: I’m awaiting confirmation that the Hawaii tax credit is taken off the system cost, rather than cost after the federal tax credit.  The FIT prices shown would rise by about 1.5 cents per kWh if the state tax credit is calculated on the system cost after the federal credit.  Update: the federal tax credit does not reduce the basis for the Hawaii state tax credit.

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New Rooftop Solar Thermal System Focuses on Space Heating and Cooling

Date: 9 Nov 2010 | posted in: Energy, Energy Self Reliant States | 0 Facebooktwitterredditmail

Solar thermal has generally been two distinct worlds, rooftop solar hot water systems and utility-scale concentrating solar power plants.

No more.

A new rooftop solar collector can provide thermal energy rather than producing hot water or electricity for space heating and cooling. With inexpensive fresnel reflectors to concentrate sunlight, the Chromasun could prove an interesting way to use distributed solar thermal energy for more than just hot water.

The unit produces temperatures up to 220 Celsius and promises to use less roofspace than comparable systems using solar PV. 

Now, what will it cost?

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Community Solar Power report – revised grades for project location

Date: 9 Nov 2010 | posted in: Energy, Energy Self Reliant States | 0 Facebooktwitterredditmail

The original edition of Community Solar Power received a lot of attention, for which we at the Institute for Local Self-Reliance are very grateful. The grading system we used for community solar projects was of particular interest, especially our offer of higher scores for projects placed on rooftops rather than on the ground. In particular, the … Read More

Hawaii Rolls Out Feed-in Tariff for Distributed Renewables

Date: 8 Nov 2010 | posted in: Energy, Energy Self Reliant States | 0 Facebooktwitterredditmail

The Hawaii Public Utility Commission moved ahead with the state’s feed-in tariff for projects under 500 kW, overruling objections from the state’s largest utility:

The decision came despite requests from Hawaiian Electric Company (HECO) to postpone the program over concerns that added distributed generation resources could destabilize the islands’ power grids.

…However, none of HECO’s objections “appeared to be fatal flaws that warranted any further delay in the development and implementation of the FIT [feed-in tariff] program,” according to statement released by the PUC.

The prices for the feed-in tariff program are as follows, with 20-year contracts:

 

Tier Technology Eligible System Size Rate
Tier 1 Photovoltaics Less than or equal to 20 kW $0.218/kWh
Tier 1 Concentrating Solar Power Less than or equal to 20 kW $0.269/kWh
Tier 1 On-Shore Wind Less than or equal to 20 kW $0.161/kWh
Tier 1 In-line Hydro Less than or equal to 20 kW $0.213/kWh
Tier 2 Photovoltaics Greater than 20 kW, less than or equal to 500 kW $0.189/kWh
Tier 2 Concentrating Solar Power Greater than 20 kW, less than or equal to 500 kW $0.254/kWh
Tier 2 On-Shore Wind Greater than 20 kW, less than or equal to 100 kW $0.138/kWh
Tier 2 In-line Hydro Greater than 20 kW, less than or equal to 100 kW $0.189/kWh
Baseline FIT Other RPS-Eligible Renewable Energy Technologies** Maximum size limits for facilities $0.138/kWh

The prices assume that the producer will take the Hawaii renewable energy income tax credit (35%). 

The program is capped at 80 MW of production: 60 MW on Oahu, 10 MW on the Big Island, and 10 MW for Maui, Lanai, Molokai combined.

Utility helps developers find capacity

The largest utility on the islands, HECO, has also published Locational Value Maps (LVM) to help developers identify places of greatest capacity on the existing grid.

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Cost of Fossil Fuels Makes Renewables a Harder Sell?

Date: 8 Nov 2010 | posted in: Energy, Energy Self Reliant States | 0 Facebooktwitterredditmail

This story on Sunday suggests that utilities are pulling back from investments in renewable energy over concerns about the cost

Invenergy…had a contract to sell [wind] power to a utility in Virginia, but state regulators rejected the deal, citing the recession and the lower prices of natural gas and other fossil fuels.

“The ratepayers of Virginia must be protected from costs for renewable energy that are unreasonably high,” the regulators said. Wind power would have increased the monthly bill of a typical residential customer by 0.2 percent.

Based on what price forecast?  The following chart illustrates the complexity of relying on fossil fuel prices when making decisions about renewable energy.  Note that wind and solar prices are relatively stable (i.e. zero).

The chart does a good job of showing the futility of predicting natural gas prices, but the timeline smooths out coal price changes, particularly by region.  Here’s a closer look at coal prices since 2007, courtesy of the federal EIA:

Utilities that are making shortsighted decisions about renewables based on current fossil fuel price trajectories are going to get burned, and so are their ratepayers. 

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Focus on Big Holds Solar Back in U.S.

Date: 1 Nov 2010 | posted in: Energy, Energy Self Reliant States | 0 Facebooktwitterredditmail

An article in the New York Times last week suggested that a dearth of financing is holding back solar power in the United States. In particular, the authors note that “the country needs to build large plants covering hundreds of acres,” projects that can cost $1 billion. These large solar projects are languishing without financing, they … Read More

Homes with Solar Sell Faster, and For More

Date: 29 Oct 2010 | posted in: Energy, Energy Self Reliant States | 0 Facebooktwitterredditmail

In by far the most exhaustive and detailed study to date, the National Renewable Energy Laboratory (NREL) found that solar homes sold 20% faster, for 17% more than the equivalent non-solar homes, across several subdivisions built by different California builders.

The study looked at a number of housing developments where the homes were otherwise identical except for the solar energy systems. 

Also interesting was that buyers were more interested in solar when it was-preinstalled:

If solar was already on the house, and factored into the price already, buyers were more likely to pick a house with solar. But if it was just one more decision to be made at the point of purchase, the decision got shelved.

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