Thursday, January 14, 2010

An Argument Against Feed In Tariffs For Solar PV Development

An Argument Against Feed In Tariffs For Solar PV Development
Stephen E. Morgan, CEO American Clean Energy, LLC

I just finished reading a White Paper from Enterprise Florida and GTM Research titled “Emerging Trends In The U.S. Solar Market” which posits that the nascent PV development in the country could be hastened by the development of Feed In Tariffs. The paper can be found on their site at

I happen to agree with a number of the points developed in the paper. Namely that the US market is growing rapidly, that prices are falling, that the market is flooded with new entrants and a diverse array of market strategies and regulatory structures is emerging, among others.

As in any nascent and developing market, there will be noise and opinions will abound as to the best path forward. When examining those options however, the discussion is best informed by looking at all of the relevant issues and considering the implications of the proposed solutions.

The author of the paper correctly describes the utilization of Feed In Tariffs (FIT) in Europe and elsewhere as an effective vehicle for supporting the development of solar PV deployment in the US. Unfortunately, he does not consider the very real effects that such a structure would have on the US energy market place, regulatory regimes or the end use customers.

We can forget the failed Spanish experiment for a moment and look at a well known example—Germany. It is said that 41% of the world-wide deployment of Solar PV exists in that country and many point to the FIT as the reason. If we look at readily available information from the International Energy Agency (IEA) it is apparent that consumers in Germany, on average, use one half to one third the energy per capita that we consume in this country and they pay between 4 and 6 times more per kWh consumed compared to a US consumer.

Germany, in fact many of the European UECD nations began after the oil embargo in 1973 to ratchet up the price of energy in all forms. The United States, as a policy initiative did not. They spent the last 25 years closing the gap in price between traditional and alternative sources of energy, we did not.

In fact, if you take a quick look at US Energy Information Administration (US EIA) data since 1960 you will see that the CPI adjusted average retail delivered price per kWh in 2007 is the same as it was in 1960-nearly 50 years later! In other words, the price of electricity is directly indexed to GDP during that period and per capita consumption of energy has grown tenfold! By the way, this is not a startling revelation to those of us who spent time in the energy business during those decades.

So, while electricity prices in western European nations was increasing and per capita consumption was dropping, our prices were essentially held fixed and consumption per capita increased dramatically. These facts are important to any discussion as to an appropriate market support mechanism and the reason is simple arithmetic.

The author of the paper cites a number of FIT scenarios but using the one from the Gainesville Regional Utilities will serve to illustrate the potential outcomes form broad based implementation of an FIT mechanism. I will turn to my state, New Jersey, which by many accounts is the second leading US market for Solar PV deployment.

The State of NJ has a Renewable Portfolio Standard in place that requires 22 ½% of all electrical energy to be renewable by 2020. Within that RPS is a mandatory 2 ½% solar set aside. The State also has an Energy Master Plan in place that aspires to achieve 30% renewable by 2020.

The gross average retail price of delivered electrical energy is just over 13 cents/ per kWh. A FIT of 32 cents per kWh translates into a 246% increase in the price. OK it is only for 2 ½% of the total right, so that means the average is increased only about a half a cent spread over all kWh delivered---not too bad and some, as this author does, argue it’s a good way to socialize the cost and support the market development.

But what happens to the result if a large portion of the renewable portfolio standard has to come from solar? If NJ is to achieve 30% of its delivered energy from solar to satisfy the RPS at an FIT of 32 cents per kWh then it is more akin to a 246% price increase to a third of the energy delivered and that translates into a price increase of over 80% to all energy delivered if it is spread as I suspect it would have to be through some socialization mechanism.

I would point to the recent events that have unfolded in states such as Maryland where dramatic price increases were tried and failed. It is not a pretty picture and more importantly it is not necessary.

For those who are champing at the bit to argue that the EMP goal of 30% will not come from solar I ask a few simple questions. It is now 2010 so we have basically ten years to achieve the aspiration. It takes 1 to 2 years to get met towers installed to begin the permitting and siting work for offshore wind and another 5 to 7 years to get construction completed (assuming no interventions stop the train in the station—a big if in my book). We will have eaten up the largest part of the decade with no meaningful contribution from wind. The Pro Nuclear folks know as well that the next generation of Nuke plant is not going to get built anywhere close to that time frame if ever. Biomass in any scale is not likely to get built in NJ and landfill methane can only get us nominal energy contributions.

Where is all that energy going to come from? The answer is Solar and the reason is simple. Solar is rapidly deployable. Once all of the financial uncertainty is dealt with in an acceptable (to the investors who must risk capital) manner there are no barriers to deployment. The technology is not nascent, it is well developed and the construction and operation is not a new problem to be solved.

Moreover, there are many other reasons to believe that solar development can and should take up the bulk of the RPS in New Jersey. In addition to the ability to rapidly deploy this technology, the solar array output very closely matches the residential and commercial load profiles responsible for over 80% of electricity consumption in NJ.

Solar deployment distributed throughout the load center solves a long standing dilemma for utility engineers in the state. While energy consumption growth in NJ, like the US as a whole has been a modest 1 to 2% compound annual growth rate, demand growth has been 5 to 7%. Because the local Energy Delivery Companies (EDC’s) are required to serve that demand, they must make capital investments to increase capacity. At this growth rate they have to double installed capacity every ten to 15 years. But, and here is the rub, that demand lasts generally less than 100 hours per year on only the hottest days of summer, and the investment is recovered through a kWh delivery charge. This can translate into a capacity utilization factor well below 50%. Do the math, the investments can never be truly recovered over their economic life using a fixed kWh charge that applies to throughput that only exist for one percent of the hours available. Under the current regulatory regime there is no practical way to properly incent the utilities to build that capacity but even if there were we would have to argue that it is an uneconomic investment and one that standard engineering economics would argue should be avoided.

Distributed solar arrays, sited at host facilities and serving the partial energy needs of the host provide a benefit to all customer classes because they allow the EDC to avoid an otherwise uneconomic investment that will someday, someway have to be borne by rate payers. More importantly though, it allows that value to get monetized in a way that regulators and EDC’s can’t, through avoidance of cost. This cost avoidance translates into delivery price stability going forward perhaps even cost reductions as asset book values depreciate and are not replaced with new capacity. Existing capacity becomes more fully utilized and therefore economically efficient. A byproduct benefit is the reduction of total system delivery losses and the need for VAR support to carry these heavy distribution loads for peak hours during a day.

Those who are following the NJ market know that nothing comes for free. Obviously the market support for solar PV development has to come from somewhere. That somewhere is the combined effects of the federal ITC/grant, accelerated depreciation treatment and flow through tax benefits, and a marketable Solar Renewable Energy Certificate (SREC).

We can set aside discussion of tax incentives and depreciation tax benefits because they apply to all arrays across the country. What makes NJ unique is the SREC which becomes a marketable commodity with very specific benefits to project developers and customers. While it is true that the SRECs must be purchased by the energy suppliers in the state on an increasing schedule to match the RPS, those costs will naturally be spread over the term and factored into the forward price on a three year forward averaging basis as a result of the BGS auction process that currently exists in NJ. This will reduce price volatility and smooth out the increases. But, because energy producers are in competition, there are a number of forces at work in favor of moderating consumer price shocks.

Post-deregulation of the production and delivery components of the electric utilities, NJ like other states, has lost the ability to do integrated resource planning. The burden for this has generally fallen to RTO’s who, I would argue look only for cost plus solutions—build new Transmission or generating capacity. The SREC requirement will create an opportunity for producers to buy credits in long term, stable forward markets and make decisions with regard to production capacity based upon optimizing the fuel and SREC mix. If we could get to a national RPS with nationally traded SRECs that market place would become larger, options to producers would be greater and the optimization could occur over a larger region and across any number of production assets—all good for consumers.

In conclusion, while I agree that the US can and should support the emergence of a robust renewable energy marketplace and that should place heavy emphasis on solar PV deployments, we should carefully examine the impacts-intended and unintended-that any proposal is likely to create.

There may not be a one size fits all solution. What works in a regulated state may not work in a deregulated state or at least not the way intended. Before making wide eyed comparisons to other places and other situations, we need to examine the underlying factors that create unique problems and opportunities. When considering whether Feed IN Tariffs will work on a large scale in this country we should consider likely price impacts to end use customers.

I prefer the New Jersey model because it deals with these and other issues. We undoubtedly will deal with increasing energy prices in the future—the reasons are many and are the subject of another article. Using the SREC vehicle both supports the development of a nascent industry while giving producers an incentive to optimize fleet operations and fuel mix, avoids otherwise uneconomic G,T and D investments and creates savings in future energy delivery rates that consumers and regulators cannot otherwise take advantage of.

The author:

Steve Morgan is currently CEO of a New Jersey based renewable energy company focused on solar PV deployments in the commercial, industrial and public sectors.

Prior to joining American Clean Energy in 2009, he spent over three decades in the electric utility business in engineering, operational and executive management positions. He retired in 2009 as the president and CEO of Jersey Central Power and Light Company, a wholly owned subsidiary of FirstEnergy Corporation and the second largest electric company in the state of NJ with over 1500 employees and 1.1 Million electric customers
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