Solar Incentives Analysis: California Solar in the “Free Market”

An essay by Emily Engle, an Allterra intern.

Ralph Nader, renowned environmental and political activist stated, “The use of solar energy has not been opened up because the oil industry does not own the sun.” The U.S. energy sector is a highly subsidized market dominated by hydrocarbon fuel industries. Solar is becoming a much more tangible source of energy through government support, challenging fossil fuel’s control of electricity production. Faced with impending threats from anthropogenic climate change, the U.S. has come to realize the need to progress qualitatively for humanity’s well-being: the unsustainable reality of finite fossil fuel energy production is being combated by renewable power, with private photovoltaic (PV) solar electricity generation leading the campaign. Society’s exponential growth and ever increasing need for power in a finite world call for change in conventional energy production, bringing forth debate concerning the government’s role in the transition to renewables. The country and state have implemented policies to facilitate the adoption of renewable technologies through subsidies, mandates, and incentives promoting solar to consumers and producers. In the context of a federally conservative political climate, it is imperative to understand California’s economic based initiatives for solar photovoltaics, the inherently subsidized market in which they operate, and the subsequent effects of their implementation on the state’s solar industry.
Solar is largely seen as an altruistic technology, combating environmentally degrading fossil fuel energy production and mitigating green house gas emissions; however, it has been noted that economic benefits are the driving force behind 90 percent of panel purchases. As of 2016, the levelized cost of electricity from solar was 12.2 cents per kWh. Comparatively, residents in California buying electricity from major utility companies (Pacific Gas and Electric, Southern California Edison and San Diego Gas and Electric) in February 2017 were paying on average 18.86 cents for every kWh. These measurements, although widely utilized, are inherently flawed as they neglect to account for changing seasons, variability in energy production based on weather, and the environmental costs of energy production. Natural gas, oil, coal, nuclear and hydro power production are utilized in grid electricity, with prices excluding the long-term environmental externalities of these energies.
In California, both state and federal policies bring to light the potential and merits of solar and incentivize the technology’s residential adoption. Renewable Portfolio Standards (RPS) set the base for state regulations concerning renewable energy production. Although progress is being made to revolutionize the state’s electricity generation, incremental procurement of incentives is valuable to mitigate the risk of program failures. The Investment Tax Credit (ITC) provided by the federal government allows panel owners to deduct 30 percent of their system cost (negating rebates) from their taxes. These credits were extended in 2015 and are intended to phase out by the end of 2022, fostering “25 gigawatts (GW) of additional solar capacity over the next five years — a 54 percent increase”. With the policy continuation, the price of solar is expected to fall, while installation rates and technological efficiency are projected to increase steadily. As a result of the growing popularity of solar energy in the state, available subsidies are being reduced. Net metering is a state provided incentive for buyers, with electric meters winding in reverse while panels produce electricity during sunny days and wind forward when grid power is utilized. In 2016 net metering evolved to what has been deemed by the industry as “net metering 2.0”, when a utility caps the number of solar installations eligible for full net metering benefits. Because of solar’s broad adoption, utility companies can offer less compensation for excess energy provided back to the grid, charge a larger initial fee to add producers to the grid and transition users to time-of-use rates (charging more for electricity used at times of peak demand). Net metering 2.0 reduces previous incentives which may impact demand and hinder adoption; however, advances in efficiency and accessibility can allow for the industry’s continuous growth. A mandated statewide feed-in tariff (FIT) led to the implementation of the Renewable Market Adjusting Tariff (ReMAT). ReMAT acts as a “market opportunity” as opposed to a direct subsidy, enabling utility companies to enter into long-term contracts with producers, paying for generated electricity based on “quantifiable ratepayer avoided costs,” and gradually depreciating this transaction value over time. In 2012 the FIT was reworked after it was decided the solar industry was robust enough to function with lesser incentives. As solar has become more competitive, this value can defer to the market price as to be flexible to market conditions, inciting innovation and deterring overpayment. Although this incentive has decreased, it has still served its purpose stimulating demand for solar from independent power producers and promoting industry growth.
The state offers rebates through the California Solar Initiative in the form of Expected Performance Based Buy-downs (large initial payments) or Production Incentives, reducing the cost of solar electricity. Property tax exemptions are also offered for consumers to exclude the value of PV systems. Purchasing or leasing panels has been a longstanding debate for prospective solar consumers with government incentives playing a strong role in the decision. According to estimates from 2016, for the first time since 2011, a majority of the U.S. solar market was customer-owned. Consumer ownership of the solar market displays a shift away from previously dominant corporations which focused on panel leasing, moving towards demand for installation companies. This change may be credited to the lack of incentives accessible to renters, promoting panel purchasing. Leasing companies own, install, and maintain panels on client properties, selling the produced electricity at a cheaper cost than the grid price to the renter. However, in retaining the ownership of the system, the company divisively collects the installation’s renewable energy credits (RECs) and other economic benefits. These credits are in essence production incentives; power is utilized by homeowners, and Solar Renewable Energy Certificates (SRECs) are awarded in return under the California Solar Initiative. For every 1000 kWh produced by a panel system, the owner can receive one SREC. These credits convert energy generated from renewable sources to an economic currency that can be traded, and lower the long-term costs of solar. To meet RPS mandates, utility companies are often eager to purchase these credits, further reducing the overall costs of installations. Incentives towards purchasing panels have thus presented a more favorable market for installation companies to compete with large corporations that have previously controlled the market through panel renting.
A conservative federal government has placed America in a solar eclipse, with possible reductions in national incentives obstructing the adoption of solar technology. The current pro-carbon presidential administration’s renewable energy policy is fairly simple: “cut subsidies as much as possible to thwart further market expansion.” Slashing subsidies would act to limit energy independence and diversity with fewer production sources, resulting in catastrophic effects on the nation’s energy security. The Office of Energy Efficiency and Renewable Energy, which has been largely involved in limiting the costs of solar is now faced with a proposed 69 percent reduction in funding from the newly proposed budget. This will undoubtedly foster changes in current incentives. The termination of the Clean Power Plan, designed to phase out fossil fuel reliance and open the door for renewable energy expansion, will inevitably hinder solar growth. The president’s cabinet, comprised of proponents of the fossil fuel industry, is opposed to renewable technologies that have challenged hydrocarbon’s control of the energy sector. It is preached that coal power must be resurrected in the pursuit of job growth. In reality investing in renewables provides greater employment opportunities as the solar installation sector’s job market is expanding. The next four years have been loosely deemed “the solarcoaster,” with inevitable ups and downs brought by wavering federal government support; with larger impacts on the industry still yet to be seen.
Regardless of proposed cuts, some solar supporters believe the industry may have already hit the “utility tipping point.” Regardless of subsidies, the industry is in a position to continue exponential growth. Proponents of the tipping point believe that market incentives are no longer required for the prosperity of the industry. Demand is on the rise, while the price of systems and installations continues to drop with new innovations, making solar power competitive with unsustainable energy from coal, oil, natural gas and other non-renewables. Some believe solar’s progression has strengthened its market share to the point of independence from government support.
Government policies incentivize early adoption of solar, and as more consumers purchase the technology, the available benefits progressively subside. Solar as a long-term investment with market subsidies, is a less costly form of energy than traditional power. Minimal environmental impacts and lower costs in producing energy foster the technology’s increased demand. In theory, the institution of incentives would allow the solar industry to become more established and thus more capable of competing with other forms of energy production. Many contend that the solar market is still immature; incapable of functioning in a free market; meaning financial incentives are imperative for continued growth.
Almost all forms of energy production receive government financing, whether it be tax breaks for fossil fuels or subsidies for solar. Solar is not operating with an unfair advantage in the “free market”; all producers are competing with varying forms of government assistance. Solar has become a strongly rooted industry, but its ability to prevail through extensive budget cuts will be determined by states’ ability to protect and continue implementing incentivizing policies. Solar is a proactive approach to energy security; rather than waiting for fossil fuels to be exploited to the point they are no longer economically feasible, we can create sustainable energy infrastructure. Solar has become a robust market and continues to make progress towards independence. However, in the context of a highly subsidized energy sector, with government support and representation of hydrocarbon energy production, it is imperative that solar power continues to receive financial incentives to facilitate wider adoption.
The solar industry is functioning proof that long-term financial incentives can foster economic growth while simultaneously reducing prices and creating jobs. Journalist Susannah Locke said “The sun–that power plant in the sky–bathes Earth in ample energy to fulfill all the world’s power needs many times over. It doesn’t give off carbon dioxide emissions. It won’t run out. And it’s free”. Solar is the obvious response to the nations energy demand as it offers infinite clean energy resources for exponential growth. Regardless of a conservative presidency, economic based initiatives for California residential solar photovoltaics have allowed for the industry to take root and flourish in the energy market. Supporting solar is imperative for the well-being of future generations and the long-term sustainability of the nation.