HOW TO MAKE MORE NEW ENERGY

California moving to boost small solar projects
Laura Isensee (w/Andre Grenon), September 16, 2009 (Reuters)

SUMMARY
The California Public Utilities Commission (CPUC) is seriously considering adopting a Feed-in Tariff (FiT) to boost the installation of distributed generation solar energy systems. It is meant to supplement California’s new target of obtaining 33% of its power from New Energy sources by 2020.

Where FiTs have been used, they have consistently produced solar industry growth and California’s photovoltaic (PV) manufacturers and installers expect such an incentive to do the same throughout the state.

The proposed CPUC plan would apply to systems of 10 megawatts or less and be capped after it boosts the state’s installed capacity by 1 gigawatt (1,000 megawatts).

The CPUC seems ready to reject the “1% requirement” part of the FiT proposal requiring utilities to obtain at least 1% of their power from distributed generation sources yearly until the 33% standard is met because it would push electricity prices too high.

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COMMENTARY
There has literally never been a better time to buy a rooftop solar energy system for a home or business. Prices are falling, state and federal incentives are rising and ownership opportunities in the form of financing deals and lease or lease-like deals are expanding. (See SUN SHINES BRIGHTER IN TOUGH TIMES)

With prices approaching all-time lows, excess volumes at all-time highs and incentives better than ever before, there has never been a better time to build a PV solar system. (click to enlarge)

And California’s Public Utility Commission, spurred by activists in the state’s environmental community, wants to make it even better by establishing an FiT. Approval is far from certain. (SB32, a less rigorous FiT measure, was passed by the California legislature but awaits the Governor's signature.)

The FiT is meant to compliment California's new, more aggressive Renewable Electricity Standard (RES) (known in California by its more arcane label of Renewable Portfolio Standard, RPS, because California set a standard early on, when it went by its arcane label). The standard establishes a specific portion of power that regulated utilities are required to obtain from New Energy sources by a date certain.

Until September 2009, California’s utilities were required to obtain 20% of their power from New Energy sources by 2010. Even though none of the state’s utilities will make that percentage by next year, Governor Schwarzenegger this week made the standard more demanding. His executive order requires utilities to obtain 33% of their power from New Energy sources by 2020.

The FiT, many believe, will make the standard more achievable by providing a financial incentive for people to install systems.

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A Feed-in Tariff awards a higher-than-market-rate per-kilowatt-hour payment (tariff) to anybody who adds power to the central transmission system. The tariff is guaranteed to system installers for an extended period of time, usually 15-to-25 years, which matches the anticipated life of a solar system and is probably 2 or more times the pay-off-period for rooftop solar systems, small wind turbines and home geothermal systems.

The FiT was first developed in California in the late 1970s but fell out of favor during the Reagan and post-Reagan free market fervor. With faith now widely shaken in the reliability of an unfettered free market, Californians are noticing what an unqualified success their FiT concept has been in Germany (and what a qualified success it has been in Spain).

Germany set New Energy targets in the late 1990s but only when it perfected its FiT did development really explode, making the program’s success unqualified. Germany – despite very moderate insolation – became the world leader in solar energy installed capacity and built a thriving set of New Energy industries. It has tens of thousands of green collar jobs and only its auto industry consumes more steel than its wind industry.

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Spain, seeing the potential for New Energy in what its wind sector accomplished with few incentives, also instituted an FiT. But Spain’s program was more aggressive and less disciplined and it had the misfortune of running headlong into the world financial downturn. The program’s success was, therefore, qualified. It drove installation but had counterproductive unintended consequences.

It is clear California’s leaders are approaching the FiT trepidatiously.

Spain’s FiT – a cautionary tale. (click to enlarge)

Though California’s PUC has fixed the maximum size of systems it will subsidize and the maximum amount of capacity it is aiming for, it has not fixed a tariff rate. It recently set out the 5 points it will likely take into consideration:
(a) seller’s cost,
(b) seller’s cost plus or minus an adjustment,
(c) buyer’s avoided cost,
(d) buyer’s avoided cost plus or minus an adjustment, and
(e) market prices (known as Market Price Referrant, MPR).

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The CPUC also identified a list of 15 goals it wants to achieve with its FiT price structure:
1. Be open to all RPS-eligible technologies (technology neutrality) to the
extent that is consistent with the state’s climate change goals and RPS
deadlines
2. Provide sufficient payment to simulate untapped market segments at the
distribution level and build new projects while minimizing ratepayer costs
and preserving competition.
3. Focus on projects of a certain size that can effectively mitigate the market
and regulatory constraints (such as site control and permitting) that slow
down development of larger renewable projects.
4. Minimize the transaction costs for the seller, buyer, and the regulator.
5. Maximize transparency while protecting commercially sensitive
information and the public interest.
6. Equitably allocate risk, relative to project size, between the buyer and the
seller.
7. Adopt program design elements and a contract that adequately address
project viability.
8. Facilitate interconnection of projects that efficiently utilize the existing
distribution system.
9. Complement, but not impede or duplicate, existing programs, especially
the California Solar Initiative and the existing Renewable Portfolio
Standard programs, which are both aimed at facilitating the state’s energy
policy and climate change goals.
10. Provide sufficient regulatory certainty to create a sustainable marketplace
for small distributed generation renewable developers.
11. Just and reasonable rates for the buyer, seller, ratepayer, and society.
The cost of a solar system depends on 4 factors: (1) System size; (2) Panel price; (3) State rebate; (4) Federal Investment Tax Credit.
12. Simplicity.
13. Economic efficiency.
14. Promote performance.
15. Align performance with demand.

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Solar panel prices are falling because there is an oversupply of panels and silicon. It is a truly glutted market. One manufacturer predicts more than half of the panels made in 2009 won’t be used this year. It also predicts the glut will last into 2012 and has decided to cut its planned production all the way through 2013. Meanwhile, due to pre-glut planning, total world solar panel production will grow 14.3% this year to 7.5 gigawatts. (Total world solar panel production in 2008 was 6.5 gigawatts.) Only 3.9 gigawatts of solar panels will be installed in 2009. In other words, almost 1 of every 2 panels will be inventoried.

To sell panels and clear their inventories, manufacturers are lowering prices. It doesn’t take a degree in economics to come to the conclusion that the price for solar panels has never been and may not again be so low.

The U.S. wholesale price for top-quality crystalline silicon modules is less than half what it was last year, ~$2.40 per watt. The retail price of an installed system, before subsidies and tax credits, is down from $9-to-$10 per watt to ~$7.50 per watt. Volume buys warrant even lower, below-retail prices.

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The California Solar Initiative (aka the “million solar roofs” initiative) is a 10-year, $3-billion program. Launched in 2007, it is funded by California utility ratepayers. Designed to drive volume, the amount of the rebate drops as the state’s installations reach progressively higher levels of total megawatts. For big utility customers, the rebate started at $2.50 per watt. It is now $1.55 ($1.90 for SCE customers) and will shrink to 20 cents per watt by 2016, the last year of the program. On that schedule, the sooner a system purchase is made, the better. The difference between a 2007 purchase of a 5-kilowatt system and a 2016 purchase is $11,500. (Every state’s New Energy incentive programs are outlined in detail at DSIRE)

The solar initiative was carefully designed to drive controlled growth. (click to enlarge)

The federal stimulus bill that was passed in October 2008 extended the 30% investment tax credit (ITC) to the entire system cost instead of only the first 25% of the cost. The stimulus bill also guaranteed the ITC on all systems purchased through 2016, freeing the ITC from its previous year-to-year uncertainty. An average-to-large home rooftop system can have an after-state rebate value of $30,000, making the tax credits worth nearly $10,000. That’s a big deal.

A typical home rooftop solar system is 3-to-5 kilowatts (3,000-to-5,000 watts). The cost of panels constitutes about half the system’s cost. In addition to the panels, homeowners must pay for installation (labor, permits, taxes) and an inverter to transform the direct current created by the panels into the alternating current required to run home electronics. A well-built, well-installed, well-designed rooftop solar system should last 25-to-30 years and significantly reduce the house’s utility bill.

After all the rebates and incentives, the price for a typical system is likely to be around $20,000. That’s like prepaying the utility bill for a quarter century. It may or may not be the right decision for a homeowner. If taking on the financing of $20,000 seems unrealistic, solar is still more possible than ever, thanks to other really interesting and exciting new options that make a lot of sense and will help make the use of solar energy more accessible. They include (1) volume buying, (2) power purchase agreements (PPAs), and (3) publicly-funded plans.

Until last year, solar panel prices were elevated by a scarcity of silicon, a vital semiconductor ingredient. Demand was greater than supply because the supply of refined silicon was inadequate and, at the same time, Spain radically ramped its demand up with its very generous FiT.

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The industry rapidly ratcheted up its silicon refining and panel manufacturing capacities. Then, the burden of the FiT became too great for Spanish ratepayers, especially in the context of the global financial meltdown. Spain lowered the amount of megawatts on which it would pay the subsidized tariff. Demand immediately dropped off. Prices followed. Spain wound up with a decreasing installed capacity and the world wound up with shelves full of solar panels.

Volume sales are now the only real answer for the solar industry. Enter California’s more aggressive New Energy standard and the FiT. Executives for solar industry powerhouses such as SunPower and Suntech Power Holdings favor the FiT, certain it will dramatically increase installations in California, their biggest U.S. market.

On top of all the other savings available from federal, state and local incentives, the FiT offers solar system buyers the potential to earn income from the electricity their panels generate. It is expected to be an offer too good to refuse.

There are few better resources for learning about the FiT than Paul Gipe’s authoritative and comprehensive Feed Laws page. It is everything, and far more, than anybody could ever want to know.

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QUOTES
- Tom Werner, CEO, SunPower: "I think the feed-in tariff in California is a step in the right direction (for) customizing policy to the market segments…"
- Steven Chadima, U.S. vice president of external affairs, Suntech Power Holding: "I think it's definitely worth a shot [to get an EU-strength FiT]…But there's this belief or legal opinion that that's not possible to do…"
- Benjamin Salisbury, analyst, FBR Capital Markets: "[The] feed-in tariff could be an important RPS tool."