Doing Solar Incentives Right

Different solar incentives encourage different types and locations of solar installations.  Better solar installations will result if we first decide what we want from solar, and then choose the solar incentives we use to match.

Tom Konrad, Ph.D.

Choosing Carefully

This article is based on a presentation I gave at Solar 2009 [11.7 MB].  As with wind, the current incentives for Solar photovoltaics are good for encouraging more solar, but they are less effective at encouraging better solar.  Jigar Shah, founder of SunEdison and Jigar Shah Consulting, told the audience that they should be very careful in calling for a Feed-in-Tariff for solar, saying that “Pigs get fed, hogs get slaughtered,” in his keynote address at that same conference.  He was concerned that Germany might become the market of last resort for solar PV because of the supply glut in 2009, and that their government might decide to put a hard cap on the total installations under Germany’s Feed-in-Tariff in response.

What do We Want?

Before we advocate for a solar incentive we should look at what we want the incentive to accomplish.  I don’t mean the obvious facetious answer “more solar.”  James Groelinger, the former President and CEO of EPV Solar, speaking on a panel on investment opportunities in solar, said, “What counts is not modules, systems, megawatts, or capacity; it’s energy…. in America we’ve been rewarding watts installed, while Germany is rewarding kWh produced.  Germany gets approximately 50% more kWh per watt installed than the US, after adjusting for the lower solar resource.”

I agree that the relatively low energy production on US systems is probably an indicator of perverse incentives, but Solar should not be considered as solely an energy resource.  For instance, the correlation of PV output with demand is valuable in its own right, and the greater that correlation, the more valuable the energy produced will be, even if greater correlation comes at the expense of slightly lower output.

We should look at what we want from solar.  We should ask, “What are solar PV’s benefits and weaknesses compared to other technologies?”  How important these benefits and disadvantages are greatly depends on how solar is installed.

A look at current incentives show that more could be done to take advantage of more of these incentives.

Incentives for energy production

Many incentives for solar involve direct payments per kWh produced.  These include Renewable Energy Credits (RECs) which consumers often use to buy green power, Renewable Electricity Standards (RES), Feed-in-Tariffs (FIT), such as the one just passed by Ontario and the one in Germany which James Groelinger credits for the higher energy output of German solar farms.   Such incentives clearly encourage production of more energy (kWh), but by not differentiating between when or where the energy is produced, they can lead to perverse incentives.  Energy production incentives typically lead to:

1. South-oriented panels which produce more, but often lower-value, electricity than panels oriented to the southwest.
2. Large clustered farms which may have quick fluctuations in output when a cloud passes over (cloud transients.)  A recent study, Quantifying PV Power Output Variability presented by Tom Hoff  on the same panel where I presented showed that, if a cluster of PV installation  is sufficiently dispersed (relative to cloud speeds), the variability of solar output from cloud transients will be reduced by a factor of approximately the square root of the number of installations.
3. Installations may cluster on the wrong distribution feeders.  If a local electric substation is nearing its capacity at peak times, placing PV on the distribution system of that substation can allow the utility to delay a very expensive substation upgrade.  On the other hand, most new substation are likely to have significant extra capacity, and placing PV in the areas served by that substation will force the utility to pay back the investment on that substation over a smaller number of kWh, a problem referred to as stranded assets.
4. The carbon intensity of the electricity displaced by power from PV will vary with time, and, if cloud transients mean that gas turbines must ramp up and down quickly, that will also decrease turbine efficiency and change the carbon intensity of displaced electricity.

From an economic perspective, it makes sense to subsidize peak power production which can help delay a substation upgrade more than pure kWh production, especially if it is from an installation which might strand transmission and distribution (T&D) assets.

Net Metering

Net metering, or allowing the PV owner to sell electricity back to the grid at the same price he pays for it, is also a subsidy.  Net metering may not compensate the utility for the cost of making sure that the power is always there, depending on the tariff.  This is especially true on typical flat-rate residential tariffs, where payments are typically a fixed price per (net) kWh used, and produces incentives very much like the Energy Production incentives discussed above.

A Time-of-Use (TOU) tariff, where a kWh produced when demand is high receives a much higher value than one produced when demand is low, is much better for compensating the utility for the demands a user places on (or removes from) the system.

In contrast, a typical commercial or industrial tariff, which is based on a low charge per kWh, but a large demand charge payment based on the highest 15 minutes of demand in any given month, can produce very perverse incentives.  Because of cloud transients, PV systems seldom will do much to reduce demand charges, and the low energy payment does little if anything to compensate for the PV investment.  This means that many otherwise ideal spaces on commercial properties are not economically viable for PV installations.  Ron Binz, the Chairman of the Colorado Public Utilities Commission, uses the example of the corners of square farm fields which are irrigated by rotating sprinkler irrigation.  Since farms are normally on demand charges in Colorado, these large areas of otherwise unused, flat space near electric distribution infrastructure are
unavailable for PV installations.

Creative tariff structures might be used with net metering to help distribute solar where it could do the most good in helping to defer T&D upgrades.  This could be done with higher per kWh charges for T&D in areas which might soon need T&D upgrades, but probably is not politically possible because of concerns about fairness.

Incentives to Reduce Carbon

If the goal for solar is to reduce global warming pollution, then the best way to do it will be to put a price on Carbon.  This will not only mean that a solar installation which displaces high-carbon electricity (such as coal or inefficient natural gas peaking turbines) will receive a higher incentive than an installation which displaces low-carbon electricity (such as efficient natural gas combined cycle turbines or nuclear,) but it will also take into account the high embodied energy of crystalline silicon PV (if produced using fossil fuels) relative to the lower embodied energy of thin-film technologies.

One weakness of pure carbon pricing (at least from the perspective of solar advocates) is that it does more to encourage less expensive technologies that have quicker energy paybacks.  But if the goal is to reduce overall carbon emissions, that is precisely the result we want.  To take into account the other benefits of solar, other types of incentives will need to be used in conjunction with a carbon price.

Incentives for Investment

Incentives for investment, such as the Investment Tax Credit (ITC) and accelerated depreciation, help with the high cost of PV, but if used alone, without other incentives to reduce carbon or produce peak power, may lead to many installations which don’t do much of anything, as highlighted by James Groelinger above.  They are simply an incentive to spend more on solar installations, even if the energy produced has very little value.

By reducing the effective cost of PV, they also blunt some normal market incentives.  Solar manufacturers and installers have less incentive than they otherwise would to cut costs, because their customers are only picking up a fraction of the bill.  Part of any incentive for spending on solar will go to the installer and manufacturers in the form of higher prices.  While this may be a good thing if the goal is to grow the solar industry, a large solar industry is only as useful as the solar installations it provides.

Overall, incentives for investment do not produce many distortions to incentives, and can be an effective way of reducing the cost of solar, so long as they are used in conjunction with other incentives which will assure that the solar installations produce valuable power.

Conclusion

If we want to encourage solar,  we can, and there are many potential benefits to society.  By understanding those benefits, and by not being blind to the drawbacks of solar, we can design incentives which encourage just those benefits we want at relatively low cost, both in terms of price and in terms of the costs that the electric system must bear to integrate solar.

Ask for solar, but be careful how you ask.