Solar Panels, SREC’s and Public Utilities

from WSSC

Last week in the Washington Post was an article by Katherine Shaver about the Washington Suburban Sanitary Commission’s (WSSC) solar farm. The WSSC plant in Montgomery County, Maryland has 8,500 solar photovoltaic panels covering 13 acres of land that began operations last fall and is expected to save the WSSC 25% of their electrical costs. They WSSC expects to save $3.5 million over 20 years without a single dollar outlay, while neighboring Fairfax Water found that even with today’s low solar photovoltaic panel prices that the solar project they considered would require 36 years of operation just to break even. How is that possible that two adjacent utilities have found such vastly different economics of solar photovoltaic installations? The answer is financial incentives provided by the state and paid for by the electric utilities and their rate payers.

Solar incentives exist in Maryland, but not Virginia. Some of the rebates are state wide, others are county incentives, there are rebates based on sales of SRECs which in turn are based on the power produced by the solar panels. A SREC is a credit for each megawatt hours of electricity that is produced, but used elsewhere. SRECs have value only because some states have solar set asides from their Renewable Portfolio Standards, RPS, which require that a portion of energy produced by a utility be produced by renewable power. Maryland has such a set aside. Maryland has a healthy and robust SREC market because they have both a significant solar carve out for solar that will be 0.35% of the RPS in 2014, a market that is open only to solar installations located in Maryland and a current $400 Solar Alternative Compliance Payment, SACP. The SACP is the amount that electric utilities, must pay per MWh of solar electricity that they are required to have, but are unable to generate themselves or buy rights to through SREC purchases to meet the state RPS solar requirement. In other words, the SACP is the maximum value of an in-state SREC. The minimum value is based on the supply. Right now Maryland has 153 MW of installed and registered in-state capacity with a 2013 requirement of 136.5 MW solar requirement under the RPS, but that requirement will jump to 194 MW in 2014 so the market will once more be under supplied and SREC value should approach the SACP price.

WSSC is engaged in a solar leasing contract with Washington Gas Energy Systems who actually paid the $12 million to install the solar panels on the WSSC land and will maintain and service the installation. The solar leasing companies are profit making enterprises that excel at managing, government guarantee loans, rebates, incentives, tax credits and SRECs, to maximize their profit while providing discounted electricity from renewable sources to landowners with favorably oriented roofs or large areas of open land in locations with adequate rebates. However, many of the solar panel leasing companies have enough scale to negotiate multiple year deals with utilities to buy their SRECs reducing their financial risk and ensuring a better deal than a small generator and eliminating market risk. They can in essence they can lock in a guaranteed annual profit for setting up the deal.

There are no RPS solar requirements in Virginia, thus no value to SRECs beyond the $10-$15 that a RPS credit is worth. Thus, Fairfax Water would have to pay about $12 million dollars today to save $14 million over 20 years in addition to incur the expenses to maintain the solar photovoltaic panels and borrow the money to buy the solar panels. This is not an expenditure that would be a good deal for their rate payers. If they paid just 3% interest on the money borrowed to install the solar panels then it would cost $21 million to save $14 million in electricity over 20 years. Lack of financial incentives for solar leasing companies is why Fairfax Water cannot “afford” to install a cool solar photovoltaic panel farm to power their water treatment and waste water treatment plants. However, Virginia electric rate payers have lower electricity costs than Maryland.

Washington’s DC Water has a different problem. The District of Columbia passed a law in 2011 which prevents out-of-state systems registered after January 31st 2011 from participating in the DC SREC Market. DC is currently the only under-supplied SREC market in the nation, because of the lack of large commercial solar farms and large industrial installations. Washington DC is a city with limited non-governmental buildings and no available private land. Approximately 288 MW of solar capacity is required under the Washington DC law by 2023. The 2013 RPS requirement is approximately 49 MW of solar power. Currently, there is only 28 MW registered, and Washington DC SREC prices are the highest of any SREC market at $480/SREC. Yet, despite the very rich SREC incentive in the District, construction of solar photovoltaic arrays has been slow. The leasing companies have been stymied by the lack of locations to install solar farms and building capacity one single family home and church at a time is simply slow going and requires a lot of overhead and sales staff. DC Water’s Blue Plaines Advanced Sewage Treatment Plant own much less buffer land than either Fairfax or WSSC, but is considering installing solar panels on the waste water treatment structures to allow them to reap the benefits of the SREC based solar savings.

I am watching these developments closely because due to a bit of luck, and the soul of an accountant, I registered my Virginia based solar photovoltaic array in the Washington DC market in July 2010 and I can sell my SRECs in the Washington DC market. The dollar value of the solar power I generate from my solar panels is worth less than half the money I have sold my SRECs for over the past three plus years. However, there is no guarantee that my SRECs will be worth anything next year and as more solar power is registered in DC the value of my SRECs will decrease. A nice big installation at DC Water or the Aqueduct properties could potentially eliminate the value of my SRECs.

Solar Power, My Tax Returns and My Electric Bill

I electronically filed my tax returns and now that the threat of a government shutdown is past I am looking forward to receiving my refund from my renewable energy tax credit shortly. With my tax returns I filed form 5659 Residential Energy Credits Part II to obtain my tax credit. In summary, too 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. For the engineering and permits I paid $1,500 for a grand total of $58,540 out of pocket. (Last winter while interviewing a solar photovoltaic purchaser I discovered that the solar market is cheaper in San Francisco than Virginia which I suppose was no surprise.) Calculating the final cost of my solar panels is complicated, but I will walk you through it.

The 7.36 KW gross are equivalent to 6.2 KW PTC. I reserved 6 KW PTC Renewable Energy Rebate from Virginia and on completion of installation, inspection by the county, and sign-off by my power company, NOVC, I filled out all my paperwork, provided copies of permits, signed off inspections, invoices, technical information, contractor information and pictures of the installation, and meter and promptly (within 4 weeks) received my renewable energy rebate of $12,000 from Virginia. This payment is not taxable income, but according to the Commonwealth of Virginia, the Federal Tax instructions for form 5659, my accountant, Scott Price, and research performed by Andy Black, the payment reduces the cost basis of the solar system that the federal tax credit is calculated on. A tax credit is more valuable than an equivalent tax deduction because a tax credit reduces taxes dollar-for-dollar, while a deduction only removes a percentage of the tax that is owed. My 30% tax credit is calculated on $46,540 and was $13,962. 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 $13,962 and my total out of pocket cost for my solar system after the first year is $32,578. A rough estimate using the DOE model of my savings on electricity (I have an air heat exchanger) is $1,400 per year. That is slightly over a 4% return on my investment each year.

However, that’s not the final cost. The cost and return on a solar power system is based entirely on regulated incentives and there are more. The final incentive is the Solar Renewable Energy Credit or SREC. Each SREC is a credit for each megawatt of electricity that is produced. SRECs have value only because some states have Renewable Portfolio Standards, RPS, which require that a portion of energy produced by a utility be produced by renewable power. Utilities in some states can fulfill that requirement by buying 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 very high. Some states, like Virginia, have no current RPS requirement. Other states, like Pennsylvania allow their utilities to buy their RPS from any resident within the PJM regional transmission organization (at least for now). Still other states like California do not allow the purchase of SRECs to meet RPS requirements. I am currently selling my SRECs in Pennsylvania. SRECs in Pennsylvania have ranged from $180-$300 per megawatt hour recently. So, I could earn an additional $1,800-$3,000 a year for 15 years or as long as the demand for RPS lasts which ever is less. This past year I earned $1,045.94 in SREC income for the partial year that my panels were installed. This income needs to be reported on your tax returns. You report the total dollars received in SREC payments during the calendar year on Line 21 of the 1040 form-other income.

After the tax exercise and calculating my total return I was not feeling particularly excited about my solar panels and this was compounded by having nothing but trouble with the Enphase micro converter system that is sending a constant stream of error messages. Nonetheless, several service calls to the solar company identified the problem as a network and monitoring problem. The solar panels continue to work and produce power into the grid. The customer service for the installation company is virtually non-existent for the Enphase micro converter and the customer service at Enphase was virtually useless to me though I did buy another router to boost the signal of my internet.

Two days after filing my tax returns, I received my electric bill for $55.17 (compared to the $213.53 for the same month last year). That was a quick way to regain the joy with my solar system. Though, I have more solar panels than Ed Begley, Jr., my panels in Virginia do not have quite as many sunny (and not covered with snow) days as Ed’s panels in Southern California and in truth my multiple refrigerators and freezers and my air heat exchanger consume a lot of power. Only when my heat pump is operating within its most efficient range and cycle combined with the insulation and passive solar steps I have taken are my electric bills this low, but it still felt really good.

The effectiveness of a heat pump is based on the temperature difference between the source and the sink and which cycle it is in. Heat pumps are more effective for heating than for cooling if the temperature difference is held equal. This is because the energy used to power the compressor is largely converted to useful heat when in heating mode and released into the house as extra heat. During the cooling cycle, the condenser is normally outdoors, and the compressor's dissipated work is rejected rather than put to a useful purpose. When the temperature is below 48 degrees Fahrenheit or above 90 degrees the air source heat exchanger becomes much less efficient and my electric power use soars.

The most effective type of heat pump is the geothermal heat pump. Like all heat pumps it doesn't create heat by burning fuel. Instead, in winter it collects the Earth's natural heat through a series of pipes, called a loop, installed below the surface of the ground or submersed in a pond or lake. As you may have experienced in a cave, the temperature six feet beneath ground surface is cooler in summer and warmer in winter than the ambient temperature. Using this temperature as its source the geothermal heat pump can operate within its most efficient range at all times. In winter, fluid circulates through the loop and carries the heat to the house. There, an electrically driven compressor and a heat exchanger concentrate the Earth's energy and release it inside the home at a higher temperature. I have not been able to find any calculators of cost savings I might experience by converting to a geothermal heat exchanger, only the grand claims of the manufactures. 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 and extended the tax credit until 2016. Like solar panels, geothermal heat exchangers are eligible for an unlimited 30% tax credit and I have four years to save up to buy a geothermal heat exchanger to replace my air heat exchanger that should be near the end of its useful life by that time.