Monday, November 29, 2010

Solar incentives and Other Market Distortions

The government in its wisdom has determined that solar, wind and geothermal sources of renewable energy are to be encouraged either to prevent global warming or for energy independence. Tax incentives and rebates targeted at end users were created to encourage the adoption of inefficient and costly technologies like solar panels. To purchase and install a 7.36 KW solar array consisting of 32 Sharp 230 watt solar panels, 32 Enphase micro-inverters and mounts was $57,040. The engineering and permits cost $1,500 for a grand total of $58,540 out of pocket. A rough estimate using the DOE model of my savings on electricity is $1,400 per year. That is an under 2.4% return on my investment each year. Not a very attractive investment. To encourage the solar voltaic industry, the federal and state government offered incentives.

The 7.36 KW are equivalent to 6.2 KW PTC. I managed to reserve 6 KW PTC Renewable Energy Rebates from Virginia and on completion of installation, inspection by the county, and sign-off by my power company, NOVC, I filed my paperwork with the state and received my renewable energy rebate of $12,000 from Virginia. This payment may or not be taxable income. When I file my federal tax returns at the end of the year, I will have to fill out a special form and maintain copies of all the documentation for my federal tax returns as well as evidence that Virginia paid my Renewable Energy Rebate to obtain my 30% tax credit of $17,562. Thus, from the original installation cost of $58,540 I subtract the Virginia Renewable Energy Rebate of $12,000 and the 30% tax credit of $17,562 and my total out of pocket cost for my solar system after the first year is $28,978. which ups my return on investment to almost 5% a year.

In addition, some state governments have required electricity distributors to take measures to reduce the amount of fossil fuel used to generate electricity and increase the amount of renewable energy used within their energy mix. This is called the Renewable Portfolio Standard and utilities can meet their requirements by either investing in renewable technology directly, or purchasing the renewable energy credits from others. Power generated by renewable energy sources (like my solar photovoltaic system) is tracked by a state created authority and given a certificate of production. Then, the Solar Renewable Energy Credit, SREC, can be traded on the open market to allow utilities to meet their Renewable Portfolio Standard, RPS, that are required to offset their carbon-emissions. A SREC is not electricity, it is a credit for energy produced and used elsewhere. SRECs have value only because RPSs require that a portion of energy produced by a utility be produced by renewable power.

Utilities in the state buy SRECs from solar installation producers. It is a way for states to ensure that the upfront cost of solar power is recovered from utility companies (and ultimately from the consumers). Some states, like New Jersey and Maryland, require their utilities to buy SRECs only from residents of their states creating a closed market where the price is kept high. Other states, like Virginia, have no current RPS requirement. Still other states, like Pennsylvania allow their utilities to buy their RPS from any resident within the PJM regional transmission organization. The power in the grid is purchased and sold on a regional basis, so I suppose there is some logic to a regional SREC market. This is a virtual market place where virtual commodities are sold by virtual companies. Only accounting entries change hands in this market.
In order to produce SRECs, a solar system must first be certified by state regulatory agencies, usually public service commissions or public utility commissions, and then registered with the state authorized registry that creates and tracks SRECs. Once a solar system is certified with the state agency and registered with a registry such as PJM GATS, SRECs can be issued using either an estimate table or actual meter readings depending upon state regulations and the type of meter used. My solar meter has to be manually read, and thought the power production of my panels can be monitored online; the PJM GATS uses estimated production for residential installations. In most cases, smaller installations are able to use estimates, while actual meter readings are required for large installations.

Within the PJM (where my house is located) I can currently sell my SRECs to utilities in Pennsylvania and Washington, DC. I can sell my SRECs on the spot market or I can shop for a long-term SREC contract. The discount for a long term contract is huge because the market is not well established and potentially risky. The value of SRECs will go up and down depending on the supply and demand as determined by the number of solar installations, states requiring RPS, and states allowing sale within the PJM regional transmission organizations. RPS requirements are currently set to increase over time, but regulations can change. SRECs in Pennsylvania have ranged from $200-$300 per megawatt hour. So after having my system qualified in Pennsylvania, I could earn an additional $2,000-$3,000 a year for 15 years or as long as the demand for RPS lasts which ever is less. Under the federal incentives (what my husband lovingly calls Al Gore funny money) I can sell SRECs for 15 years assuming that there remains a market for SRECs in the future. So my return on investment could double or triple depending on the value of the SRECs.

SRECs are not physical entities, but merely a credit for having made power (I used all the power produced by the panels in my own home) their value depends entirely on regulation which can change over time. There is a certain risk that SRECs could become worthless at any time if regulations change because SRECs are nothing real. Of course they could become worth more. Meanwhile, I will continue selling SRECs on the spot market. After looking into creating an account for my SRECs in Pennsylvania and Washington DC, I ended up signing up with a service to manage my SRECs for 5% of the sale price. After investigating the market, I discovered that there are tremendous inefficiencies, a few young companies and not a lot of operating history. I ended up taking a bit of a flyer on SREC Trade, a small operation out of San Francisco after checking references with the state regulators. So far it is working out. I have successfully been registered in the Pennsylvania and Washington DC markets and have received three checks so far for the sale of my SRECs.

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