Land of the Free and Home of the Subsidies

Renewable energy politics has become a powerful force at both the federal and state level.  Wind and solar advocates argue that renewable energy generates power without the expense of burning fossil fuels. While this may sound appealing, the reality is that this energy supply is highly subsidized and the policies are fossilized.

For example, in 1982, federal and state governments designed a program called net energy metering (NEM). NEM was originally designed to help promote the development of an emerging market of distributed generation technologies, thus including solar photovoltaic (PV).

Today, NEM incentives are provided in 44 states and the District of Columbia, which allow solar customers to participate in programs offered by their respective utilities.  The concept of NEM is simple: when customers do not use all of the power generated by their solar panels, the excess energy flows back to the utility and the customer receives a credit that is carried forward and applied to future bills. But the bill credit is awarded at the higher retail rate, rather than the lower wholesale rate.  As noted in CAGW’s February 2016 WasteWatcher, “Solar Wars: Revenge of the Subsidies,” NEM incentives shift the utility costs to non-solar customers, creating an uneven playing field between wealthy solar customers being subsidized by lower-income homeowners and renters that rely on conventional forms of electricity.  In other words, NEM is the reverse Robin Hood of renewable energy subsidies.

As NEM incentives continue to provide a crutch for the solar energy industry, a new business model has developed over the years to provide even more “affordable” access to solar power; the third party ownership (TPO) model.

Under TPO, a solar company (TPO) owns the solar PV system that is installed on a homeowner’s rooftop.  The business will either sell the homeowner energy it produces through a long-term contract or lease the solar PV system to the homeowner at a monthly rate.  With this arrangement, the TPO receives additional incentives, such as being allowed to depreciate the solar facility as a business asset over five years.  What’s more, the TPO is able to base the depreciation deductions and the federal investment tax credit (ITC) on the solar facilities at fair market value (FMV), which is always higher than the installed cost.  The TPO will determine their solar facilities’ FMV by determining the present value of the anticipated stream of net cash flows the TPO is likely to receive over the desired term of the contract signed by the homeowner. Therefore, the higher the contract, the more incentives the TPO receives from taxpayers.

In addition to the elaborate schemes set up by NEM and TPO, the Renewable Energy Certificate (REC) and the Solar Renewable Energy Certificate (SREC) provide even more incentives for solar PV owners.  Both RECs and SRECs are a property right created for the owner of a renewable energy source when it produces at least one megawatt hour (MWh).  The MWh must then be certified and reported to one of the nine regional tracking systems: the Electric Reliability Council of Texas;  Michigan Renewable Energy Certification System;  Midwest Renewable Energy Tracking System;  Nevada Tracks Renewable Energy Credits;  New England Power Pool Generation Information System;  New York State Energy Research and Development Authority (under development);  North American Renewables Registry;  North Carolina Renewable Energy Tracking System;  PJM Generation Attribute Tracking System;  and the Western Renewable Energy Generation Information System.

REC and SREC prices can vary widely across the country. States like New Jersey and New Hampshire impose draconian restrictions on the types and amounts of RECs that can be purchased by their jurisdictional utilities.  These onerous restrictions inhibit access to renewable energy markets and restrict free trading of RECs and SRECs across the country, further distorting REC and SREC prices.

While the cost of rooftop solar has gone down significantly over the years, the generous incentives offered by federal, state, and local governments have only increased.  In 2007, the cost was roughly $9 per watt-dc.  In 2013, the reported median cost had decreased to less than $5 per watt-dc. The Solar Energy Industries Association released a report showcasing the continuing decline of residential rooftop solar installations through the first quarter of 2015.  During that timeframe, the cost to install residential rooftop solar was $3.46 per watt-dc.

Even though lower costs and state mandates have promoted the adoption of solar PV across the country, the current incentive structure is putting the solar energy industry at risk.  Considering that rooftop solar is the fastest-growing segment of renewable energy in the U.S., with an annual growth rate of 40 percent over a four-year period, one has to wonder why the incentive structure is so generous to an industry that is growing so rapidly.  If everything is sunny and bright for the solar industry, maybe it is time to turn off these expensive subsidies.