Commentary: The next solar bailout (October, 2017)

by John McClaughry

John McClaughry“Free electricity from the sun” has been a dream for decades. Although solar photovoltaic cells have been used for 40 years in spacecraft, the growth of the solar PV industry began around 1990, spurred by concerns about global warming from fossil fuel combustion.

“Clean, green” solar PV electricity can charge radios and cell phone batteries, but it’s challenged by powering a refrigerator or home freezer. That’s because sunlight is diffuse and intermittent.

“Diffuse” means that the amount of direct sunlight that falls on a PV cell, even in a cloudless desert, is pretty weak. Overcoming the “diffuse” problem requires lots of collector area – full roof coverage for a home, or acres of solar panels for supporting the power grid.

“Intermittent” means that most solar PV electricity is produced during six or eight hours of a cloudless day, and almost none with heavy overcast. The “intermittent” problem for a home or neighborhood system can be solved (at considerable cost) by battery storage, but solar PV can’t realistically power the grid. It can only augment baseload power generated by hydro, nuclear, geothermal, tidal, biomass or fossil fuels like coal, oil or natural gas.

Beyond the political rhetoric about stopping climate change, the driver for solar PV deployment is profit. And the fact is that, except for remote and unique locations, there would be precious little if any profit in solar PV were it not for the cornucopia of special benefits offered by the federal and state tax and regulatory laws.

The big hitter is the 2005 solar investment tax credit of 30 percent of installed cost, used to offset the solar company’s income tax liability. When this credit was slated to expire at the end of 2016, the solar industry went into overdrive to postpone the deadline. It won a six-year phase-out, ending in 2022.

Vermont offers a parallel tax credit at 24 percent of the federal rate, plus exemption of solar equipment from the sales tax and from the education property tax.

There are two major solar PV models. One is the large-scale solar farm. The other is the homestead “rooftop” or backyard system. The profit driver is net metering.

This is a special deal where the solar installation inverts the DC electricity from the panels and runs it back through the utility meter, reducing the electric bill. The subsidy occurs when the homeowner is credited not at the wholesale generation price, but at the maybe 40 percent higher retail price. The net metering customer thus pays little or nothing toward the costs of maintaining the utility’s transmission and distribution systems, or its management. The other “ordinary” customers have to pay for that.

A common solar industry deal is structured as a limited partnership. The partnership installs and owns the solar panels, claims the tax credit, sells the renewable energy credits, and routes the generous depreciation deductions to the partnership’s high income tax shelter-seeking partners.

The homeowner enjoys net metering for a specified number of years, which under some circumstances can result in zero-cost electricity. When the partnership has pocketed the upfront tax credit and the declining depreciation for (typically) five years, the homeowner can buy the system for a nominal price, and own and maintain it thereafter.

How important is net metering? The New York Times (July 26, 2013) quoted the executive director of the advocacy group Vote Solar as saying, “Net metering right now is the only way for customers to get value for their rooftop solar systems.” That is to say, unless taxpayers and other ratepayers can be made to cover the subsidies, homestead solar installation will be attractive only to those who are willing to spend their own money to display green energy virtue.

The price of solar PV panels has dropped gratifyingly over the past decade. But last month the International Trade Commission found that solar panels are being “imported in such increased quantities as to be a substantial cause of serious injury to the domestic industry.” The two plaintiff companies, one bankrupt and one insolvent, are urging President Donald Trump to impose a big tariff on imported panels, mainly from China.

News of the petition caused a rush by speculators to stockpile panels before the price shoots up. A significantly higher price for panels, along with the disappearance of the investment tax credit in 2022, will dramatically change the economics of net metering deals, meaning that the solar boom may well peter out, except in off-grid locations. This would also seriously undercut Vermont’s (actually Peter Shumlin’s) Comprehensive Energy Plan, which declares that 90 percent of all Vermont energy must come from renewables by 2050 (or else what?).

That’s the risk solar PV entrepreneurs may be facing. If the higher price of panels and the declining investment tax credit undercut the viability of their business plans, expect the next phase: an urgent appeal for a taxpayer bailout for solar installers, to counter the government tariff bailout of the solar panel makers.

- John McClaughry is vice president of the Ethan Allen Institute.

{ 2 comments… read them below or add one }

Justin Turco October 29, 2017 at 9:38 pm

Net metering is a ripoff to the rest of us. You have your solar panels and they work your power bill down to zero every month. It happens. But it happens while you are off at work during the day. Then you come home and turn everything on. Who pays for that power? Those of us who DONT own solar panels. Now…what if everybody wanted to do this? Who would pay for the real generation that actually keeps the life humming? Additionally, and I can’t prove it…but I’m telling you ISO-NE keeps a pad of real generation on the grid greater than the capacity of all the solar. So that…in reality….solar is ALWAYS the bonus. I.E: the power generated during the day that the solar panel owners are being paid full retail price for…isn’t even doing any work. Solar panel owners need to figure out storage and be required to use what they generate, else feed it into the grid for free or the proper going rate. This incentivises planning power usage around the availability of the resource. Right now solar power producers don’t have to do that. The grid is their battery.

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Ann L Hogan November 4, 2017 at 2:54 pm

Finally! A good clear explanation of the solar business model thank you Mr McClaughry.

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