Monday, November 23, 2009

Choosing Solar Power

Solar Photo Voltaic panels are one of the least cost-effective ways of reducing your use of non-renewable resources. The only way these systems get installed are by all of us subsidizing the cost. This is accomplished by tax credits, state rebates, and renewable energy credits. A tax credit is generally more valuable than an equivalent tax deduction because a tax credit reduces tax dollar-for-dollar, while a deduction only removes a percentage of the tax that is owed. The American Recovery and Reinvestment Act of 2009 extended the tax incentives under the Energy Policy Act of 2005 (EPACT) and eliminated the limit on the credit. Rebates from the state are an inefficient return of tax dollars paid because it requires administrative costs to funnel the dollars back from the stimulus package, but does ensure that the systems were actually installed. Finally, SRECs, solar renewable energy credits, are payments to the owner of a renewable energy system from a utility. They are currently greater than the value of the energy created. This is only possible because the utilities are required to have an ever increasing portion of their generation of power from renewable sources. To meet this requirement the utilities must buy the RECs and in turn charge all their customers a higher rate to cover the cost of the RECs. RECs paid in cash to the Solar PV system owner, increase the utilities' cost to operate, and thus, the cost they charge per kilowatt goes up making my solar system more valuable to me.

Though I want a solar system, I am concerned that my decision is based primarily on government incentives. Making an economic decision based on tax incentives, puts me at risk of capricious government action leaving me stuck with the economic reality of my decision if the tax incentives should be modified. Choosing solar now only makes sense based on the incentives and RECs. Then there is the problem of cash. In order to proceed with a 5 kilowatt project I would need to have about $40,000 in cash to pay for the Solar PV system, and then in turn I can reduce the taxes I pay the federal government next year and the years beyond by $12,000 (this is not a refundable tax credit) and can receive a rebate from the state from the state for about $7,700. The RECs will pay quarterly for at least four years and the power savings will be for the life of the system. Nonetheless, I will still have to pay (net assuming I navigate the rebate and tax credit requirements correctly) a bit more than $20,000 in cash. The estimated power savings of the system would be about $760 per year.

Solar PV systems and solar thermal systems for heating water will not save enough from electric (or gas) bills to make them financially viable in a homeowner's lifetime. There is an argument for installing solar panels but it is not an economic one. The various financial incentives provided by the government make the cost palatable. The incremental change in the use of fossil fuels because of the installation of solar panels will not prevent climate change, but the increased cost of power to consumers may reduce their use of power. These tax incentives seem geared to increase conservation of energy by increasing the cost of power. The reasoning presented is we are allowing the solar industry to develop better, more efficient products by encouraging and subsidizing the installation of Solar PV and thermal systems. The federal stimulus program is just “priming the pump” with a few billion dollars in federal money and an unknown amount in REC payments from utilities in order to make solar power economically feasible in total cost. In doing this we are burning the financial resources of the country in hopes of building a self sustaining solar industry. This makes me uneasy. The government incentives to home ownership ended up encouraging irresponsible behavior on the part of lenders and individuals and excesses that resulted in the real estate mess we are in now. I am trying to anticipate the types of problems that might result from my Solar PV system. Since I am looking only at the personal downside the analysis is much simpler.

The first thing is to make sure that I qualify for the federal tax credit, i.e. you would actually pay 30% of the total cost of the Solar PV system in taxes next year or beyond. Remember, you are going to have to pay the money upfront and reduce your withholdings or apply for a tax refund for the 2010 tax year in 2011. You might be out of pocket the money for the solar system for a year or more. There do not seem to be any more restrictions, no limits on income or the cost of a system. The state rebate in Virginia is limited by the $15 million in stimulus funds that the Commonwealth of Virginia has allocated to the program. In order to obtain a rebate, you first have to sign up and be accepted. This is a very simple procedure to ensure that some of the stimulus money is reserved for you. You can go to the website and sign up with little more than your name, address and type and size of system you intend to install- if you are serious about installing solar. Do not sign up until you have done enough research to be seriously considering the installation and only sign up for the size system you can afford or your home can support. Otherwise you will be tying up funds other people could use. Your request to conditionally reserve funds from the Virginia Renewable Energy Rebate Program will be immediately approved as long as funds are available. You then have 180 days to actually install the system and meet all the requirement of the program to obtain your rebate. Signing up only guarantees that there is still money available for your project not that you will receive the rebate. My reservation for funds has been conditionally approved. I am obtaining bids, reviewing references and checking contractor licenses for complaints, and looking for reviews of solar panels. The selected contractor will have to provide me with evidence of liability insurance, workman’s liability insurance (they will have people on my roof), and a bank reference. In these tough economic times, I can not afford a contractor to go bankrupt in the middle of my project. The delay could cost me the state rebate.

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