The Lights Go On For Government Incentives for Solar Energy

The march to solar energy is on – and the United States has a lot to do to catch up with some other countries that are leading the way. Although there are those would like to think that the desire to reduce one’s carbon footprint is sufficient to convince Americans to go solar, the experience in other countries shows that only cold hard cash, and not the sun’s rays, will convince consumers to leave their fossil fuel lives behind.

Solar Energy Miniscule Part of Our Energy Portfolio in the US
Recent reports trumpet the dynamic growth in the solar industry, but the efforts are paltry compared to the potential of solar energy. According to the Energy Information Administration, renewables represent just 7% of the energy consumption within the United States – and solar represents just 1% of the renewables. You do the arithmetic: 1% of 7% is not much and the United States will have to make tremendous strides to make solar a staple of energy consumption. Even a goal of 1% of our energy portfolio from solar energy will be elusive without extensive government support.

We lag far behind other countries in which solar and other renewables have already assumed a prominent place in state policy to build a less fossil fuel dependent future. In Germany, for example, the leading solar country, 5.0 gigawatts of solar electric power has been installed, compared to 1.5 gigawatts in the United States. Germany’s adoption of solar energy is not shabby for a country whose capital is about the same latitude as that of Edmonton, Canada.

New technologies and higher cost of electricity and gas push parts of the country to grid parity, the point at which the unsubsidized cost of solar energy is equal to or less than traditional electric power. Nevertheless, the major driver to building the solar industry is government support, or as some may call it, government intervention. This intervention may take the form of government incentives and mandates, carrots and stick.

Renewable Portfolio Standards
State governments have set goals and even mandated utilities to generate a certain portion of their power from renewable energy. Under its renewable portfolio standard, for example, New York set a goal of 25% of their power from renewable energy by 2013. By executive order, California adopted standard requiring utilities to obtain as much as a third of their power from renewable energy sources by 2020. At the federal level, under the original version of the proposed Waxman-Markey American Clean Energy & Security Act, which is now pending before the Senate, 20% of the power in the US would have to be generated by renewable energy by 2020—which is exactly the same as required by the European Union’s directive on the use of energy from renewable sources. The bill originally introduced in the House has been substantially watered down and will likely be further watered down before it is eventually passed sometime next year.

State and Federal Economic Incentives Substantial
Economic incentives from the federal, state and local governments, as well as some local utilities have generated renewed interest in the solar industry and some say that there has never been a better time to go solar. Here in the US, we have generally relied on credits and rebates. The federal government removed significant limitations on the federal credit late last year and has now extended the 30% credit for solar energy projects through 2016, without any cap on the amount, creating a stable regime of incentives at the federal level for the next seven years.

States have offered a variety of incentives to entice homeowners and businesses to go solar. Some of the largest incentives are in New York and California, which pay up to $2-$5 per kilowatt. An average PV system can cost $30,000-$50,000 and have a capacity of 4-6kW. The federal credit and state rebates with local utility incentives can combine to offset more than 60% of the cost of the installation.

Feed-In-Tariffs Gaining Some Traction in the US
The European countries have used a very blunt – and effective device to promote solar energy through what are known as feed-in-tariffs. Feed in tariffs guarantee a fixed rate at which the utility will pay through the life of the system. The guaranteed rate of return can be as high as 8%, not too bad when compared with a current certificate of deposit 60 month rate of 2.7%. These feed in tariffs made Spain look like a free for all – until the rates were revised significantly downward and the solar market in Spain tanked with the end of the generous subsidies. Earlier this year, Vermont became the first state in the US to enact a feed in tariff. As the U.S. Department of Energy aptly notes on its website, “The difficulty with any feed-in tariff is to set a standard offer rate for each technology that meets the goal of encouraging renewable energy deployment without providing an excessive profit to the system’s owner.”

Financing a Solar Energy System Still Elusive
Even with this support, financing a solar array on one’s roof looms often as an insuperable hurdle. Even if $25,000-$30,000 of the overall cost of $40,000 for the installation will ultimately be paid back to the homeowner, someone still needs to advance the money. This is a tidy chunk of change to expect the homeowner to come out of pocket for as long as 18 months. In a survey that we administered to installers in five states, the installers listed lack of financing as the number two reason—behind the expense of the installed cost of the system—for consumers to defer the decision to go solar. Consequently, some of these government incentives remain theoretical more than practical without financing.

The City of Berkeley, in California has responded with a creative financing solution by offering financing that will be repaid through annual real estate tax assessments for 20 years—which survives any transfers of the property. The program is in its pilot phase but offers one creative approach to financing, although it is not likely to be adopted widely.

Mandated Solar Standards Should be Adopted
We need to rationalize our system of incentives. Nothing better gets the adrenalin running—and the lobbyists busy—like a mandated standard such as fuel efficiency standards, which when accompanied by government-supported research and development dollars produce enduring results. Modest feed in tariffs offer a good alternative to rebates, but when they are overly generous, they promote a boom and bust cycle. Credits only work for those who have a tax liability. And financing still remains a substantial obstacle. But without significant government support, solar modules will remain useful only on the International Space Station—and not on our rooftops where they belong.