May 05, 2005
How to Make Solar Powerful
Editor's note: This is the first post from guest contributor Richard Feldman, executive director of the Worker Center, the economic and workforce development division of the King County Labor Council, AFL-CIO; and regional organizer for the Washington arm of the Apollo Alliance.
This Friday, Governor Gregoire will sign a number of environmental and clean energy bills passed during Washington State’s stellar legislative session, including SB 5101. Denis Hayes, former director of the federal Solar Energy Research Institute and current President of the Bullitt Foundation, describes SB 5101 “as the most important solar legislation ever introduced in any American state legislature.”
SB 5101 is modeled after an energy policy first passed by the German government in 1990 that required utilities, among other things, to purchase any renewable energy electricity at fixed, minimum prices. This German law, also known as the feed-in tariff law, renewable tariff law or pricing law, has gone through several changes and is currently known as the German Renewable Energy Act (EEG).
Several other European countries including Spain have adopted similar policies. Under the German system, the prices paid for renewable electricity are higher than the retail cost of electricity and guaranteed for a set period of time. The prices are set in relationship to the cost of the renewable resource or may be set to spur investment and industrial development in renewables. The prices can account for improvements in technology and economies of scale by establishing a schedule that lowers the price over time for successive producers. The costs of higher payments to renewables are covered by a small additional per kilowatt-hour (kWh) charge on all consumers according to their level of use. Having the revenue source come from ratepayers instead of taxpayers has insulated the program from the vagaries of legislative renewal.
SB 5101 establishes a similar system of payments for kWh generated by wind, solar and anaerobic digesters except that the revenue source is a credit against a fixed percentage of utility taxes instead of a charge to ratepayers. In Washington State, a homeowner with a solar photovoltaic (PV) system will receive up to $2,000 per year, depending on how much energy is generated by their system.
Janet L Sawin of the Worldwatch Institute in a study of renewable energy policies notes that:
When the 1990s began, Germany had virtually no renewable energy industry and, in the view of most Germans, the country was unlikely ever to be in the forefront of these alternative energy sources. Yet, by the end of the decade, Germany had transformed into a renewable energy leader, with a new, multibillion-dollar industry and tens of thousands of new jobs.
For example, most of Germany receives less solar irradiation than Western Washington yet in 2004 it installed six times more PV than the entire US.
The reason Germany has been so successful? According to Sawin:
"[Several] policies have played an important role, but the pricing law has had the greatest impact on Germany’s renewable energy industries. It ended uncertainties regarding whether producers could sell their electricity into the grid and at what price, and provided investor confidence, making it easier for even small producers to obtain bank loans, and drawing money into the industries. Increased investment drove improvements in technology, advanced learning and experience, and produced economies of scale that have led to dramatic cost reductions. The average cost of manufacturing wind turbines in Germany fell by 43 percent between 1990 and 2000, and the cost of total PV systems has declined 39 percent over the past decade."
Like much in the renewable energy field this policy too has U.S. roots. California in the 1980s implemented the U.S. Public Utilities Regulatory Act of 1978 (PURPA)--which required utilities to interconnect with and buy energy from independent power producers--by requiring long term contracts combined with fixed energy prices assuring energy producers (including renewable producers) a market for their product and enabling bank financing. Wind farms sprouted in the hills and for a time, California became the world’s leader in renewable energy production.
In the U.S., energy advocates have pressed for Renewable Portfolio Standards (RPS) at the national and state levels. This policy requires utilities to purchase a set quota of renewable energy for their power portfolio. The two approaches to renewable energy policies differ around the role of the market and political decisions:
|Quota (RPS)||Pricing Law|
|Amount of Renewables||Political||Market|
|Price of Renewables||Market||Political|
An RPS tends to end up supporting mature renewable industries, which are able to deliver electricity at rates competitive with wholesale prices. Corporate-developed wind power is a big beneficiary of RPS. In contrast, the pricing system has the ability to build markets, encourage investment, and force the price curve down on emerging technologies as well to enhance mature technologies.
An intriguing aspect of the pricing system approach is the ability to fine-tune the prices for different technologies at different scales thus broadening the geographic and constituency support for the policy. Want to bring in the agricultural industry? Establish an attractive price for biomass-fired generation and increase the price for smaller scale producers.
Both Washington State Houses passed SB 5101 unanimously with utility support. In contrast, RPS has received a cold reception from both the legislature and the state’s public and private utilities. A weakness of SB 5101 is that its scale is limited and it depends on taxpayer revenue instead of ratepayer revenue subjecting its continuation to the will of future legislatures. With the state’s structural deficit, this type of expenditure will have to compete with funding for schools and healthcare.
In determining the best energy policy for Washington State it makes sense to look at an RPS but it also makes sense to look at building on the outstanding results of the German pricing law and the political support for SB 5101 to put in place a Washington ratepayer funded pricing law. After all, if the objective of regulating utilities is a means to the ends of transforming our economy and creating new jobs by developing clean energy industries, shouldn’t we follow the lead of one of the most successful examples?
Side note: Unfortunately, the chair of the House Energy Committee added an unfriendly amendment to SB 5101 that holds up the implementation of this groundbreaking legislation until there is general agreement by most utilities in the state on a common set of standards for interconnecting electrical generation equipment to the grid. Three steps forward. One step back.
Posted by Rich Feldman | Permalink
Since I was just skimming this article at work, could you explain to me in simple terms how this impacts homeowners interested in installing a solar system? I understand it to be a deduction of utility taxes. How is this assesed and paid?
The reason that I ask is that I have always been interested in buying a solar system for my Seattle home but I am still having trouble with the upfront cost vs the cost savings over the lifespan. Since we might sell our house in 5-10 years, and I'm doubtful that I would make back the investment, I've been hesitant to buy a solar system. However, if there was a significant incentive program such as this one, I might have a change of heart.
Posted by: Dave | May 5, 2005 2:42:17 PM
Homeowners do not take the tax credit. Incentive payments per kWh generated are paid directly by their utility to the qualifying applicants. The utility then is allowed a credit against its public utility tax for incentive payments paid to applicants.
As per the bill summary, the bill lays out a schedule of payments as follows (one caution, the language in the bill is permissive that is it uses the words “investment cost recovery incentive may be multiplied by the following factors” so the bill is a model for the utilities that they will likely use):
The incentive is calculated off a base rate of 15 cents for each kilowatt hour of energy produced. That rate is adjusted based on where the equipment or components were manufactured. The incentive rate is multiplied by the following factors:
1) for customer-generated electricity produced using solar modules manufactured in
Washington State: two and four-tenths;
2) for customer-generated electricity produced using a solar or a wind generator equipped with an inverter manufactured in Washington State: one and two-tenths;
3) for customer-generated electricity produced by an anaerobic digester, other solar, or by using a wind generator equipped with blades manufactured in Washington State: one;
4) for all other customer-generated electricity produced wind: eight-tenths.
The payments are capped at $2,000 per year for each individual, household, business or local government.
Currently, there are no solar modules manufactured in Washington. An objective of this legislation is to create jobs and attract a solar module manufacturing facility.
How much a solar electric system generates depends on your location. There are factors that people use to estimate likely generation. For example, in the Seattle area 1 kW of installed capacity is estimated to generate 1000 kWh in year. A great resource to get into details of SB 5101, costs etc. is Mike Nelson www.northwestsolarcenter.org He also runs workshops for homeowners on PV.
Posted by: Rich Feldman | May 6, 2005 8:48:58 AM
If you are doubful, don't do it. Put your money into a safe investment like treasury notes. Since there are limits to the available power production payments, let people who are more inclined toward inovation take the leadership position. If you wait 15-20 years the market will be transformed, and you can enjoy a solar system in the twilight years of your life.
Under the new Washington "feed-in" law and from a homeowners perspective, you get paid for the kWh your system produces by your utility. That is, if they choose to participate in the program. Once a year the utility cuts you a check for the KWh produced by your system (and you get to use your own kWh's). The utility can then claim the full amount as a tax credit on their utility use tax. The utility's only expense is administrative. They could use their "green rate" money to cover program costs.
To get a picture of how this shakes out, Say you had a 1kw system in Seattle, properly sited and installed, it should produce at least a thousand kWh per year. Depending on it's "Washington Grown" petigree, it will earn you between 250 and 500 per year for as much as 10 years, That's 2500 to 5000 dollars. Not bad in Seattle's climate. Of course, east of the mountians you could expect a significantly larger return. A carefully shopped system on a good roof will run between 7500 and 10,000 dollars.
Using a methodolgy developed by a national appraisers association a one kw solar electric system should add about 5000 dollars value to your home. So after 10 years you have an asset value and revenue stream that totals as much as 10,000 dollars, and the system keeps on producing savings for at least another 20 years
Buying a solar electric system is not an investement you should apply simple payback to. Unlike paying utility bills purchasing a solar electric system is aquiring a capital asset, and one with an incredible lifespan. Solar modules come with a 20-25 year warrentee. And that warrentee is that those modules will be producing 80% of the power they produced when they were brand new. The first solar modules built in 1955 are still operating. A 50 year lifespan on the modules is a reasonable expectation. If your over 35, actuarial tables suggest there is a good chance modules installed today will out last you.
The question to ask is what is the return on investment, and how does that investment compare to other investments with similar risk. Clearly a solar electric system is a lower risk investment than money in the stock market, and the return on investment is better than a t-bill.
So If you want to make a difference, if you assign a non-zero value to the future, consider investing in solar.
Posted by: Mike Nelson | May 6, 2005 9:08:11 AM
As I understand it, this law also works in conjunction with our net-metering laws. Is that correct? So, essentially, you will get paid for the Kwh your system produces in the form of a check cut once a year by Seattle City Light and also have the benefit of offsetting your remaining electricity usage by making your meter run backwards. The concept works like this: During the day, when the sun is shining, you are most likely at work so you are using less electricity in your home than your system is producing. But instead of buying a battery to store that electricity for later use it "goes into the grid" and your meter runs backwards. Then, at night, when you are home and have the lights, dishwasher, tv and computer on, you draw electricity from the grid and the meter runs forward. Generally, that equals more electricity produced than purchased from the grid. Right?)
Posted by: Charles Redell | May 6, 2005 4:03:14 PM