NewEnergyNews: ORIGINAL REPORTING: THIS IS WHAT A WELL-FUNCTIONING RENEWABLE REBATE PROGRAM LOOKS LIKE

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    Tuesday, January 13, 2015

    ORIGINAL REPORTING: THIS IS WHAT A WELL-FUNCTIONING RENEWABLE REBATE PROGRAM LOOKS LIKE

    This is what a well-functioning renewable rebate program looks like; In California, subsidy cash is going to consumers, but questions remain on solar pricing

    Herman K. Trabish, November 6, 2014 (Utility Dive)

    New metrics have uncovered something unexpected about the solar rebate program administered by California's utilities: It works.

    The California Solar Initiative (CSI) is driving a market growing so fast it has set other policy and business issues in turmoil. Yet its rebates are going not to solar companies, financiers or other profit-grabbers but to the solar customers they are intended for, according to new research.

    The overall historical pass-through rate for the California residential PV rebate programs varies from 92% to 103%, with a mean rate of 99%, according to Incentive Pass-through for Residential Solar Systems in California, a study from researchers at Lawrence Berkeley National Laboratory (LBNL) and the University of Texas at Austin.

    Pass-through rates signify how much of a given economic incentive is passed on to consumers, rather than being absorbed by other entities. For instance, if solar installers do not raise their pre-incentive prices to account for available tax credits or other incentives, and instead pass the entire value of the credits to the consumer, the pass-through rate would be 100%. If they raise their prices and retain some of the incentive, the rate falls below 100%.

    As the goal of these incentives is to improve the customer economics of solar, researchers say, a rate near or above 100% means a subsidy is working well to reduce consumer costs, and not simply line the pockets of suppliers.

    “We used a couple of different methods to increase confidence in our results but we found quite high levels of pass-through,” said LBNL Senior Researcher Ryan Wiser.

    The incentive system works, but why?

    CSI and its predecessor, the Emerging Renewables Program (ERP), are together the biggest and longest-running residential PV state incentive program in the U.S. Their numbers show California’s utilities are running “a well-functioning subsidy program,” according to researchers, and that the state's market has stayed competitive.

    “PV installers in California have considered CSI and ERP rebates as exogenous factors when making pricing decisions,” according to the research, rather than raising prices to compensate.

    The high level of pass-through surprised Wiser. Designed during the administration of former Republican Governor Arnold Schwarzenegger, the gradual, predictable CSI rebate step-downs were each a “relatively small drop in the level of the state incentive,” the report notes.

    That gradual decline could be a factor in the rates. “There may be little opportunity or motivation for installers to manipulate their pricing behavior in response to such small and somewhat-gradual rebate changes,” the report suggests.

    "That transparent step-down rebate design has indeed worked," agreed Vote Solar West Coast Regional Director Susannah Churchill. "The rooftop solar market continues its high growth today largely without CSI rebates."

    It could also be that California installers have been competing “more on quantity than on price, taking rebate step-downs as an opportunity to increase sales in advance of the step-down,” the report notes.

    Researchers say two factors limit their conclusions.

    “First, we were focused on customer-owned solar systems and the findings don’t include third party owned systems,” Wiser said. “And we were narrowly focused on the CSI and ERP rebates and not looking more broadly at value-based pricing.”

    Third party owned solar

    It was necessary to exclude the large segment of the market represented bythird party owned (TPO) systems because it is so difficult to be certain of their cost, Wiser said. A customer-owned system’s price is contractually established. The customer pays little or nothing up-front for a TPO system and makes on-going annual payments.

    There are two major approaches to establishing a TPO system’s cost. In the first, contractor-partners install and sell systems to TPO solar innovators like Sunrun, Wiser explained. That contractual transaction price is what Sunrun uses with its financing partners and for claiming rebates and incentives.

    TPO market leader SolarCity, on the other hand, installs its own systems. There is no transaction price. Instead, SolarCity has used a “Fair Market Value” to establish the amount of the 30% federal investment tax credit and CSI rebates, Wiser said.

    “The FMV is what SolarCity is able to sell the system to a TPO financier for. But it has little resemblance to the actual value of the system.” Such appraised value numbers “are almost impossible to interpret because they only have a very weak relationship to the underlying cost,” Wiser said.

    Value-based pricing

    LBNL researchers have already begun addressing value-based pricing and it will be a focus in a forthcoming paper. “Value-based pricing,” Wiser said, “asks if installers price systems on the aggregate benefits to customers.”

    A California customer "receives a very large state rebate, the 30% federal ITCand high electricity bill savings,” he explained. “Would that customer pay more than a customer in a different state where there is no rebate and retail rates are much lower?

    It is clear customers will pay more in Hawaii than in Nebraska because they get more value from solar there. “But do installers price systems higher in Hawaii than in Nebraska because they can get away with it?”

    Wiser and fellow researchers have moved beyond rebates and added multiple factors that might explain price variability in residential rooftop PV. “Is it technical characteristics? Is it value-based pricing? Is it the level of installer competition? Is it market power in some other form? Is it installer experience? Is it demographics?”

    The mystery in PV pricing

    But after including every plausible factor, “we are only able to explain something like 35% of the variability in PV system prices,” Wiser said. “There is something else going that we can’t discern through the statistical method. There are other variables out there really critical to understanding this issue. But if there is so much of the picture we can’t explain, how much can we really know about the things we think we CAN explain?”

    Whether it is a utility rebate or a state rebate doesn't seem to be a factor, Wiser said. "The CSI rebate is a state rebate but it was administered by the utilities. There isn’t an important distinction.”

    What is clear is that about 99% of the time, installers did not change system prices when CSI incentive levels changed. “That suggests," Wiser said, "that the price is based on the cost of the system and not on the level of the rebate."

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