McClaughry: The next solar bailout

By 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.

John McClaughry is vice president of the Ethan Allen Institute.

“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 ITC 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 ITC, sells the Renewable Energy Credits (RECs), 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 ITC 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 (7/26/13) 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 whose 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 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 ITC 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 ITC 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.

13 thoughts on “McClaughry: The next solar bailout

  1. All energy is heavily subsidized. Period.

    I realize this is an organization funded by climate deniers and ‘free market’ folks but reality is reality. I used ‘free market’ in quotes because, it’s a position supported only when convenient.

    For example, our government funds, via bonds etc, dams and other energy projects that then appear to have a low cost per kWh. Someone above mentioned “cheap” power from Hydro-Quebec- a government created company with “cheap power” from government funded dams. The Federal government offers billions in loan guarantees that artificially lower the cost of capital of many fossil fuel projects. They offer the opportunity to lease public lands and very low or zero rates. I mean how could electricity from these projects not be cheap if you don’t have to pay for the assets? You also get to externalize any of the environmental costs, which I’m sure you believe are zero. I’d love to start a gold mine on public land where I don’t have to pay for the pay-dirt.

    Anyway, rant aside, all energy is subsidized. The path ahead for rooftop solar is to offer storage as well which creates an energy bank for the home. Many utilities are exploring options to drain this power on demand thus increasing their on-demand capacity. The homeowner would still be grid-tied but can avoid most of the net metering if it’s properly designed.

    Utility scale solar doesn’t need any special incentives. Although you run in to problems with the intermittent nature of it so utility scale solar probably couldn’t make up more than 20% of the overall power mix.

    • Re: “Anyway, rant aside, all energy is subsidized.”

      So now ‘free market folks are climate deniers’? And that makes crony capitalism OK? Because everyone does it?

      Hey, I’m a realist. But as long as we’re discussing economic management, I’ll advocate for a free market every day of the week because it works better than any other economic system conjured by humans. But go ahead, acquiesce to foolish behavior.

      Speaking of ‘deniers’, Vermont, Oregon and Washington have, on average, only 58 sunny days a year, the least of any other state. But hey, Go Solar! And never mind Hydro Quebec’s cheap sustainable power.

      • Look up Quebec power- it’s cheap because someone else paid for it with their tax dollars.

        I did not mean that all free market folks are climate deniers. The point is that this organization only seems to complain if the incentive is going to renewable energy given that they’re funded by groups who also run climate denier campaigns. Otherwise, subsidize away!

        You get 1600 kWh per KW DC in VT. You get 1700 kWh per KW in FL, or 1800 CA. It’s not that big of a difference. Hydro is fine too. But don’t pretend those projects aren’t done with public funds and pick winners/losers just because of your bias.

        The issue with the free market approach is it’s very hard to prove complete causation. I live near a lake where you’re not supposed to eat the fish, the state fish and wildlife has reports showing that’s because of coal fired pollution. But can you imagine private citizens funding a study that made the coal company liable for the pollution? Or the respiratory illnesses that go along with it? Not likely, they’d go broke.

        • HQ power is hydro power. It’s ‘green’ and ‘sustainable’. It’s cheap because they have a lot of it. More than they can use. So we’d be doing Quebec a service buying it from them and ourselves a service paying 1/3rd the cost of local solar and wind power. Quid pro quo.

          One of the reasons Vermont power is expensive is, in no small part, because of the net metering and carbon credit scams being gamed because of less than comprehensive legislative regulations. GMP pays more than 20 cents a kwh for intermittent solar, wind and methane based power, they charge every user for it, and the increased cost increases the carbob tax credits they can sell.

          HQ will sell its power for 6 cents a kwh.

          RE: “But can you imagine private citizens funding a study that made the coal company liable for the pollution?”

          You’re damn right I can. And why not? Did you ever hear of a class action law suit? If someone can be awarded millions of dollars when they spill hot coffee on themselves, don’t you think the damages of which you speak are worthy of attention? And what is there in the purchase of HQ power to prevent the government from assisting in a law suit in the 1st place?

          • Jay,

            You are absolutely right about more hydro from H-Q.

            Scott and Roismann also are in favor.

            Hydro-Quebec has about 5600 MW of spare hydro plant capacity, the excess water, now spilling over the spillways, could immediately be used to generate electricity. H-Q has under construction and in planning stages an additional 5000 MW of hydro plant capacity. See URL.

            Here a list of the benefits of hydro energy:

            – Clean (no particulates, no SOX, no NOx)
            – Low-cost (5 – 7 c/kWh, plus 1 c/kWh for transmission), much less than wind and solar. See URL.
            – Very low CO2/kWh emissions, much lower than wind and solar
            – Steady, 24/7/365 energy, i.e., NOT variable and NOT intermittent, unlike wind and solar, which are weather dependent, variable cloudiness dependent, night and day dependent, and season dependent
            – NO federal and state subsidies and investment tax credits
            – NO capital outlays by Vermont’s government
            – NO enriching of multi-millionaires and their lucrative, risk-free, tax shelters
            – NO additional environmental impact in Vermont and Canada
            – Private entities would own the transmission lines from Quebec to New England
            – RECs would not need to be sold to out-of-state entities so they would be wearing the green halo, instead of Vermonters.
            – Much less social discord than controversial wind on pristine ridgelines and solar in fertile meadows

    • Stephen,
      Renewables are much more subsidized per kWh than non-renewables.

      Example of “Standard Offer” Subsidies of PV Solar Systems:

      In Vermont, a PV solar system, 2000 kW, turnkey capital cost about $5.9 million, produces about 2794 MWh/y and has revenues of about $365,000/y.

      Funding Source $ %/y
      Short term loan 1,356,212 4.0
      Long term loan 1,356,212 3.0
      Fed and state ITCs 1,376,189 Upfront gift
      Owner 1,808,283
      Total 5,896,897

      During the first 6 years, about 3.5/5.9 = 59% of the turnkey capital cost consists of:

      1) Upfront federal and state ITCs
      2) Taxes not paid due to rapid asset depreciation
      3) Excess costs over NE wholesale prices.

      About 48,867 kW of PV solar projects were installed since 2010. The 7-y total subsidy cost (2010 – 2017) was at least 48,867 kW/2000 kW x $3.5 million = $85.5 million, just for the PV solar projects; earlier feed-in tariffs were much higher than at present.

      – The variable, intermittent solar electricity is bought by utilities from owners at 13.36 c/kWh. But a higher-quality energy (not variable, not intermittent, steady, 24/7/365) could have been bought by utilities at the NE annual average midday wholesale price of about 6 c/kWh. The excess energy costs will occur for 25 years, per SO contract. Clearly, the overall cost of SO PV solar is much greater than the 13.36 c/kWh paid to owners. See table 3.

      – The federal ITC is 30% of the qualified portion of the turnkey capital cost. The qualified portion is 1,190,475/0.30 of the $5.9 million turnkey capital cost, or 67%.

      – The state ITC is 185,714/1,190,475, or 15.6% of the federal ITC.

      – Owners collect ITCs up front and avoid paying any taxes due to rapid asset depreciation, for a total of $2,332,758, during the first 6 years. See table 3.

      If the 6-y subsidy costs ($3,507,244) were divided by the 6-y electricity production (16,558 MWh), the subsidy cost would be 21.2 c/kWh, on top of the 13.36 c/kWh paid to owners.

      Whereas owners pay no taxes for the first 6 years, after year 6, the project would have taxable income on which state taxes ($285,476) and federal taxes ($1,075,571) likely would be collected during the 7 to 25 year period.

      Owners are not required to pay Vermont sales taxes on items used for construction of the project, and the education portion of real estate taxes.

      The subsidy train seems to be never-ending. Other households and businesses have to pay these taxes.

  2. John, please address the assertion that “..90 percent of all Vermont energy must come from renewables by 2050” Is the 6 cent per kwh power from Hydro Quebec not renewable? This is especially relevant when compared to the aggregate cost of more than 20 cents per kwh of solar.

  3. John,

    “If the higher price of panels and the declining ITC 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.”

    A unilateral Vermont carbon tax, imposed on already-struggling households and businesses, in an anemic, near-zero, real-growth Vermont economy, likely would bail out the solar and wind businesses.

    Vermont finally has a governor who aims to contain government spending to grow the hollowed-out PRIVATE economy, and not increase government spending to grow the already-bloated, wasteful GOVERNMENT economy.

    The various RE interests and lobbyists are going around the state to get some form of carbon tax to save their businesses, because federal subsidies are decreasing. The carbon tax would be increased in future years.

    The Vermont Comprehensive Energy (Shumlin) Plan, CEP, aspirational goal aims to “transform” the Vermont economy. That will cost a lot of money.

    It would require investments of about $33.3 billion, about $1 billion per year for 33 years, during the 2017 – 2050 period, per Vermont Energy Action Network 2015 Annual Report.

    Not counted is the refurbishment and replacement of short-lived RE systems during the 2017 – 2050 period.

    The CEP could not be implemented without a very high carbon tax and other taxes, surcharges and fees of at least $970 million per year for 33 years.

    For Vermont to impose a UNILATERAL carbon tax would make its economy less competitive versus other states, i.e., more brain drain, and fewer good-paying, steady, full-time jobs, with good benefits in the private sector.

    The carbon tax would be another headwind for the near-zero, real-growth Vermont economy.

    The carbon tax would further aggrandize Vermont’s government, which is too large, too inefficient, spending too much money, is bloated with programs, and is running annual deficits, that are offset with annual increases of taxes, fees and surcharges, as if money grows on trees.

  4. Of course the problem is there is no viable business model that yields profits except the one that has the whole scheme suckling ungratefully at the monstrous government teat !

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