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The Business of Energy Policy:

Analyzing the impacts of policies and

businesses on solar electricity rates in

Massachusetts

Jun Shepard

May 2014

 

The Business of Energy Policy:

Analyzing the impacts of policies and businesses on solar electricity rates in Massachusetts

A thesis presented by

Jun Shepard

to

The Committee on Degrees in Environmental Science and Public Policy

in partial fulfillment of the requirements

for a degree with honors

of Bachelor of Arts

Harvard College

Cambridge, Massachusetts

March 2014

Acknowledgements

I would like to thank Professor Michael McElroy for advising this project and providing valuable insight on the current issues surrounding renewable energy growth in the United States. His understanding of the economics and engineering that drive renewable energy implementation is truly inspiring. As my advisor throughout my career at Harvard, Professor McElroy has helped me realize my potential academically. I could not thank him enough as I continue my studies in renewable energy economics and policy.

Thank you also to Xi Lu, who, in the last few weeks of this project, met with me to discuss the accuracy and applicability of my calculations. He helped me understand the various methods of financing solar, motivating me in the process.

I would like to thank my parents, Richard and Mariko, my sister Lisa, and my roommates, Miranda and Kristine. Finally, thank you to my dear partner Patrick and my loving dog Miles.

 

 

 

 

 

 

 

 

Abstract

The solar energy industry in the United States currently leads the renewable energy market in annual growth. In 2013, newly installed solar capacity surpassed that of wind. However, cost competitiveness with conventional fuels must be achieved in order for solar energy to be used in the mainstream. Government support and market growth have minimized capital cost, but the ultimate price of solar remains unnecessarily high. This thesis explores these costs and the policies that are currently used to reduce them outside of the United States. The recent history of solar energy policy in the United States is compared to that of Germany and Spain to determine the most successful financial instruments in advancing solar development. From this foundation, the discussion shifts to the Solar Power Purchase Agreement Model (SPPA), which has found immense opportunity in solar energy’s high cost barrier. Projections are estimated for the trajectory of solar electricity prices in Massachusetts based on various business and policy factors, using calculations of data from the National Renewable Energy Laboratory’s (NREL) System Advisory Model (SAM). Based on these calculations and policy precedent in the U.S. and abroad, recommendations are made to facilitate solar industry growth in the future.

Table of Contents

Chapter 1: Introduction 1

Chapter 2: Learning from the Past: Energy Policies in Germany and Spain 7

2.1 Background on German energy policies 7

2.2 Defining net metering and feed-in tariff programs 9

2.3 Weighing net metering and FIT policy options 12

2.4 Lessons from Germany and Spain 14

2.5 Applying Policies to the United States 16

Chapter 3: Solar Policies in the United States 18

3.1 History of energy in the United States 18

3.2 Current energy make up 20

3.3 Renewable energy capacities 21

3.4 Renewable energy trends 22

3.5 The solar energy industry 28

3.6 Current federal renewable energy policies 29

Chapter 4: Solar Policies in Massachusetts 32

4.1 Renewable energy trends 32

4.2 Energy make up 33

4.3 The electricity distribution network 37

4.4 Residential electricity rates 39

4.5 Renewable energy trends and the Renewable Portfolio Standard 43

4.6 Why solar in Massachusetts? 45

4.7 Current state-level solar energy policies 48

Chapter 5: The Solar Power Purchase Agreement 53

5.1 Background on the Solar Power Purchase Agreement 53

5.2 Issues that the SPPA will face in the future 58

Chapter 6: Impacts of Business and Policy on Massachusetts’ Solar Rates 66

6.1 Methodology 66

6.2 Electricity rates for stand-alone system 70

6.3 Electricity rates for SPPA-backed solar project without SREC 73

6.4 Electricity rates for SPPA-backed solar projects with SREC 75

6.5 Electricity rates for various policy scenarios 77

Chapter 7: Discussion of Policy Recommendations 80

7.1 Goals 80

7.2 Policy recommendations for Massachusetts 82

7.3 Policy recommendations for the United States 87

Chapter 8: Conclusion 94

Appendix A: Explanation of photovoltaic technology and solar installations 107

Appendix B: Maps of renewable energy potential in the United States 111

Appendix C: Data for projections in Chapter 6 112

List of Figures

Figure 1: Nations with photovoltaic prices at grid parity 3

Figure 2: Cost of a photovoltaic installation in the United States 4

Figure 3: Solar potential in Germany, Spain, and the United States 15

Figure 4: Energy consumption in the United States by source 19

Figure 5: Electricity generation make-up in the United States 20

Figure 6: Consumption (overall) by renewable energy source in the United States 26

Figure 7: Consumption for electricity generation by renewable energy source 27

Figure 8: Installed system prices for residential and commercial PV systems 28

Figure 9: Energy consumption for Massachusetts’ electricity generation 34

Figure 10: Price comparison of weighted electricity rates and wholesale natural

gas prices (2002-2012)

40

Figure 11: Electricity rate projections in the United States (2003-2040) 42

Figure 12: Historical retail electricity rates in the United States, New England,

and Massachusetts (1997-2012)

43

Figure 13: Renewable energy industry growth in Massachusetts (2007-2013) 45

Figure 14: Overview of the SPPA business model 54

Figure 15: Net metering availability by state 56

Figure 16: SREC programs by state 57

Figure 17: Federal expenditures on energy by source (2003-2012) 61

Figure 18: Components of bankability for solar projects 64

Figure 19: Generation mix in 2050 for NREL projections 81

Figure 20: Administrative scheme to solar installation in United States 86

Figure 21: Property values based on property tax as a proportion of income 92

Figure 22: Population density in the United States 93

List of Tables

Table A: Comparison of net metering and feed in-tariff programs 11

Table B: Soft cost and total cost projections for new solar systems 47

Table C: Solar tax programs in Massachusetts 49

Table D: Alternative Compliance Payment values planned 51

Table E: Costs of a Boston residential solar installation 69

Table F: Comparison of solar “friendly” and “unfriendly” policies 77

Table G: Categorization of states based on solar irradiance 90

List of Projections

Projection 1: Stand-alone solar installation rates versus conventional rates in

Massachusetts

71

Projection 2: SPPA-backed solar rates versus stand-alone solar rates in

Massachusetts

74

Projection 3: SPPA-backed, SREC-producing solar rates in Massachusetts 76

Projection 4: Solar rates for “friendly” and “unfriendly” policies 79

List of Abbreviations

ACEEE: American Council for an Energy Efficient Economy

ACP: Alternative Compliance Payment (for SREC auction)

APS: Arizona Public Service

CaT: Cap-and-trade instrument

CBI: Capacity-based incentive

CFA: Consolidated Funding Application

COD: Commercial Date of Operation

CSP: Concentrating solar power

DOER: Department of Energy Resources

EEG: German Renewable Energy Act

EIA: Energy Information Administration

EPA: Environmental Protection Agency

FIT: Feed-in Tariff

GW: Gigawatt

GWSA: Massachusetts Global Warming Solutions Act

IBI: Investment-based incentive

IRR: Internal rate of return

ISO-NE: Independent System Operator of New England

ITC: Investment Tax Credit

kW: Kilowatt

kWh: Kilowatt-hour

LCOE: Levelized Cost of Energy

MACRS: Modified Accelerated Cost Recovery System

MW: Megawatt

NEG: Net excess generation

NEPOOL-GIS: New England Power Pool Generation Information System

NREL: National Renewable Energy Laboratory

NYSERDA: New York State Energy Research and Development Authority

OPEC: Organization of Petroleum Exporting Countries

P&I Cost: Principal and Interest Cost

PBI: Performance-based incentive

PTC: Production Tax Credit

PUC: Public Utility Commission

PURPA: Public Utility Regulatory Policies Act

PV: Photovoltaic

Q1: January-March

Q2: April-June

Q3: July-September

Q4: October-December

QF: Qualifying facilities

R&D: Research and development

RDL 1/2012: Royal Decree Law (January 2012)

REC: Renewable Energy Credit

RPS: Renewable Portfolio Standard

SAM: System Advisory Model

SPPA: Solar Power Purchase Agreement

SREC: Solar Renewable Energy Credit

VOST: Value of Solar Tariff

  1  

CHAPTER 1

Introduction

The American energy economy presents a series of predicaments. As the

consequences of global climate change have become increasingly apparent and imminent,

so too has the need for a transition to cleaner energy resources. Energy demand in the

United States, however, continues to increase and fossil fuels continue to provide

seemingly reliable and inexpensive alternatives to their renewable counterparts.

Transitioning the nation’s energy economy to one that is based in renewable resources is

now a political, economic, and social dilemma. Although the energy market has become

more favorable towards renewable energy, political stigma against a departure from

conventional resources has made it near impossible for a transition to occur. Solar, in

particular, serves as a good case study for renewable energy in the United States because

of its current unprecedented industry growth (a complete description of photovoltaic

technology and installation is available in Appendix A). The costs of solar power are

rapidly decreasing, but have not yet entered the threshold of true competitiveness with

fossil fuels. Cost-competitiveness will ultimately determine the success of renewable

energy in the future.

Globally, solar energy prices have decreased significantly since 1977, when the

capital cost of photovoltaic (PV) modules was $75.67/W. This figure declined to

  2  

$0.74/W in 2013, illustrating a 99% reduction in prices.1 The cause of this downward

trajectory is the fortuitous combination of increased solar manufacture, international

trade, and government support. Driving all three is the growing concern over a changing

climate. The global capacity of PV module manufacturing has a particularly corollary

relationship to solar energy prices. While price has decreased, PV module production has

increased from 3,231MW in 2007 to 35,945MW in 2012.2 In what has been dubbed the

Swanson Effect (after Richard Swanson, founder of SunPower Corporation), PV prices

dropped by 20% for every doubling in manufactured capacity. While the relationship

between the trends in global price and manufacturing demonstrate the Swanson Effect,

government support in the form of energy incentives and electricity policies was

instrumental in driving down prices at such a rapid rate.

Recent history evidences the extent to which government support has helped to

facilitate solar advancements. In Germany, where the government regulates the electricity

market, renewable energy-based facilities are allowed preferential entry into the national

power grid. Despite its lack of direct sunlight, Germany is now an international leader in

solar energy development with a net installed capacity of 35.9GW.3 In China, the

centralized government has total control over electricity generation and distribution.

Through stringent energy portfolio standards and energy mandates, China achieved a net

installed capacity of 10GW solar at the end of 2013. Its goal is to increase this to 15GW

                                                                                                               1 Swanson, Richard. "Solar Cells at the Cusp." Photovoltaic Lecture Series. Kellogg Auditorium, Santa Clara. Oct. 2009. Lecture. 2 Arvizu, Dan E. "Solar Photovoltaic Technology Status, Challenges and Promise." Solar PV Outlook. National Renewable Energy Laboratory, 6 Dec. 2012. Web. 3 Hoffman, Winfried. "PV Solar Electricity Industry: Market Growth and Perspective." PV Solar Electricity Industry: Market Growth and Perspective. Solar Energy Materials and Solar Cells, 23 Nov. 2010.

  3  

by 2015.4 Utilizing a wide range of policy instruments, solar industries worldwide have

gained momentum towards large-scale implementation. Global solar installation prices

reflect this momentum, and illustrate also the policies that have been most favorable in

advancing solar. Currently 102 nations have achieved solar PV prices at grid parity.5

Figure 1: Nations with photovoltaic prices at grid parity5

Where does the United States fit into this international solar market? In 2013, the

United States surpassed Germany in newly installed solar capacity, with 930MW

installed in Q3 2013. This was 35% more than the solar systems installed in the same

quarter the year before.6 That same year, annual global solar installation surpassed annual

wind installation for the first time in history. Yet price trends in the United States reveal

that despite this growth, the U.S. solar industry is still not cost-comparable to that of                                                                                                                4 "Translation of China’s 12th Five-Year Plan." Weily Reinn LLP, 2011. Web. 5 Wenham, Stuart. "Solar PV Grid Parity." Solar 2013 Conference. Melbourne. Presentation. 6 Munsell, Mike. "US to Surpass Germany in Solar in 2013; 930 MW Installed in Q3." Greentech Media. GTM Research, Dec. 2013. Web

  4  

other nations. While Germany achieved grid parity with an installed price of $2.50/W

(2013), the United States aims to distribute solar power with a price of $5.12/W, nearly

double that amount.7 Capital costs in the United States continue to decline, but the

ultimate retail price of solar remains unnecessarily high. Currently, the capital cost of

solar projects is no longer the greatest obstacle to grid parity in the United States. Soft

costs make up over 60% of the total cost of solar installation, and present the greatest

barrier for large-scale solar entry into the energy market. Soft costs are not the direct cost

of construction, but rather the fees required pre and post-construction for customer

acquisition, permitting, engineering, and installation. Compared to Germany, this cost in

the United States is less correlated with market growth (9% correlation vs. 54%

correlation), but is roughly $2.8/W higher.8

Figure 2: Cost of a photovoltaic installation in the United States8

                                                                                                               7 Morris, Jesse, Koben Calhoun, Joseph Goodman, and Daniel Seif. Reducing Solar PV Soft Costs. Publication. Boulder: Rocky Mountain Institute, 2013. Print. 8 Seel, Joachim, Ryan Wiser, and Galen Barbose. Why Are Residential PV Prices in Germany So Much Lower Than in the United States? Rep. Lawrence Berkeley National Laboratory: National Renewable Energy Laboratory, 2013. Print.

  5  

Contrary to the Swanson Effect, even while manufacturing capacity has doubled, soft

costs have remained approximately constant and dissuade independently installed

projects. Government support is necessary in order to reduce the administrative burden of

solar engineering and permitting. While tax incentives and grants have helped minimize

the direct upfront costs of construction, they have not addressed the issue of labor and

paperwork. Yet despite this obstacle to solar cost competitiveness, solar installations have

grown over 20 years. This is because the soft cost barrier in the 1990’s presented both a

dilemma and a business opportunity for the solar industry. The Solar Power Purchase

Agreement (SPPA) business model is a rapidly growing branch of the solar financing,

and has found a niche market within the soft cost dilemma. The SPPA is a contract

between a consumer and a solar company that allows the company to own and maintain

an installation and sell the electricity generated at a fixed rate. Through this third-party

ownership of a project, consumers are able to reap the benefits of solar power, often

without any upfront cost. Currently, SPPA-based solar projects make up the majority of

new residential installations in most states. In Colorado, 80% of new residential

installations are facilitated by a SPPA.9 In California, third-party ownership encompasses

50% of all solar installations.10

The SPPA business model’s success illustrates a trade off between government

support and market behavior in the United States energy economy. Sustained success for

the SPPA is questionable, as it depends on the lack of government policies to mitigate the

soft costs of solar. Monitoring the impacts of this business model on residential electricity

                                                                                                               9 Kollins, Katharine, Bethany Speer, and Karlynn Cory. "Solar PV Project Financing: Regulatory and Legislative Challenges for Third-Party PPA System Owners." National Renewable Energy Laboratory, Feb. 2010. Web. 10 How States Can Attract PPA Financing." Renewable Energy Project Finance. National Renewable Energy Laboratory, 2012. Web.

  6  

rates is crucial for future energy policymaking. If solar policies can incentivize

households to independently install solar, the SPPA business will have to phase out.

When this happens, the new solar electricity rates must be competitive with the SPPA-

facilitated rates for solar advancements to continue.

This thesis explores the intersection of government support and the SPPA business

model in the United States. Massachusetts, in particular, is explored as a case study in

order to illustrate the viability of solar in locations that are not predisposed to having a

booming solar industry. The thesis begins with overviews of solar energy policies on

global, national, and state levels. It continues with an in-depth discussion of the SPPA

model and the impacts that it currently has on the electricity market and state-level

energy regulation. Using this information as a foundation, the thesis then presents

forecasts for electricity rates in Massachusetts based on changes in policies and business

practices. Based on these forecasts, recommendations are offered for state and federal

initiatives that would allow the United States to take advantage of the vast renewable

energy resource that is just within reach.

  7  

CHAPTER 2

Learning from the Past: Energy policies in Germany and Spain

2.1 Background on German energy policies

As the United States looks forward to increasing solar electricity generation, it

must reflect on precedent in other nations. Germany is not blessed with sunny landscapes

in the way the United States is. Its annual cloud cover is roughly equal to that of Alaska.

Yet Germany has become the leader in implementing policies to encourage solar industry

growth. The Act on Granting Priority to Renewable Energy Sources (Erneuerbare-

Energien-Gesetz, EEG) of 2000 began Germany’s boost in renewable energy. In 2004,

EEG was amended to address targets set by the European Union; the government planned

to increase shares of renewable energy to 12.5% by 2010 and 20% by 2020.11 In 2005, the

Federal Network Agency was established to regulate grid access fees; this, in effect,

ended the political sway of large utilities and facilitated further growth of the renewable

energy industry.12 That same year, the governing Social Democratic party, which

partnered with the environmentally oriented Alliance 90’s/The Greens party for 7 years

(1998-2005), was replaced with the Christian Democratic Party. Many worried that this

shift would stymie prospects for renewable energy. However, despite this shift, support

for renewable energy growth continued under the new Chancellor, Angela Merkel.12

Currently, Germany continues to facilitate the entry of new energy technologies through

                                                                                                               11 Germany. Federal Ministry for the Environment, Nature Conservation and Nuclear Safety. Public Relations Division. The Main Features of the Act on Granting Priority to Renewable Energy Sources (Renewable Energy Sources Act). Berlin: n.p., 2004. 12 Laird, Frank N., and Christoph Stefes. "The Diverging Paths of German and United States Policies for Renewable Energy: Sources of Difference." Energy Policy 37 (2009): 2619-2629.

  8  

a series of financial instruments. In October 2013, the German coalition government

agreed to a renewable energy target of 45% by 2025 and 55% by 2035.13

The most important financial instrument to result from EEG was the feed-in tariff

(FIT). This instrument allowed for electricity generated by renewable energy facilities to

receive a fixed rate higher than the retail rate, incentivizing industry growth and

interconnection. This rate was determined by the national government in the form of a

15-20 year contract, and included a ~1% monthly degression to safeguard against

overgeneration by renewables.14 This degression was for newly constructed projects, so

that a project with a commercial operation date (COD) in 2012 would have a higher fixed

rate than a project with a COD in 2013. Older technologies, such as wind turbines, were

offered a lower tariff rate than solar and tidal wave technologies. Additionally, the policy

mandated that renewables-based electricity should be used in preference to conventional

fossil fuel-based facilities. In the years that followed, Germany underwent a steady

transition towards renewable energy, with an industry-wide annual growth rate of roughly

15%.15 In 2011, electricity consumption from renewable energy resources increased by

19.5% to 20.3% of the total electricity market.16 In 2012, the impact was even greater as

the share of renewables-based electricity generation increased to 25%.15

The German FIT, however, underestimated the amount of investment that should

be incentivized. On June 16th 2013, renewable energy in Germany generated 28.9GW,

                                                                                                               13 Thomas, Andrea. "Merkel Backs Plan to Cut Germany's Green Energy Subsidies." The Wall Street Journal. Dow Jones & Company, 22 Jan. 2014. 14 Germany. Federal Ministry for the Environment, Nature Conservation, and Nuclear Safety. Act on Granting Priority to Renewable Energy Sources (Renewable Energy Sources Act ). Berlin: 2005. 15 "Retail Power Rates Could Drop in Germany." 100% Renewable. Renewable International Magazine, 7 Apr. 2013. Web. 16 Pulmer, Brad. "Germany Has Five times as Much Solar Power as the U.S. — despite Alaska Levels of Sun." The Washington Post, 8 Feb. 2013. Web.

  9  

over half of the electricity required by the grid. With a power capacity of 45GW, and

peak generation by both renewable and fossil fuel-based facilities of 51GW, electricity

prices went negative to encourage supply reductions.17 Since the grid allowed preferential

distribution of renewable energy resources, the brunt of the financial responsibility fell on

conventional generating facilities. These facilities were not constructed to shut down on

short duty cycles, which was essentially what the FIT policy forced them to do. One gas-

fired plant, the E.ON Irsching-5 in Vohberg, was operational for only 25% of the time in

2012. Supplying approximately 10% of the grid capacity, the facilities had to not only cut

back on production but also pay for the electricity they contributed to the grid.18 Fossil

fuel and nuclear-based facilities are not capable of shutting down production, and in this

instance the FIT caused a financial burden on the utilities that had powered Germany for

decades. This event, however, is just a microcosm of the transition that the nation- and

Europe as a whole- is undergoing. As renewable energy takes precedence, conventional

utilities become obsolete.

2.2 Defining net metering and feed in tariff programs

After witnessing the impact of FIT on German utilities, American utilities have

been hesitant about establishing a similar policy in the U.S. Currently two states- Hawaii

and California- have state-regulated FIT policies for renewable energy. Additionally,

several utility-based FIT policies were put in place recently in Los Angeles (CA), Long

                                                                                                               17 "How to Lose Half a Trillion Euros." The Economist. The Economist Newspaper, 12 Oct. 2013. Web. 18 "Irsching Power Plant." Structure and Asset Managing. E.ON Irsching. Web.

  10  

Island (NY), Gainesville (FL), and Northern Indiana.19 Despite these developments,

implementing a FIT in state and regional policymaking has become a point of contention.

While FIT increases renewable energy-based generation in the short term, an overloaded

grid capacity results in increased rates for consumers. While net metering allows for a

sustained growth of renewable energy capacity, prices are set by the wholesale electricity

market and are unpredictable. It is important, therefore, to distinguish the two policy

instruments, highlight their positive and negative influences on electricity markets, and

build a foundation for an unbiased cost-benefit analysis.

The greatest difference between net metering and the FIT is in the determination

of electricity prices. Net metering uses the same meter to buy and sell electricity, and the

price of electricity in both directions is the same as the full retail price.20 The FIT uses an

additional meter that sets another price for electricity that is sold back to the grid.

Typically, the prices of electricity generated by the independent generator are purchased

at a rate determined by a 15-20 year contract. For renewable energy-based facilities, this

rate is higher than the retail price with a tariff regression over the lifetime of the

contract.21 Essentially, the FIT acts as a PPA for utilities to purchase power from

independent facilities. The following table outlines the differences between the FIT and

net metering policies.

                                                                                                               19 "Feed-in Tariffs and Similar Program." Electricity. U.S. Energy Information Administration - EIA, 4 June 2013. Web. 20 "Net Metering." Green Power Network. Department of Energy: Energy Efficient and Renewable Energy, 2013. Web. 21 "Feed-In Tariffs." NREL: State and Local Activities -. National Renewable Energy Laboratory. Web.

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Table A: Comparison of net metering and feed-in tariff programs20,21

Net Metering Feed-in Tariff

Regulation State-regulated State-regulated

Price determination One meter; the retail meter goes in reverse when more electricity is generated than is used. Price is at the retail purchase rate.

Two meters; consumption and production are priced separately, and production rates are higher for renewables-based generation. Tariff rates are fixed and based on 15-20year contracts.

Price depreciation Price levels depend on electricity market results; fluctuates according to wholesale market behavior.

The fixed rate addresses depreciation of electricity output from facility.

Capacity limit for grid Maximum generation capacity is determined by the state; in Massachusetts, there are three classes of net metering that are dependent on size.

No maximum; there is maximum to individual capacity but not overall capacity

Eligibility of generation type

Only renewable energy facilities are eligible Renewable energy is eligible; in addition, renewable energy-based facilities receive preference in entering market (German example)

Impact on per kWh retail rates

Non-generating consumers’ rates increase (because net metering consumers’ electricity bills reflect generation into the grid)

Overall rates increase

Not all net metering or FIT policies are implemented in the same way, however.

The preferential access treatment of renewable energy and the decreasing tariff rate that

are characteristic of the German FIT are not used in United States-based policies. Even

on a domestic scale in the United States, net metering programs in different states have

distinctive regulations. For instance, the net metering program in Florida offers the retail

electricity rate and has no limit for the renewable subscriber. Georgia, on the other hand,

offers a fixed rate and has a subscriber limit of 0.2% of the grid’s peak capacity.22

Without centralized grid regulation, the United States cannot implement a streamlined

                                                                                                               22 United States. Department of Energy. A Policymaker’s Guide to Feed-in Tariff Policy Design. By Toby D. Couture, Karylynn Cory, and Emily Williams. Print.

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electricity buyback policy. The rate for renewable energy entry into the grid is dependent

on an attractive financial instrument, whether net metering or FIT.

The deciding factors in choosing one policy over the other are population density,

retail price of electricity, grid capacity, and the capacity for renewables (in this case

solar) relative to conventional fuels. Additionally, the method for determining the solar

FIT fixed rate, or value of solar tariff (VOST), determines whether or not FIT or net

metering should be used. In the United States, electricity providers determine the rates in

17 FIT (and similar) programs. The rates in the remaining 7 FIT-based programs are

determined by state governments.23 In smaller nations with a centralized electricity

regulator, such as Germany, the VOST is typically determined by the national

government.

2.3 Weighing net metering and FIT policies options

Net metering policies work better for the advancement of renewable energy than

the FIT for areas that have higher electricity rates and a higher output of solar electricity

onto the grid. There is a strong correlation between electricity consumption and solar

electricity generation; as solar irradiance increases, residents rely more heavily on air

conditioning and prices increase.23 As demand increases, utilities must look to alternative

generating facilities. Net metering allows grid entry by solar power at the set retail rate

when electricity demand is the greatest.21 The alternative would be to contract power

from expensive peak generators. In this case, net metering provides the utility with a

                                                                                                               23 Sunrun Inc. Sunrun Supports Net Metering. CleanTechnica. N.p., 26 Aug. 2013.

  13  

stable price for electricity while simultaneously protecting the grid from overburdening

the power capacity. Consumers, if given the opportunity, will aim to obtain maximized

profit. Net metering limits individual capacity by presenting profit in the form of avoided

cost instead of direct revenue.24 This incentivizes consumers to install solar systems only

large enough to support the real electricity need of the household. This characteristic of

net metering makes it a better financial policy for developing solar in regions with high

irradiance.

While they are often faulted with overburdening the grid, FIT policies allow for

rapid increases in renewables-based generation entry into the grid. By differentiating

among tariff rates for different resources, they offer a “fair rate” for specific renewable

technologies.21 This subsequently allows for more advanced and expensive technologies

to enter the grid and for renewable energy to be incentivized and implemented quickly.

Net metering does not incentivize rapid development, and only accounted for about 2%

of the international solar photovoltaic market. FIT policies comprised about 25% of the

same market.25 In areas that are not attractive for solar investment because of low solar

output, lower population density, or lower electricity rates, FIT acts as an impetus for

solar development in the short term. This characteristic has become increasingly

important as a more urgent response to climate change is necessitated.

The greatest flaw of the FIT becomes apparent when it is used in high output,

high price locations. Germany has less solar capacity but a similar range of wholesale

electricity prices compared to the United States. The FIT therefore attracts renewable

                                                                                                               24 Poyrazoglu, Gokturk. Benefits of Feed-in Tariff Bill on Renewable Energy. University of Buffalo, Feb. 2011. Web. 25 Gipe, Paul. "Time to Break Free of Net-Metering." The Great Energy Challenge Blog. National Geographic, 26 Dec. 2013. Web.

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developments with minimal risk of overburdening the grid.26 In places like the United

States with a much higher solar capacity, this risk is significant. Spain, which has solar

potential similar to the American southwest, experienced a solar crisis when it

implemented an FIT in 2008. The electricity rates were kept artificially low in an attempt

to stifle inflation; however, in doing so, the electricity market incurred a deficit of €24

billion.27 In January 2012, the Spanish government temporarily stopped FIT payments for

solar constructions after January 2013 as part of Royal Decree Law (RDL 1/2012). The

great potential for the development of solar energy in Spain was stymied by two critical

mistakes in policymaking.28 The first was that the Spanish government maintained an

artificially low rate for consumers without the sustainability provided by an instrument

like the 20-year price degression used in Germany. Secondly, it based a policy decision

on these artificial rates, opting for an aggressive FIT over other incentives. While the FIT

perpetuated rapid developments of renewable energy, it was unsustainable. The Spanish

FIT illustrates the dangers caused by a governmental ambition that lacks an accurate

economic foundation.

2.4 Lessons from Germany and Spain

The policies used in Germany and Spain offers insight onto the impacts of solar

energy policies on electricity markets. The landscapes of the two European nations may

be different, but they represent two extremes of the spectrum of renewable potential in

                                                                                                               26 Stefes, Christoph H. "The German Solution: Feed-In Tariffs." New York Times [New York] 11 Sept. 2011: Print. 27 Ragwitz, Mario, and Claus Huber. Feed-In Systems in Germany and Spain and a Comparison. Publication. Karlsruhe: Fraunhofer Institute for Systems and Innovation Researc, 2012. Print. 28 Voosen, Paul. "Spain's Solar Market Crash Offers a Cautionary Tale About Feed-In Tariffs." New York Times [New York] 18 Aug. 2009: Print.

  15  

the United States. The solar potentials in Spain and Germany roughly resemble those of

the Southwest and Northeast, respectively. Therefore, when formulating policy

recommendations for the United States at-large, it will be important to learn from the

experiences in these two nations.

Figure 3: Solar potential in Germany, Spain, and United States29

Adapted from Solar GIS

The fact that the United States uses net metering over FIT signifies the regulatory

power that public utilities still have over the electricity grid. While the FIT allows for

solar-based facilities to independently profit from electricity generation, net metering

connects them to the utility, thereby limiting their capacity and moderating their revenue.

                                                                                                               29 "Global Horizontal Irradiation: United States." Map. SolarGIS. GeoModel Solar, 2013. Web.

  16  

Net metering is favorable for renewable energy advancements in areas where the FIT is

not; these are the high output and high price situations in which it is not cost-effective for

utilities to purchase electricity at a rate higher than the retail electricity rate. However, it

is interesting that while most of the world has implemented the FIT despite its flaws, the

United States has chosen to use a more sustainable but less effective policy mechanism.

Today, as Europe utilizes aggressive policies to combat climate change, the United States

continues to appease established institutions by building a weaker policy framework. The

Spanish FIT demonstrated that an aggressive electricity policy that is improperly used

would have a significant negative impact on the energy economy. Yet the FIT has the

potential to jumpstart a rapid transition to cleaner energy resources. As the United States

explores different policy mechanisms, the FIT should not be taken off the table.

2.5 Applying policies to United States

This paper focuses on the policy instruments necessary to develop solar energy in

Massachusetts both quickly and sustainably. Germany’s experience with the FIT

facilitates a new understanding of the applicability of various financing instruments.

Furthermore, it is important to acknowledge the different policy decisions used in each

location. While both have solar irradiances of 1100 to 1300 kWh/m2, Germany has opted

for the FIT where Massachusetts currently couples a net metering program with various

  17  

tax-based incentives30. The German renewable energy policies should be used, therefore,

as templates for future policymaking at the Massachusetts state level.

The United States on the whole, however, cannot use one streamlined policy

mechanism to regulate solar energy growth across its varying landscape. On one end of

the spectrum, there are states that have low solar output and electricity prices; these

locations can operate under an FIT because the risk of overburdening the electricity grid

is minimized. On the other end are states like California with high output and high prices.

These areas require programs similar to net metering programs, with or without the

additional support of tax-based incentives. A unilateral policy decision cannot effectively

be used in the United States because it would not address the individual solar capacities

of different states. Currently, the federal policies that promote renewable energy are

primarily tax-based incentives that are supportive of state-level programs.23 Before

making policy recommendations-like the FIT- that would effectively eliminate the need

for these incentives, it is important to examine the existing mechanisms and their impacts

on local electricity markets and ultimately the end-use consumer.

                                                                                                               30 "Federal Incentives/Policies for Renewables and Efficiency Federal : Incentives/Policies for Renewables & Efficiency." Database of State Incentives for Renewables and Efficiency. Department of Energy, 2014. Web.

  18  

CHAPTER 3

Solar Policies in the United States

3.1 A history of energy in the United States

The United States is very much a high-energy country; its rapid economic

transition from agriculture to energy intensive industry in the late 19th century

dramatically increased its demand for fossil fuel resources. As mechanical technologies

became more efficient and necessary for high productivity on farms and in factories,

greater amounts of energy were required to sustain growth. In the early 1880s, the United

States consumption of fossil fuels surpassed that of wood. New technologies and

industries established themselves as integral parts of a new American lifestyle, increasing

demand for larger amounts of energy. During the second half of the 19th century, coal

consumption and production rose tenfold.31 The United States has the highest content of

coal reserves in the world and produces more coal than any other fossil fuel resource.32

The new global demand for coal gives the United States a competitive advantage in

international trade.

Coal currently remains the dominant source of energy for electricity generation in

the United States. In other sectors, however, petroleum overtook coal as the primary

energy resource in the 1950’s. This transition coincided with the largest growth in energy

consumption in the United States; in the period between the late 1930’s and the 1970’s,                                                                                                                31 Smil, Vaclav. Energy at the Crossroads: Global Perspectives and Uncertainties. Cambridge, Mass.: MIT, 2003. Print. 32 "Introductory Statistics." Fossil Energy: A Brief Overview of Coal. United States Department of Energy, Web.

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total consumption grew by 350%.33 In addition to petroleum, natural gas production also

gained momentum in the mid 20th century. In the 1970’s, nuclear energy entered the

United States energy economy as a powerful source of energy. Despite these trends in

general energy consumption, however, coal continued to increase for over 50 years. In

2008, coal use for electricity generation began to decline despite roughly constant

electricity consumption.34 The following diagram depicts trends in energy consumption

for the generation of electricity since 1949:

Figure 4: Energy consumption in the United States by source35

The figure illustrates a turning point in electricity generation in the United States.

As natural gas deposits are developed, the nation’s reliance on coal decreases.

Additionally, the implementation of various renewable energy resources, particularly

hydro and wind, has also curbed the need for large amounts of coal consumption. It is                                                                                                                33 Evans, Allan R. Energy and Environment: Student Manual. Wentworth, NH: COMPress, 1980. Print. 34 United States. Department of Energy. Energy Information Administration. Energy Consumption Estimates by Sector, 1949– 2012. Washington, D.C.: EIA, 2013. Web. 35 United States. Department of Energy. Energy Information Administration. Net Generation by Energy Source: Total (All Sectors), 2003-December 2013. Washington, D.C.: EIA, February 2014. Web.

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important to note that while trends of fuels used for electricity generation tend be

adjusted similarly to overall energy consumption trends, they do not address

transportation, industry, construction, or agriculture specifically.

3.2 Current energy make up in the United States

The United States’ diverse landscape is rich in various energy resources. Recent

advancements in both technology and policymaking have allowed resources other than

coal to be explored as viable options. In 2013, electricity generation by fuel type was as

follows: coal (43%), natural gas (22%) nuclear (22%), hydro (7%), wind (4%), biomass

(1%), and solar (<1%).29

Figure 5: Electricity generation make-up in the United States36

                                                                                                               36 United States. Department of Energy. Energy Information Administration. Electricity Net Generation: Electric Power Sector. Washington, D.C.: EIA, February 2014. Web.

Coal 43%

Natural Gas 22%

Petroleum 1%

Nuclear 22%

Solar 0%

Wind 4%

Biomass 1%

Hydro 7% Coal

Natural Gas Petroleum Nuclear Solar Wind Biomass Hydro

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The natural gas industry in particular has advanced at an unprecedented rate since

2005. In 1997, the first large-scale shale gas extraction was achieved. Prices declined

rapidly after this point, and in 2012 hit historic lows at $1.95/MMBtu.37 The price of coal

for electricity generation at this time was $2.35/MMBtu.38 As natural gas prices continue

to decline, distribution has allowed for increased generation by this resource nationwide.

By 2010, 12 states used natural gas as their primary fuel for electricity generation; 26

states continue to support the majority of their electricity consumption with coal, though

only 3 states use coal to generate over half of their electricity demand. Washington D.C.

and Hawaii use petroleum as their dominant energy source. In 10 states- Alaska,

California, Connecticut, Delaware, Florida, Louisiana, Massachusetts, Mississippi,

Nevada, and Rhode Island- natural gas powers over half of the states’ electricity

production.39

3.3 Renewable energy capacities in the United States

The topography and location of the United States provides immense renewable

energy potential. The nation is diverse with respect to solar and wind capacity; in areas

such as Arizona, potential solar capacity is comparable to that of Sub-Saharan Africa.40

Wind potential in the Midwest is at levels comparable to that in Northern China.41 The

                                                                                                               37 What is Shale Gas and Why is it so Important? US Energy Information Administration – Independent Statistics & Analysis. Web. 38 United States. Department of Energy. Energy Information Administration. Table 4.10.A. Average Cost of Coal Delivered for Electricity Generation by State, December 2013 and 2012 Washington, D.C.: EIA, February 2014. Web. 39 United States. Department of Energy. Vehicle Technologies Office. Sources of Electricity by State. Department of Energy: Energy Efficiency and Renewable Energy, Nov. 2012. Web. 40 United States. Department of Energy. Energy Information Administration. Net Generation by State by Type of Producer by Energy Source. Washington, D.C.: EIA, February 2014. Web. 41 "Global Horizontal Irradiation: World" Map. SolarGIS. GeoModel Solar, 2013. Web.

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United States can be viewed as encompassing the renewable energy environments of the

world; with the proper policies, it could very well power its entire electricity demand

using renewable resources. The figures in Appendix B describe the magnitude and

spectrum of solar and wind potential in the United States.

Potential wind generation is estimated to be at 10,459GW for onshore wind

projects. This is nine times the energy needed to supply the total electricity demand of the

United States. Likewise, solar has the ability to generate over 100 times the current

electricity demand with a potential of 192,864GW.42 Wind technology, one of the more

mature renewable energy technologies, generated 61,108MW at the end of 2013. It has an

annual growth rate of nearly 50%, compared to the international growth rate of 28.8%. In

the solar industry, PV technologies have been particularly successful, generating over

10GW and putting the United States in the same tier of installed capacity as China, Italy,

and Germany.43 In 2013, the industry installed 900-1000MW of new generating capacity

per quarter.44

3.4 Renewable Energy Trends

Renewable energy currently accounts for roughly 6% of total electricity generated

in the United States. Industry growth, however, did not accelerate until the 1970’s, when

an embargo was placed on petroleum imports from OPEC nations in the Oil Shock of

                                                                                                               42 Mapping the Global Wind Power Resource. College of the Earth, Ocean, and Environment. University of Delaware, 2013. 43 Montgomery, James. "US Joins 10-GW Solar PV Club, Prepares For Liftoff." Renewable Energy (2013). 44 Lopez, Anthony, Billy Roberts, Donna Heimiller, Nate Blair, and Gian Poro. U.S. Renewable Energy Technical Potentials: A GIS-Based Analysis. Tech. Golden: National Renewable Energy Laboratory, 2012. Print.

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1973. This led to a serious consideration of the use of renewable resources for electricity

generation. In 1978 the Public Utilities Regulatory Policy Act (PURPA) was passed.

Aimed to increase an emphasis on domestically generated renewable energy, this

regulation forced electric utilities to contract for power from renewable or energy

efficient users. This allowed for a long-term and stable market for qualified facilities

(QF) to continue power generation, as well as increased wholesale electricity competition

among suppliers. Several state-level policies evolved from this initiative; California, in

particular, began an aggressive campaign for the implementation of renewable energy

technologies. Over the course of a decade, more than 12,000MW of renewable power

was introduced in the United States.45 This trend continued until 1990.

The period between 1990 and 1997 witnessed a temporary pause to the growth of

domestic renewable power. This was due to confusion surrounding the deregulation of

electricity markets at the state level. Deregulation divides the supply of electricity into

production and distribution; in states that have not undergone this decoupling, the utility

controls both of these components. Deregulation allows consumers to choose their

electricity suppliers based on cost. Ultimately, consumers are allowed to choose the

electric generating entity in a competitive market. Currently, 24 states in the U.S. have

some form of deregulated (or partially deregulated) electricity markets.46 In March 1998,

California became the first state to restructure its electricity market. It partially divested

the market from large utilities, and allowed residential consumers to choose independent

                                                                                                               45 United States. Department of Energy. Stakeholder Engagement and Outreach. New Wind Resource Maps and Wind Potential Estimates for the United States. Department of Energy: Energy Efficiency and Renewable Energy, Feb. 19, 2012. 46 Slocum, Tyson. "Electric Utility Deregulation and the Myths of the Energy Crisis." Bulletin of Science, Technology & Society 21.6 (2001)

  24  

suppliers.47 Although this presented an opportunity for lower electricity rates through

market forces, deregulation in California ultimately failed. The state implemented price

controls on retail rates while deregulating the wholesale market. This meant that as

demand for electricity increased, wholesale prices would increase but retail prices would

remain relatively constant. In a deregulated market, wholesale suppliers were able to

withhold generation to manipulate the price.48 This caused dramatic supply shortages that

lead to brownouts. While deregulation ultimately allowed for the entrance of renewable

energy into local energy economies, the learning curve for this policy was long and

significant.

As states underwent their difficult transitions to deregulated markets, federal tax

incentives were also rescinded. The production tax credit (PTC), one of the main

incentives for renewable energy technologies, was established when the Energy Policy

Act was passed in 1992. This tax credit expired in June 1999 and was then extended in

December of the same year; however, in the face of the PTC’s expiration, renewable

energy companies did not plan for the construction of new facilities.49 Instead, they

waited until the PTC was extended to 2001. Since its first expiration, the PTC has been

extended on intervals of 2-3 years as part of several tax relief policies: the Job Creation

and Worker Assistance Act of 2002, Working Families Tax Relief Act of 2004, Energy

                                                                                                               47 Ritschel, Alexander, and Greg P. Smestad. "Energy Subsidies in California’s Electricity Market Deregulation." Energy Policy 31 (2003): 1379-391. Web. 48 Martinot, Eric, Jan Hamrin, and Ryan Wiser. Renewable Energy Policies and Markets in the United States. Center for Resource Solutions, 2005. Web. 49 U.S. Wind Industry Fourth Quarter 2013 Market Report. Rep. Washington, D.C.: American Wind Energy Association, 2014. Print.

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Policy At of 2005, Tax Relief an Health Care Act of 2006, Economic Stabilization Act of

2008.50

After about five years, the confusion from electricity market deregulation began

to settle down and renewable energy growth regained momentum. Several policies were

implemented to construct and operate large amounts of renewable power. One of the

most instrumental of these policies was the Renewable Portfolio Standard (RPS),

introduced by state governments. The RPS required a certain percentage of a states’

electricity generation to come from renewable energy resources. By 2005, 18 states and

Washington D.C. had adopted an RPS, with requirements ranging from 1% to 30%.

Currently, 37 states have implemented an RPS or similar renewable energy goal.48

Another type of program that has significantly impacted the growth of renewable

energy is the renewable energy credit (REC) program. Under the RPS, a utility is

required to generate a part of its electricity from renewable energy. The REC program

allows these utilities to purchase credits from renewable energy facilities in lieu of their

own generation. The basic structure of the program is similar to that of the carbon cap-

and-trade (CaT) programs. This controversial program has been likened to “someone rich

paying another person to go to jail”;51 in this case, carbon emitting entities can continue

to emit at current rates as long as they purchase credits from a non or lesser-emitting

entity. However, the REC program safeguards against this by incentivising production

and not reduction. While carbon CaT aims to ultimately encourage the exit of carbon

intensive industries from the market, the REC program promotes entrance by renewable

                                                                                                               50 "Solar Energy Facts: 2013 in Review." Solar Energy Data. Solar Energy Industries Association. 51 Juma, Calestous. "Green Economy and Climate Change." ESPP 90p: Biotechnology, Sustainability and Public Policy. Harvard University, Cambridge. 26 Feb. 2014. Lecture.

  26  

energy-based facilities. It is much more difficult to phase an established industry out of

the energy economy than it is to bring a new one in. This is because familiarity breeds

complacency and a mature industry that has had a history of supplying energy will not

exit the economy without opposition. The fossil fuel industries that are grandfathered

socially will also be grandfathered politically.

Figure 6: Consumption (overall) by renewable energy source in the United

States52

                                                                                                               52 United States. Department of Energy. Energy Information Administration. Renewable energy consumption by energy-use sector and energy source, 2006 - 2010. Washington, D.C.: EIA, August 2013. Web.

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Figure 7: Consumption for electricity generation by renewable energy source53

The current market share of renewable energy in the United States is a result of a

long history of policy successes and failures. The future of renewable energy market

growth depends on the continuation and enhancement of federal tax incentives and state

level energy programs. In January 2014, the PTC for wind expired along with 55 other

tax credits.54 In the period between 2000-2014, the PTC had driven advancements in wind

technologies and installations. When a similar event occurred in 2013, investment

significantly declined in the one week that a PTC was not present. With no extension on

the table as of yet, further developments in wind power may be stagnated for this fiscal

year.

                                                                                                               53 United States. Department of Energy. Energy Information Administration. Table 3. Renewable energy consumption for electricity generation by energy-use sector and energy source, 2006 - 2012. Washington, D.C.: EIA, August 2013. 54 Pulmer, Brad. "From NASCAR to Wind Power: Congress Just Let 55 Tax Breaks Expire." The Washington Post 2 Jan. 2014: Web.

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3.5 The solar energy industry in the United States

The solar PV industry in the United States is the most rapidly growing industry in

the renewable energy market today. Since 2011, solar generation has increased by 2300%

and in 2013 surpassed wind in new generation (36.7GW added versus 35.5GW

added).49,50 The costs of solar installations have decreased at near record rates; the cost of

solar panels in Q3 2013 was 60% lower than the cost in Q1 2011.55 Despite tensions in

international trade from the United States’ use of import tariffs on solar system

components, the National Renewable Energy Laboratory (NREL) estimates that system

prices will continue to decrease through 2014 at a rate of approximately 6-7%.56

Figure 8: Installed system prices for residential and commercial PV systems56

                                                                                                               55 U.S. Solar Market Insight: Executive Summary. Rep. N.p.: Solar Energy Industries Association, Greentech Media, 2014. Print. 56 United States. Department of Energy. National Renewable Energy Laboratory. Photovoltaic (PV) Pricing Trends: Historical, Recent, and Near-Term Projections. By David Feldman, Galen Barbose, Robert Margolis, Ryan Wiser, Naim Darghouth, and Alan Goodrich. SunShot, 2012. Print.

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This continued decrease in prices has been embraced by middle class residential

consumers, and 60% of residential installations in the past decade have been located in

areas with a median income of $40,000-$90,000. Furthermore, neighborhoods with the

most growth have been on the lower end of this spectrum, in areas with a median income

of $30,000-$40,000 in New Jersey and $40,000-$50,000 in both Arizona and

California.57,58 Solar has become attractive for lower middle class customers because of

the potential for even further cost savings through federal and state level grants and

incentives. Through policies like net metering that target smaller scale PV systems,

accessibility to renewable energy technologies has increased.

3.6 Current federal renewable energy policies

Current federal renewable energy policies can be roughly categorized into energy

tax policies, grant programs, and loan programs. The most significant of these three in

galvanizing solar energy growth has been the tax-based incentives. The other two policies

have had an impact on the solar energy industry primarily by attracting investment into

the construction of new solar facilities. The following section describes the policies that

are pertinent to the solar industry in both the residential and commercial sectors.

                                                                                                               57 Meza, Edgar. "Study: American Middle Class Embracing Solar Technology." Photovoltaic Markets and Technology 23 Oct. 2013: Web. 58 Harris, Arno. "The Era of Mainstream Clean Energy: Solar Rising." Recurrent Energy Conference. Stanford University, Palo Alto. Jan. 2013.

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Tax policies

There are currently two major tax-based policies that support solar installation in the

United States: the Qualifying Advanced Manufacturing Investment Tax Credit (ITC) and

the Modified Accelerated Cost-Recovery System (MACRS). The two can be used in

conjunction with each other and significantly reduce the cost of the system.

- The ITC offers a 30% tax reduction on investments in renewable energy

technologies. This incentive was introduced in the American Recovery and

Reinvestment Act. The maximum is $30 million and the total budget in 2013 was

$150 million.59 The incentive is used to support expansions of existing facilities

that are large and able to spur job growth. This incentive is not used for residential

rooftop installations, but rather larger installations from which a number of

households can receive power [61]. It is therefore often used by larger solar

companies to support the construction of new generating facilities.

- MACRS provides annual deductions on depreciated property. Using a set

depreciation table, businesses are able to recover investments on solar energy

installations. Most solar projects fall under the 5-year property class, and owners

can deduct 20% in the first year, 32% in the second year, 19.2% in the third year,

11.52% in the fourth and fifth years, and 5.76% in the sixth year after

construction.60 In addition to MACRS, a bonus depreciation policy was

                                                                                                               59 "Investment Tax Credit." Database of State Incentives for Renewables and Efficiency. Department of Energy, 2014. Web. 60 "Modified Accelerated Cost-Recovery System+ Bonus Depreciation." Database of State Incentives for Renewables and Efficiency. Department of Energy, 2014. Web.

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implemented in the Economic Stimulus Act of 2008, allowing businesses to

receive a 50% first-year bonus depreciation.

1603 Federal Grant Program

The 1603 Treasury Program was designed to be used in lieu of the ITC. The

program was established through the American Recovery and Reinvestment Act of 2009,

in the wake of the financial recession. It allows businesses to receive a grant equal to the

amount they would have received with an ITC. Residential projects are also eligible if

they are operated by third-party owners (such as a solar leasing company). The program

has allowed for the advancement of the private sector market, and subsequently solar

innovation and efficiencies. In just three years, the 1603 Treasury Program incentivized

$7.17 billion in private sector projects and the creation of 52,000- 75,000 jobs.61

                                                                                                               61 "1603 Federal Grant Program." Database of State Incentives for Renewables and Efficiency. Department of Energy, 2014. Web.

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CHAPTER 4

Solar Policies in Massachusetts

4.1 Renewable energy trends in Massachusetts

Massachusetts is an unexpected leader in the United States’ clean energy

transition, and the state boasts one of the least energy intensive economies in the nation.

The population density is relatively high at 852.6 residents per square mile, yet per-capita

energy consumption was only 211.8 million Btu in 2011. It is 46th in per-capita energy

consumption rankings by state, followed by Hawaii, Connecticut, Rhode Island, New

York, and California [64,65]. In 2010, Massachusetts became the nation’s most energy

efficient state, as measured by the American Council for an Energy Efficient Economy

(ACEEE). It has maintained this position for three years subsequently.62 Primarily

targeting utility-scale energy efficiency projects, Massachusetts has implemented various

state-level energy rebates and incentives to reduce electricity demand. With regard to

renewable energy advancements, Massachusetts has provided an example for neighboring

states with its expansive network of renewable energy incentives and credit programs.

The reasoning behind this investigation and discussion of Massachusetts-based

energy policies is that the state is likely to be the leader of regional renewable energy

transitions in the future. Along with California, Massachusetts has one of the most

ambitious clean energy goals in the United States. In December 2010, the Executive

                                                                                                               62 American Council for an Energy Efficient Economy. Massachusetts Most Energy-Efficient State in 2013 with California Close Behind at #2, Mississippi Is Most Improved. Energy Efficiency Scorecard. N.p., 6 Nov. 2013. Web.

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Office of Energy and Environmental Affairs announced a greenhouse gas emissions

reductions goal of 25% below 1990 levels by 2020.63 This was compliant with the state’s

Global Warming Solutions Act (GWSA) of 2008 which mandated a reduction of 80% by

2050.64 In order to achieve these emissions reductions goals, the state has tapped into its

abundant renewable energy resources while also relying heavily on natural gas for

electricity generation.

Further, in 2007 Governor Deval Patrick proposed a solar energy goal of 250MW

by 2017. This was bolstered by the Commonwealth Solar Rebate Program of 2008, which

allowed for installations to increase from 3.5MW in 2007 to 270MW in 2012.65 The

continuation, enforcement, and enhancement of state and federal-level incentives and

credit trading programs will accelerate the advancement of renewable energy in

Massachusetts into 2030. This report aims to explore the options available to the state

legislature in realizing the full potential of its wind and solar capacity.

4.2 Energy make up in Massachusetts

Natural gas currently dominates Massachusetts’ energy consumption; the recent

discovery of the vast shale deposits in neighboring states, particularly in the Mid-

Atlantic, has allowed for depreciations in energy production costs that make other

resources no longer cost-competitive. Figure 9 describes the trends in energy

                                                                                                               63 United States. Department of Energy Resources. Executive Office of Energy and Environmental Affairs. Massachusetts Clean Energy and Climate Plan. Boston: n.p., 2010. Climate Protection and Green Economy Climate Protection and Green Advisory Committee. 29 Dec. 2010. Web. 64 United States. Department of Energy Resources. Executive Office of Energy and Environmental Affairs. Massachusetts’ Progress Towards Reducing Greenhouse Gas. Massachusetts Global Warming Solutions Act. Web. 65 Massachusetts Clean Energy Center. Department of Energy Resources. Second Round of 2013 Massachusetts Solar Incentive Program Opens for Applications. About Solar Electricity. MassCEC, 12 Sept. 2013. Web.

  34  

consumption in Massachusetts, and illustrates a significant increase in natural gas

consumption as well as the decline in the use of coal and petroleum as energy resources.

Figure 9: Energy consumption for Massachusetts’ electricity generation 66,67,68

On a national level, petroleum has historically been the second most used resource for

electricity generation, after coal. In Massachusetts, petroleum was the primary resource

consumed in the electric power sector from 1965 to 1993. After the oil shock of 1979,

Massachusetts underwent a steady decline in the use of petroleum for electricity

generation. The current level of consumption in this sector is minimal. The

transportation sector, however, has historically been nearly completely reliant on oil,

primarily in the form of gasoline. While a transition in the transportation sector to natural

gas is forecast, until technological advances are made on automobiles, petroleum will

                                                                                                               66 United States. Department of Energy Resources. Energy Information Administration. Massachusetts Petroleum Estimates. Vol. F15. Total Petroleum Consumption Estimates, 2011. Web. 67 United States. Department of Energy Resources. Energy Information Administration. Table CT1. Energy Consumption Estimates for Major Energy Sources in Physical Units, 1960-2011. Web. 68 United States. Energy Information Administration. Department of Energy. State Energy Consumption Estimates: 1960 through 2011. Washington D.C.: n.p., 2013. Consumption Estimate in Physical Units. June 2013. Web.

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  35  

continue to hold a significant share in the state’s energy market as a whole.69

Coal consumption for electricity increased dramatically in the early 1980s,

correlating with the sudden reduction in petroleum use in the wake of the oil shock of

1979. Since this initial spike, consumption has remained relatively constant at about 120

trillion Btu annually. The trajectory of coal consumption for electricity had a generally

negative correlation with that of petroleum consumption until the 1993 when natural gas

became the dominating resource. In 2011, only 11% of electricity generated came from

coal-fired facilities. Despite this small margin, Massachusetts is currently the largest coal

consuming state in New England.70 As of 2005, there were 12 coal-fired power plants that

comprised roughly 12% of the state’s total electricity generation. Two large power plants,

generating more than 300MW each, comprised 1,454.5MW or roughly 81.4% of

electricity generated from coal.71 Brayton Point in Bristol County has a nameplate

capacity of 1,125MW, and Salem Harbor in Essex County has a nameplate capacity of

330MW.72 In early 2013, through large public protests by various non-profit and

community organization, Dominion- the owner of both large power plants- decided to set

a closing year of 2017 for Brayton Point.73 This will mean a power generation reduction

of about 7% that will likely be filled with generation from natural gas.

In 1991, natural gas surpassed petroleum to become the state’s primary energy                                                                                                                69 Mcrae, Gregory C., and Carolyn Ruppel. The Future of Natural Gas. Rep. Cambridge: Massachusetts Institute of Technology, 2011. MIT Study on the Future of Natural Gas. MIT, June 2011. Web. 70  U.S. Coal Supply and Demand: 2011 Year in Review. Publication. U.S. Energy Information Administration, 11 June 2012. Web. Nov. 2013.  71  United States. Energy Information Administration. Department of Energy. Net Generation from Coal by State by Operating Facility: 2012. Washington D.C.:2012. November 2013. Web.  72  Dominion Corporate. Brayton Point Power Station. Boston: Dominion Corporate, 2012. Print.  73  Konkel, Lindsey. "Coal-Fired Power Plants Virtually Extinct in New England: Scientific American." Coal-Fired Power Plants Virtually Extinct in New England: Scientific American. Scientific American, 1 July 2013. Web. Nov. 2013.

 

  36  

resource. Currently, it constitutes roughly three quarters of the energy market supply with

primary end-use in electricity production and in the residential sector. While most of

Massachusetts’ natural gas is distributed by pipeline, the state hosts three terminals that

provide 20% of New England’s natural gas.69 With the recent extraction of resources

from the vast natural gas deposits in the Marcellus Formation, wholesale gas prices have

decreased in the short-term. In the long-term, increased exports or other domestic uses

may result in at least a marginal rise in domestic prices as demand increases

incrementally to meet supply. Additionally, the need for developing future technology to

extract the resource beyond the currently abundant shale gas deposits is likely to cause

the price of natural gas consumption to increase. Although Massachusetts has become a

hub for interstate natural gas imports, it lacks the reserves to be self-sufficient using this

resource.

Where Massachusetts lacks fossil fuel reserves within its borders, it is abundant in

renewable energy resources. The state’s utilization of these resources began in 2006 with

the installation of 3MW of wind turbines. By 2012, the cumulative installed capacity

reached 100MW.74 Significant solar installations began in 2006, when 2.18MW were

installed cumulatively.75 This represented a 600% increase from 2005, when the installed

capacity was 0.28MW.76 Both energy resources are currently supported by tax subsidies

and energy rebates that allow for the payback period to be markedly decreased. Further,

the residential sector in Massachusetts can currently achieve a payback period of 5-6

years instead of the typical 20 years for solar and 10 years instead of 25 years for small

                                                                                                               74 Jordan, Phillip, and Jamie Barrah. 2012 Massachusetts Clean Energy Industry Report. Issue brief. Massachusetts Clean Energy Center, 2013. Web. 75 Sherwood, Larry. U.S. Solar Market Trends 2008. Rep. Interstate Renewable Energy Council, June 2009. Web. 76 Sherwood, Larry. U.S. Solar Market Trends 2009. Rep. Interstate Renewable Energy Council, June 2010. Web.

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wind turbine installations.

4.3 The Massachusetts electricity distribution network

Massachusetts deregulated its electricity market in 1997 when the Massachusetts

Legislature implemented The Electric Restructuring Act. This law made it possible for

electricity consumers to choose both an electricity supplier and distributer instead of

being assigned a conglomerate public utility based on location.77 Prior to The Electric

Restructuring Act, Massachusetts residents paid some of the highest rates in the United

States. Following in the footsteps of California’s AB1890 that restructured and

deregulated electricity distribution, Massachusetts structured the law differently so that it

would not encounter the same concerns faced by California. The most significant of these

differences was that Massachusetts allowed for maintained price flexibility, while

California placed caps on electricity rates.78 By 1998, Massachusetts residents saved

10% on monthly electricity bills, and by 1999 an additional reduction of 5% was

achieved.79 Furthermore, the law allowed for new generation facilities to be built,

avoiding the electricity shortages that California faced in the wake of the California

Electricity Crisis of 2001.

The Electric Restructuring Act allowed for out of state retail electricity suppliers

to enter the competitive energy supply market, effectively lowering rates for consumers.

                                                                                                               77 United States. General Court of Massachusetts. Session Laws: Chapter 164 of the Acts of 1997. November 1997. Web. 78 May, Thomas J. "Deregulation in Massachusetts: It's Working." Transmission & Distribution 1 Dec. 2001: Web. 79 Joskow, Paul L. "Restructuring, Competition and Regulatory Reform in the U.S. Electricity Sector." Journal of Economic Perspectives 11.3 (1997): 119-38. The Journal of Economic Perspectives, Summer 1997. Web.

  38  

Local utilities maintained the responsibility of electricity distribution and in some

locations a small share of the supply market. Currently, four larger companies control

residential electricity supply in Massachusetts. Fitchburg Gas and Natural Light

Company, the smallest of this group, provides service to the towns of Ashby, Fitchburg,

Lunenburg, and Townsend.80 National Grid provides service to Worcester, Bristol,

Plymouth, and Essex counties, in addition to surrounding states.81 NSTAR Electric

provides electricity services to areas of Plymouth, Middlesex, and Worcester counties.82

Western Massachusetts Electric Company primarily provides service to the region west

of Worcester County.83

Distribution through the electric grid is essentially a complex web of connections

among public utilities, retail electricity suppliers, generators, and consumers. It is divided

into three key levels at which individual prices are set based on location and

circumstance. At the first stage, generation, power plants produce large amounts of

electricity to be transmitted through the grid. These facilities are typically centrally

located, and are owned by energy production companies based both in and out of state.

The energy production companies then forward the cost of their electricity generation to

the transmission stage, where it concurrently enters the wholesale electricity market.84,85

In Massachusetts, this market is regulated by the New England Independent System

Operator (ISO-NE). At this point, retail electricity suppliers take the output from energy

                                                                                                               80 Department of Public Utilities. Executive Office of Energy and Environmental Affairs. Electric Retail Suppliers Directory. 81 "Service Territories." National Grid. National Grid: MA Electric Company, n.d. Web. 82 "Service Area Map.": Map. NSTAR. NSTAR: Massachusetts Area, Web. 83 "Areas Serviced: Directory.": WMECO. Western Massachusetts Electric Company: Massachusetts Service. 84 Pansini, Anthony J. Electrical Distribution Engineering. New York: McGraw-Hill, 2006. Print. 85 "Distributed Generation and Interconnection in Massachusetts." Distributed Generation and Interconnection in Massachusetts. Massachusetts Department of Energy Resources, 10 Nov. 2013. Web. Nov. 2013.

  39  

production facilities and price it according to the wholesale market price. The

transmission system takes the large amounts of electricity through high voltage wires as

the market sets the price for retail electricity suppliers. Finally, the electricity is sent to

the distribution stage, at which point the voltage is reduced at substations and sent to end-

use consumers.86 The rate that is paid by the consumer is therefore based on two prices,

one from the retail supplier and the other from the public utility distributer.

4.4 Electricity rates in Massachusetts

Electricity rate trends in Massachusetts currently follow the price trajectory of

natural gas, as the state has become dependent on this primary energy resource. The

historical trend in wholesale electricity rates provided by the ISO-NE at the

Massachusetts Hub reveals that the day-ahead electricity price is set by domestic natural

gas prices.87 Figure 10, below, describes the price differential in both state electricity

rates and natural gas prices on a quarterly basis. It shows a correlation between the two

trajectories, implying that the electricity rate is determined by the state’s heavy reliance

on a single fuel source.

                                                                                                               86 "How the System Works: Massachusetts." Distribution and Deregulation. Edison Electric Institute, n.d. Web. 87 Independent System Operator (New England). Day-Ahead Demand-Bid Data: 2003-2013. Web. 20 Sept. 2013.

  40  

Figure 10: Price comparison of weighted electricity rates and wholesale natural

gas prices (2002-2012)88

As Massachusetts transitions away from fossil fuels, it must have a more varied

portfolio of energy resources. The dependence on natural gas will have significant

ramifications in the long term as the price of natural gas extraction increases. With no

fossil fuel reserves within the state’s borders, Massachusetts must tap into its abundant

renewable energy resources with particular emphasis on wind and solar. While interstate

trade of energy resources is an option, is not the optimal choice because it restricts energy

independence and does not utilize intrastate energy trade opportunities.

The Energy Information Administration (EIA) estimates that electricity rates will

continue to increase through 2015, while electricity consumption will remain roughly

constant.89 This is partly based on fuel cost projections, with particular emphasis on the

cost of natural gas extraction. Another important factor in the rising cost of electricity is                                                                                                                88 Energy Information Administration. Natural Gas in New England: Natural Gas Prices: Electric Power Price. Web. 20 Sept. 2013.

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  41  

the increasing capital cost of building new power plants. The EIA recognizes the role of

the Environmental Protection Agency (EPA) and its plans to implement more stringent

regulations for new fossil fuel plants, in addition to the not-in-my-backyard public

opposition towards nuclear facilities and an increased awareness of the effects of fossil

fuel combustion on the global climate. These factors have made permitting and grid

interconnection more expensive for energy producers who had relied previously on a

consistently increasing demand for electricity to keep capital costs low. The recent

economic downturn has also softened demand and has caused a nationwide decrease in a

technologically skilled labor force. Coal, nuclear, and renewables generating facilities

typically have higher upfront capital cost than natural gas, which makes electricity rates

additionally dependent on wholesale prices for natural gas.

The EIA’s forecast estimates an average annual increase of 1.6% in electricity

rates through 2040. The following diagram depicts this growth, accounting for

generation, transmission, and distribution costs:

  42  

Figure 11: Electricity rate projections in the United States (2003-2040)89

The Energy Outlook model that the EIA used assumes that current policies and

regulations will stay the same for the next 30 years. Weight was particularly placed on

the relationship between crude oil and natural gas prices in structuring the model, as these

were deemed as the primary resources consumed in the U.S. energy market.

In Massachusetts, electricity rates are slightly higher than other areas primarily

because the state lacks energy resource reserves within its borders. The following is a

diagram of electricity rates, inclusive of generation, transmission, and distribution costs

for Massachusetts from 1997 to 2012. The trajectory is superimposed on national and

regional (New England) trends, and displays the markedly higher rates that were found

the state. Massachusetts electricity rates are dependent on domestic wholesale natural gas

prices, as these prices have declined in recent years as noted earlier in response to the

increase supply for and subsequent decrease in shale price elasticity.

                                                                                                               89 Short-Term Energy Outlook (STEO). Rep. Energy Information Administration, Fall 2013. Web.

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Figure 12: Historical retail electricity rates in the United States, New England, and

Massachusetts (1997-2012)90,91

4.5 Renewable energy trends and the Renewable Portfolio Standard

As a leader in the transition to a renewable energy economy, Massachusetts has

implemented numerous state-level financial programs to incentivize the growth of the

wind, solar, and biofuel markets. Massachusetts’ Renewable Portfolio Standard (RPS)

was one of the first laws to put a number on its carbon emissions reduction goal. An RPS

mandates that retail energy suppliers fulfill a certain percentage of their supply using

renewable energy resources. In Massachusetts, this percentage is satisfied through the

purchase of RECs, with each REC equivalent to 1MW of renewables-sourced power.92

The Massachusetts RPS ordered a 1% reduction by 2003, increased by half percent

                                                                                                               90 2013 Regional Electricity Outlook. Rep. New England Independent System Operator, Summer 2013. Web. 91 United States. Energy Information Administration. Wholesale Market Data. Updated November 2013. NEPOOL Mass Hub New England. Web. 13 Nov. 2013. 92 "RPS and APS Program Executive Summaries." Energy and Utilities. Executive Office of Energy and Environmental Affairs, Summer 2012. Web.

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annually until there was a 4% reduction in 2009. In 2009, this annual growth in

reductions was raised to 1% and the RPS was divided into two categories- Class I and

Class II- each with different percentages for renewables obligation.93 Class I is primarily

for renewable resources-based generation facilities that began commercial operation after

1997. The current 2013 RPS Class I requirement is 8%, with an annual increase of 1%.94

The Class II RPS requirement was established in order to facilitate the phase out of older

generation facilities built before 1997. The Class II RPS requirement has two parts, both

of which must be satisfied. The first part is the RPS Class II Renewables Requirement

which orders that 3.6% of generation comes from renewable energy resources. The

second is the RPS Class II Waste Energy Requirement, which is currently 3.5% and

based on electricity or steam generation from burning solid waste at high temperatures.95

The RPS is regulated by the Executive Office of Energy and Environmental

Affairs’ Department of Energy Resources. It is facilitated at the wholesale electricity

market by the New England Power Pool (NEPOOL) Generation Information System

(GIS), which tracks and operates the transmission of electricity into the New England

power grid. Through NEPOOL-GIS, retail electricity suppliers purchase RECs from

renewable energy-based generators who then transfer the RECs through the NEPOOL-

GIS REC database.96

                                                                                                               93 Massachusetts Department of Energy Resources. Executive Office of Energy and Environmental Affairs. 225 CMR 15.00 Renewable Energy Portfolio Standard- Class II. Boston: 2010. Print 94 Parker, Seth, Ellen Cool, and Diane Rigos. Power Market and System Operating Impacts of Solar Development in Massachusetts. New England Energy and Commerce Association Renewables and Distributed Generation Committee, 28 Mar. 2012. Web. 95 "Massachusetts Excise Tax Deduction for Solar- or Wind-Powered Systems." Database of State Incentives for Renewables and Efficiency. Department of Energy/ Interstate Renewable Energy Council, n.d. Web. 96 "Excise tax exemption for solar powered systems." Database of State Incentives for Renewables and Efficiency. Department of Energy/ Interstate Renewable Energy Council, n.d. Web.

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4.6 Why Solar in Massachusetts?

Massachusetts has a foundation of solar policymaking that makes it conducive for

an emerging and advancing solar photovoltaic market. While wind power has been seen

as the more conventional, and in some ways reliable, energy resource in the northeastern

state, solar is quickly catching up with respect to its renewable energy market share. In

the second quarter of 2012, solar industry growth surpassed wind growth and in 2013

fulfilled 2.3% of Massachusetts energy demand (compared to 1.8% for wind).97 The

following diagram depicts the trajectory of market growth for wind and solar industries.

Figure 13: Renewable energy industry growth in Massachusetts (2007-2013)98

Solar installations have a net capacity factor (efficiency) of 12.8% in

Massachusetts, and have the potential to generate 51,568MW (11,723 million kWh) of

photovoltaic energy.98 For wind installations, the potential more than tripled, at                                                                                                                97 Ardani, Kristen, Dan Seif, Robert Margolis, Jesse Morris, and Carolyn Davis. Non-Hardware (“Soft”) Cost- Reduction Roadmap for Residential and Small Commercial Solar Photovoltaics. Publication. Golden: National Renewable Energy Laboratory, 2013. Print. 98 Department of Energy Resources. Renewable Energy Portfolio Standard Guideline on the Forward Schedule of the Solar Carve-Out and Alternative Compliance Payment. Renewable Energy Portfolio Standard Class I Regulation in 225 CMR 14.00. Massachusetts Executive Office of Energy and Environmental Affairs, 28 Dec. 2012. Web.

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184,075MW (82,205 million kWh) for offshore windfarms.99 This potential is the amount

of power produced if the state utilized all of its renewable resource. Electricity

consumption in Massachusetts was 55,570 million kWh in 2012, of which the residential

sector comprised about 37.1% (20,670 million kWh).67 Solar energy, which is more

popular in residential installations due to its sizing flexibility, has the potential to power

all residential electricity demand in the state. Perhaps realizing solar energy’s

applicability for smaller household properties, the Massachusetts government has

advanced state-level incentives and credit trading programs more for solar than it has for

wind energy.

Small residential sector solar projects have increased in popularity; from 2011-

2012 this market grew by 60%. In 2013 over 35.9GW of new solar photovoltaic

installations were made worldwide. The revenue from the technology is forecast to

surpass $137 billion by 2020, driven by the rising popularity of “solar-as-service”

businesses which lease the installations but retain ownership over the project.98 Factors

influencing this rise in popularity include the increased awareness of the cost-savings

from solar projects and a public concern with respect to the ramifications of global

climate change. Further incentivizing homeowners is the lower capital cost of installing a

solar project as compared to a wind project, as less property is required to install a solar

system. The National Renewable Energy Laboratory projets that capital cost will

continue to decrease through 2020 due to increased efficiency in manufacture and quality

assurance and that the ultimate cost to consumers will also follow this trajectory.97 The

table below presents NREL’s estimations through 2020:

                                                                                                               99 Howe, Peter J. "State to Launch $68m Solar Panel Program." The Boston Globe 14 Dec. 2007: Print.

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Table B: Soft cost and total cost projections for new solar systems99

2010 2013 2014 2015 2016 2017 2018 2019 2020

Total Soft Costs ($/W)

3.32 2.52 2.25 1.99 1.72 1.45 1.18 0.92 0.65

Total System Costs ($/W)

6.60 4.99 4.49 3.99 3.49 3.00 2.50 2.00 1.50

Currently, the most effective and best publicized renewable energy program in the

state is the RPS Solar Carve-Out Program which was established in 2010. The program,

compliant with the 2008 Green Communitites Act which aimed to emphasize residential

renewable energy projects, went through a series of evaluations by private energy

generators, suppliers, and public utilities before it went into effect. It is a market-based

incentive that supports residential and commerical solar installations to achieve the

DOER’s goal of 400MW of solar photovoltaic energy.100 The Solar Carve-Out Program

was a groundbreaking program that perpetuated the rapid growth of the solar industry in

Massachusetts. This, in addition to smaller state-level programs, makes solar an

economicaly viable option in Massachusetts.

                                                                                                               100 "Massachusetts Excise Tax Deduction for Solar- or Wind-Powered Systems." Database of State Incentives for Renewables and Efficiency. Department of Energy/ Interstate Renewable Energy Council, n.d. Web.

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4.7 Current state-level solar energy incentives

In 2002, Massachusetts’ legislature allocated $68 million to incentivize residential

sector solar installations.101 This budget was exhausted in two years. The Renewable

Portfolio Standard (2002) and subsequent Solar Carve-Out program quickly made solar

power close to cost-competitive with conventional fuel sources. Currently, there are over

twenty state-funded programs that support solar energy installations in the residential and

commercial sectors. Each has individual requirements for the generating facility, and

many include a cap on the size of the incentive (or the size of the plant). These programs

can be categorized into three groups: tax credit-based programs, incentive/rebate

programs, and a renewable energy credit trading program, The following is a listing of

the groups with general descriptions of their programs.

Tax credits

The solar energy tax credit is the oldest solar energy incentive in Massachusetts.

The Residential Renewable Energy Income Tax Credit, which allows a 15% against state

income taxes (up to $1000), was implemented in 1979. The Renewable Energy Property

Tax Exemption credits the property tax on the land used for renewable energy

installations, and was enacted in 1975.102 Despite the fiscal incentive that the tax credit

provided, residential solar panels were not installed until 1993. Because fossil fuel costs

were so low at the time, solar energy was not cost-competitive even when the tax

                                                                                                               101 "Excise tax exemption for solar powered systems." Database of State Incentives for Renewables and Efficiency. Department of Energy/ Interstate Renewable Energy Council, n.d. Web. 102 "Residential Renewable Energy Income Tax CreditDatabase of State Incentives for Renewables and Efficiency. Department of Energy/ Interstate Renewable Energy Council, n.d. Web.

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exemptions were taken into account. Currently there are five state-funded tax programs

that support solar, listed below:

Table C: Solar tax programs in Massachusetts103,104,105

Tax Program Description Amount Start and End Date Excise tax deduction for solar powered systems

Capital expenditures related to solar installations are tax deductible

100% 2008 onwards

Excise tax exemption for solar powered systems

Property rates related to solar installations are deductible

100% 1976 onwards (updated 2008)

Residential Renewable Energy Income Tax Credit

Tax credit against state income tax for solar installation

15%, up to $1000 1979 onwards

Renewable Energy Property Tax Exemption

Property tax exemption 100% for 20 years (operation period)

1984 onwards

Renewable Energy Equipment Sales Tax Exemption

Equipment sales tax exemption

100% for 20 years (operation period)

1997 onwards

Incentives and rebates:

Massachusetts first implemented its solar incentive program in 2001, when it

enacted a renewable energy surcharge on electric utility bills. In April 2007, a goal of

450MW by 2017 was announced; to facilitate this goal the Commonwealth Solar Rebate

Program was established in January 2008. The most important development in

Massachusetts’ solar rebate programs was the Commonwealth Solar Rebate II that began

concurrently in 2008. The incentive is currently in its 16th block, with a budget of $1.5

million. The program includes a base incentive of $0.40/W, with an added incentive of

$0.05/W for Massachusetts company components and $0.40/W for households of

                                                                                                               103 "Renewable Energy Property Tax ExemptionDatabase of State Incentives for Renewables and Efficiency. Department of Energy/ Interstate Renewable Energy Council, n.d. Web. 104 "Renewable Energy Equipment Sales Tax Exemption”Database of State Incentives for Renewables and Efficiency. Department of Energy/ Interstate Renewable Energy Council, n.d. Web. 105 “Commonwealth Solar II Rebate”Database of State Incentives for Renewables and Efficiency. Department of Energy/ Interstate Renewable Energy Council, n.d. Web.

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moderate income or moderate home value. The maximum for this incentive is $4,250 for

residential installations and $2,250 for commercial installations.106

Often applicable in conjunction with the Solar Rebate II program is the Green

Communities Grant Program. Enacted in July 2008, this program allocates custom

incentives to communities that implement education and solar installation projects that

reduce energy use by 20% in 5 years and increase renewable projects significantly. This

program accepted its final application in 2013, and has not been planned to continue into

the next block.107

Renewable Energy Credit Program

The Solar Renewable Energy Credit (SREC) Program was implemented to

facilitate the achievement of energy goals outlined in the Massachusetts RPS, which

mandates that energy suppliers include qualifying renewables in 15% of the electricity

they sell by 2021. It facilitates the trade of Class I solar credits described by the Solar

Carve-Out program, which must come from in-state and interconnected solar facilities.

Each SREC is equivalent to 1MWh of solar-based production. Generators enter their

electricity output, in the form of SRECs, into the SREC auction. Various retail energy

suppliers then enter the market and take out credits as needed. Compliance with the RPS

regulations can only be done through the use of SRECs. The price of each credit is based

                                                                                                               106 Massachusetts Clean Energy Center. Commonwealth Solar II - Block 16. Commonwealth Solar II Rebates. Massachusetts DOER, Web. 107 “Green Communities Grant”Database of State Incentives for Renewables and Efficiency. Department of Energy/ Interstate Renewable Energy Council, n.d. Web.

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on market behavior, very similar to the cap-and-trade systems used in the European

Union and discussed in the U.S.108

In order to combat the price volatility faced by similar auctions used previously,

the DOER implemented a Solar Credit Clearinghouse Auction with set prices. There is

currently a price floor of $285/MWh ($300/MWh minus a 5% administrative fee) and a

ceiling, known as the Solar Alternative Compliance Payment, that follows the annual

schedule noted below:

Table D: Alternative Compliance Payment values planned109

Year SACP ($/MWh)

2012 550

2013 550

2014 523

2015 496

2016 472

2017 448

2018 426

2019 404

2020 384

2021 365

In the summer of 2013, Solar Credit Clearinghouse Auction entered its first

auction using generation from 2012. Due to the implementation of the incentivizing

                                                                                                               108 Berwick, Dan. "Understanding Massachusetts’ SREC Auction Program." Greentech Media 22 July 2013: n. pag. Web. 109 “Solar Renewable Energy Credits” Database of State Incentives for Renewables and Efficiency. Department of Energy/ Interstate Renewable Energy Council, n.d. Web.

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financial instruments discussed previously, as well as various new business models that

attracted solar installations, the auction did not fully clear. There was an unexpected

oversupply of 38,863 SRECs, and ultimately the auction only partially cleared at the third

and final round with 3 SRECs sold. The DOER offered to purchase the remaining unsold

SRECs at a price of $285/SREC, costing the agency $10,384,545.110 Some SREC

depositors requested that their SRECs be returned to bank for future auctions. While the

cost of this auction failure was significant, it also signaled Massachusetts’ readiness to

encourage further solar developments. Days after the auction results were released,

Governor Patrick announced a solar goal of 1600MW for 2020.111

                                                                                                               110 Executive Office of Energy and Environmental Affairs. Department of Energy Resources. DOER After-Auction SREC Purchase Results. Solar Credit Clearinghouse Auction. N.p., n.d. Web. 111 Executive Office of Energy and Environmental Affairs. Department of Energy Resources. SREC-II Solar Carve Out Policy Development. Post-400MW Solar Policy Developments, 7 June 2013. Web.

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CHAPTER 5:

The Solar Power Purchase Agreement

5.1 Background on Solar Power Purchase Agreement

The increasing popularity of solar installations in the residential and commercial

sectors is a result of three factors: a transition in public opinion towards climate change,

the implementation of supportive policies by state and federal governments, and the

emergence of business ventures that take advantage of new financial opportunities. While

the first two of these factors have created an environment that is capable of supporting

solar industry growth in the short term, it was the introduction of SPPA business model

that perpetuated rapid growth between 2003 and 2013, particularly the increase after

2010.112 This model, which consolidates the many components of solar power distribution

into one company, allows end-use customers to easily install residential and commercial

solar systems and for the SPPA-based company to take advantage of the financial

opportunities available.113 The financial systems implemented in Massachusetts are

particularly friendly towards this model and its facilitation of end-use solar consumption.

The SPPA-based business model has evolved from its original form, in which

utilities contract for power from the solar companies, to tailor their agreements on an

independent scale in the distributed generation markets. As the middleman between the

utility and the consumer, the SPPA-based company absorbs the high upfront cost that is                                                                                                                112 "Solar Power Purchase Agreement." Green Power Partnership. Environmental Protection Agency. 113 Critchfield, James, Mark Buckley, and Mark Culpepper. "Solar Power Purchase Agreement." EPA Green Power Partnership. 28 July 2009. Webinar.

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historically associated with solar installations.114 The model begins with a PPA between

the host and the solar service provider, which allows the provider to own and maintain

any solar installations made. Instead of relying on the local utility for electrical power,

the host purchases it from the solar provider at a negotiated rate that is typically lower

than the standard rate. The state-level financial incentives are processed by the provider,

who also often has control over the sale of the renewable energy credits generated by the

PV system. The utility, though it is not used as the primary power provider, remains

interconnected to the host in order to ensure that regular electricity service can be

provided. It also issues net metering credits to the host (where net metering is available),

allowing the system to sell back electricity that it produces but does not use.115

Figure 14: Overview of the SPPA business model112

                                                                                                               114 Kollins, Katherine, and Lincoln Pratson. Solar PV Financing: Potential Legal Challenges to the Third Party PPA Model. Nicholas School for the Environment. Duke University, 5 Dec. 2008. Web. 115 Eberhard, Anton. "Independent Power Producers and Power Purchase Agreements: Frontiers of International Experience." University of Capetown, Graduate School of Business, Cape Town. Presentation.

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A solar PPA (SPPA) covers the installation and operation of a solar panel system

typically for 6-20 years (6 years is the minimum amount of time for tax incentives to be

fully realized).116 In general, the SPPA-based company can take better advantage of the

policy mechanisms offered by the state and utility, which operate in large blocks of

power generation. These companies are able to enter the power generation market (net

metering and SREC auctions) with groups of projects that each total upwards of 1MW.117

This in turn allows for these companies to lower their rates of electricity, making them

cost-competitive with the local utility. Consumers are attracted to the promise of a lower

electricity bill, environmental benefits, and the stable rates that an SPPA offers in volatile

electricity markets.

While many states have adopted policy mechanisms to support a solar energy

transition through SPPAs, they have applied them in distinctive ways. The two most

significant market-based instruments used are net metering programs and the SREC

auction. Net metering is not a transaction between the state government and an electricity

consumer, but rather a renewable facility host and the utility. The net metering program

allows the host to sell net excess generation (NEG) back to the grid, at a rate comparable

to that supplied standard utility.118 The electricity was therefore sold at the retail rate,

rather than the wholesale electricity price. Each state has individual regulations for this

transaction, and those with explicit net metering mechanisms have had increased solar

activity.

                                                                                                               116 Customer Guide to Solar Power Purchase Agreements. Publication. Pasadena: Rahus Institute, 2008. Print. 117 Power Purchase Agreement Checklist National Renewable for State and Local Governments. Publication. Golden: National Renewable Energy Laboratory, 2010. Print. 118 "Net Metering." Distributed Generation. National Grid, Web.

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Figure 15: Net metering availability by state119

In addition to net metering, the SREC auction plays a great role in facilitating

SPPA competitiveness. In Massachusetts, where the SREC auction requires entries in

1MW intervals, individual solar hosts are not incentivized to enter their projects. Solar

leasing companies, however, can bundle projects into larger packages that can have

market pull in determining the price of each SREC. Similarly to states that regulate net

metering transactions, states that house intrastate SREC auctions tend to have a better

trajectory towards solar cost competitiveness.120

                                                                                                               119 "Map: Net Metering Programs by State." Green Power Network. Department of Energy: Energy Efficient and Renewable Energy, 2013. Web. 120 Massachusetts SREC Market Price & Rule Update. Publication. Boston: Karbone Research and Advisory, 2013. Print.

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Figure 16: SREC programs by state121

The SPPA-based business model evolved from this original legislation as

companies began to tailor their agreements on an independent scale in the distributed

generation markets. As SPPA-backed solar installations continue to increase in

popularity, states will need to explore various policy enhancements and market-based

instruments to support and ease a shift towards a less grid-reliant energy economy.

Massachusetts has already begun to examine relevant policies; therefore, the influence

that the business model has on electricity rates will need to be explored to understand the

direction of solar growth in the future.

                                                                                                               121 "Market Drivers: SREC Auctions." Map. Sustainable Energy. Map. Pennsylvania State University, 2012. Print.

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5.2 Issues that the SPPA will face in the future

As the solar industry in Massachusetts continues to gain momentum, it is

important to discuss the obstacles that the SPPA will face in the future. While SPPA-

based installations allow for minimized upfront costs and price stability, they are

vulnerable to problems that are inevitable for this investment-backed emerging market. In

Massachusetts these issues are not too significant because the state has built a solar-

friendly policy infrastructure to support the continued increase of SPPA-based

businesses. As the market expands to other states however, it will face heavy legal

scrutiny that may impede its success in entering the local energy economies. Though in

theory the business model can lead to rate-competitiveness of solar against other

generating resources, these issues must be explored to facilitate the transition to a cleaner

energy economy on a national scale.

(1) Competition with natural monopoly of utilities

Massachusetts’ deregulation of the electricity market has allowed for the entry of

independent generators and the subsequent rise of third-party (SPPA-based) solar

companies. In states that regulate their power distribution, a single utility becomes the

natural monopoly and sets the price of electricity. The legal feasibility of using an SPPA

depends on deregulation; in these cases, the end-use consumer is allowed to choose the

electric generating entity in a competitive market. Currently, 24 states in the U.S. have

some form of deregulated (or partially deregulated) electricity markets. Kansas,

Colorado, Utah, and Florida are four states that do not have deregulated markets but are

  59  

in regions with high solar influx.122 These states do not have deregulated markets due to

strong political positions of their utilities; competition in the market would impose on the

financial success of the utilities’ current business models.

Public utility commissions (PUC) currently have regulatory power over the

wholesale electricity market in order to ensure that end-use consumers are protected from

fraudulent transactions. Entry into the electricity market by SPPA-based companies leads

them to question whether or not these PUCs should have control over SPPA-based

companies as well.123 Although the companies claim that competitive market behavior

will act as a safeguard, the issue still remains a question of legality. In states with

interconnection regulations, such as Massachusetts, utilities are able to maintain some

oversight through net metering credits. These credits, however, also incentivize solar

installations that in turn dissuade consumers from using the utility. With the increase in

demand for residential solar systems, particularly those that are SPPA-backed, many

utilities are now worried that they will soon become obsolete.

In 2013, the Arizona Public Service (APS) proposed to eliminate net metering

programs and institute a $50 monthly surcharge on homeowners who installed a solar

system. It claimed that solar consumers were receiving credits while non-solar consumers

paid additional amounts on their electricity bills to maintain the distribution

infrastructure.124 In November 2013, regulators agreed to allow the net metering program

to continue but for a $5 surcharge to be implemented on solar consumers’ bills. Earlier in

2008, the Arizona Corporate Commission, the regulatory body for power distribution,                                                                                                                122 "Energy Deregulation State By State Breakdown." IConnectEnergy. Verde Energy USA. 123 St. John, Jeff. "Fight Over Battery-Backed Solar in Southern California." Greentech Media 23 Sept. 2013:Web. 124 Cardwell, Diane. "Compromise in Arizona Defers a Solar Power Fight." The New York Times. The New York Times, 15 Nov. 2013.

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had claimed that SPPA-based installations were not legal.125 Citing Article 15 Section 2

of Arizona’s constitution, it defined a public utility as an entity “furnishing electricity or

power” and required the companies to be regulated. However, this was also struck down

as the companies are not “clothed in the public interest” and therefore are not utilities but

private businesses.126 Arizona has the third largest installed solar capacity in the United

States, and its recent history of conflict should be viewed as a harbinger of obstacles to

come.

(2) Solar is unsustainable, needs incentives to thrive

An argument that is raised as a shift towards the SPPA gains momentum in

Massachusetts is that solar industries necessitate generous policies to facilitate growth,

and that the market is not inherently sustainable. The existence and amount of

government support for an emerging market, however, is not uncommon and certainly is

not new. In fact, in the period between 2003 and 2012, the federal government spent

more on the development of almost every other type of energy resource than it did on

renewable energy resources.127

                                                                                                               125 Wilder, Clint. "2014: The Maturation of Clean Tech." The Huffington Post. TheHuffingtonPost.com, 09 Jan. 2014. Web. 126 "Public Service Corporations" Defined. Phoenix: Arizona State Legislature. 127 United States. Congressional Research Service. Renewable Energy R&D Funding History: A Comparison with Funding for Nuclear Energy, Fossil Energy, and Energy Efficiency R&D. By Fred Sissine. Washington, D.C.: n.p., 2012. Print.

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Figure 17: Federal expenditures on energy by source (2003-2012)

In 2009, the federal government spent $3.2 billion to support fossil fuels compared to

$1.5 billion for renewable energy resources.128 The majority of the financial support was

received by these industries in the form of tax subsidies and exemptions. 40% of the cost

of federal energy development came in the form of tax provisions, or the amount of

federal tax revenue reduced. Over the course of 60 years, the United States government

spent $194 billion on tax policies for the oil industry, compared to $44 billion for wind

and solar combined.129

Based on President Obama’s FY2014 budget, the future of tax policies will not

include an increase in tax credits for renewable energy, but rather an extension of what is

already in place. In the period between 2013 and 2017, the cost of tax provisions for

fossil fuels is expected to be $20.6 billion. For renewables, this cost is estimated to be

$39.6 billion. Of this $39.6 billion, however, $17.2 billion is expected to be provided                                                                                                                128 Pew Charitable Trust. Pew Illuminates Federal Energy Spending. Federal Energy Spending Analysis. N.p., 9 Sept. 2010. 129 60 Years of Energy Incentives: Analysis of Federal Expenditures for Energy Development. Publication. Washington, D.C.: Nuclear Energy Institute, 2011.

Renewable Energy

17%

Nuclear Energy 26%

Fossil Fuel Energy

25%

Energy Efficiency and

Systems 32%

Renewable Energy

Nuclear Energy

Fossil Fuel Energy

Energy Efficiency and Systems

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through Section 1603 grants, described earlier in Chapter 3.130 Accounting for this, the

actual cost of tax expenditure and tax incentives for renewables is estimated at $22.4

billion for this period. The budget plans to repeal several significant tax policies from the

fossil fuel industry while supplementing the remaining policies with additional incentives

for electric and alternative fuel vehicles. In total, the budget plans to repeal $48.1 billion

in fossil fuel tax provisions over the course of 10 years and to add $33.6 billion in new

and continuing incentives for alternative resources and electric vehicles.

In Massachusetts, federal tax policies- though significant in reducing the cost of

solar electricity- may not be the greatest factor in achieving cost-competitiveness with

other resources. In conjunction with an SPPA, the SREC market will continue to drive

down costs by encouraging direct investment into the state. The market-based instrument

is not supported by federal funding and does not figure into the calculation of federal

expenditures on energy development outlined above. Although the 2013 Solar

Clearinghouse Auction did not clear, as explained in Chapter 3, the introduction of the

SREC market incentivized over half a billion dollars in direct investment. This direct

investment was reflected in an increased number of out-of-state solar companies planning

projects in Massachusetts.131 The total cost from the first SREC auction was $14 million,

but the market ultimately brought in over $450 million in additional revenue to the

Massachusetts solar industry.132 Using the alternative compliance payment price, the

impact of the SREC market on electricity costs can be calculated as having a 15%

reduction of end cost. Because the ACP is a price floor, it can be assumed that this is the                                                                                                                130 United States. White House. Office of Management and Budget. FY2014 Budget: Department of Energy. 2013. Web. 131 Abe, Jon. "Conversation with Jon Abe, VP of Nexamp Inc.” 132 "Solar Credit Clearinghouse Auction." Department of Energy Resources. Massachusetts Executive Office of Energy and Environmental Affairs, Web.

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minimum impact. In Massachusetts, significant cost reductions are achieved by allowing

for competition amongst solar companies. The experience in 2013 with market-based

instruments (the SREC auction and net metering program) shows that government

support in the form of market regulation has an equally significant and more sustainable

influence on the solar industry.

(3) Investment-backed installations hurt innovation in the long-term

The sustainability of the solar industry relies on some level of government

support, both at the federal and state level. The sustainability of financing for individual

SPPA-backed projects, however, depends on private investment. Whereas stand-alone

projects require individual households to secure funding for the upfront and maintenance

cost of the solar system, SPPA-backed projects require investments from third party firms

before installation can begin. This dependence on investment for securing funding has led

to questions concerning the SPPA-dominated solar industry’s ability to foster innovation

in the long term. Investors for residential scale projects are generally not looking to spend

on new technologies that have little experience.133 SPPA-based companies are essentially

intermediaries in various transactions; they are much more likely to be successful at

securing funding if they use established solar manufacturers. A foreseeable issue with the

increased growth of the SPPA-based solar market is therefore a plateau in solar

technology innovation, something that cannot easily be fixed with government-supported

R&D efforts.

                                                                                                               133 Overholm, Harold. New Business Models Help the Take-up of Sustainable Technologies. Rep. Cambridge: Cambridge University Institute for Manufacturing, 2013.

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This continued use of the same established manufacturers in some ways

resembles the technological “lock-in” that is caused by government-enforced

performance standards. This lock-in occurs when a certain number is set for the amount

of carbon emissions reduction or renewable technology additions; once this number is

reached, firms are not incentivized to carry out further research and development.134

Similarly, because the solar industry has become successful through the use of standard

photovoltaic technology, investors are less interested in increasing efficiency than they

are in minimizing risk. The SPPA-based company must therefore cater to this

technological complacency. This notion of “bankability”- the ability to secure financing

for a solar system- is characteristic to this branch of the solar industry.133

Figure 18: Components of bankability for solar projects133

                                                                                                               134 Jaffe, Adam B., and Robert N. Stavins. "The Energy Paradox and the Diffusion of Conservation Technology." Resource and Energy Economics 16.2 (1994): 91-122. Web.

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Policymakers must address this issue of innovation within the solar industry in

order to ensure that an increasing solar market does not lead to a stagnant technological

trajectory. In Massachusetts, solar policies should aim to be stable and long-term. By

focusing on streamlining regulations for utility interconnection, permitting, and tax

exemptions, the state government can facilitate solar consumers, especially the

intermediary SPPA-based companies, to utilize more advanced technologies. Risk-averse

investors will not opt for a newer technology if the incentives that allow for project

payback are based on a volatile market. Presenting the SREC auction, net metering

program, and tax incentives as long-term and credible will be key in commercially

implementing the results of solar R&D.

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CHAPTER 6

Impacts of Business and Policy on Massachusetts’ Solar Rates

6.1 Methodology

In Massachusetts, the increased market share of SPPA-based companies has

significant impacts on projected trends in electricity rates. Further, depending on the solar

policies in place, the Massachusetts-based solar industry has the potential to achieve rate

competitiveness with other sources of electricity. The following are projections of

electricity rates, given various policy factors. Together, the five projections demonstrate

the viability of solar-based electricity for Massachusetts. These projections estimate (1)

electricity rates for an independent system that is not operated by a solar leasing company

through an SPPA, (2) electricity rates for an SPPA-backed system without entrance into

the Massachusetts SREC Auction, (3) electricity rates for an SPPA-backed system with

entrance into the Massachusetts SREC Auction, (4) electricity rates for an SPPA-backed

system if “solar-unfriendly” policies are implemented, and (5) electricity rates for an

SPPA-backed system if “solar-friendly” policies are implemented. For the purposes of

this thesis, four financial instruments were used to model electricity rates over the course

of 25 years: federal tax policy, state tax policy, capacity-based incentives, and utility

facilitated incentives. The following is a description of each instrument with the policies

that are covered by the variable:

a. Federal tax policies: For the calculations in this model, the Federal Investment

Tax Credit (ITC) for solar was addressed. This credit allows for a 30% deduction

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for solar systems installed after 2008 that generate over 0.5kW. The ITC is set to

expire in 2016, with a 10% ITC to be enacted in its place. This change is also

reflected in the calculations for the electricity rate projections. Other policies,

such as the Modified Accelerated Cost-Recovery System (MACRS), which

allows for investments in solar installations to be recovered through depreciation

deductions, are not applicable because the model is focused on the residential

sector.59,60

b. State tax policies: State-level tax policies in Massachusetts tend to focus on

residential consumers as the target audience. The Residential Renewable Energy

Income Tax Credit allows for a 15% deduction of up to $1000.102 The Renewable

Energy Property Tax Exemption allows for a 100% tax exemption for the

operational period of the solar system. The Renewable Energy Equipment Tax

Exemption allows for a complete exemption of sales tax on solar components for

the operational period. All three of these policies were accounted for in the

calculation.104

c. Capacity-based incentives: A Massachusetts-based capacity incentive of

$0.40/W, up to $4250, was applied in the calculation. This incentive is funded by

the Commonwealth Solar Rebate II, and a similar incentive of a smaller size is

provided for commercial installations.105

d. Utility facilitated incentives: The net metering program in Massachusetts is a

utility-facilitated program that has a significant impact on solar electricity rates.

Because of the location of the project, the rate schedule for National Grid was

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used. For the projections in this thesis, a flat net metering tariff of $0.143/kWh

was assumed.118

The following projections use the System Advisor Model (SAM), an input-output

software developed by the National Renewable Energy Laboratory based on a network of

weather stations in the U.S. The software calculates PV solar array and performance

information, PV system costs, financing instruments, incentives, net-metering, and

electric load. The projections in this thesis were formulated by using the results from

SAM as factors in estimating the annual energy value and cost of solar electricity.

For purposes of this thesis, the projections of electricity rates are based on a

hypothetical solar project constructed in 2014. Because the circumstance of financial

incentives undergoes major changes over the lifetime of a solar project, projections were

divided into three phases. During the first phase, from year n=1 to n=3, the federal

investment tax incentive provides a 30% reduction in expenditures. During the second

phase, from year n=4 to n=17, the federal incentive tax credit is reduced to 10% to reflect

the policy change planned for 2017. Finally, during the third phase, from n=18 to n=25,

the capacity-based incentive is removed as it reaches the maximum incentive amount

within the first 17 years of the project’s lifetime.

In order to address a solar installation specifically located in Massachusetts, a

hypothetical system was created. This system was a 4kW installation on a residential

home in Boston, Massachusetts. At this location, the average annual solar irradiance is

1386.6 kWh/m2, the global horizontal insolation is 1431.6 kWh/m2, the wind speed is 5.4

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m/s, and the dry-bulb temperature is 10.3 C. The solar module used was the SunPower

SPR-E20-327, a low-cost product series marketed by the largest module manufacturer in

the world. The module has an efficiency of 20.06% and is mounted on the roof. There are

9 modules per string, and 2 strings in each parallel, connected to one inverter (SMA

America, SB5000TL). More information on the components of a solar system can be

found in Appendix A. The calculation used in SAM was a “worst case calculation”,

addressing the maximum amount of shading from the local weather stations; the annual

output, therefore, declines by 0.5% per year. Addressing shade in this way minimizes the

annual output, thereby giving a lower power calculation. Table E, below, presents the

costs related to this project:

Table E: Costs of a Boston residential solar installation

Direct Cost $19066.05

BOS and Equipment $0.49/Wdc

Installation Labor $0.77/Wdc

Installer margin and overhead $0.91/Wdc

Indirect Capital Cost $3019.68

Permitting $0.12/Wdc

Engineering $0.18/Wdc

Grid Interconnection $300 fixed

Land preparation $300 fixed

Land $0 (assume host owns property)

Operation and Maintenance $20/kWyr

Total Installed Cost $22085.73

Total Installed Cost per Capacity $3.75/Wdc

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Based on these inputs, the annual generation amount and the total value of tax incentives

were found.

Unlike electricity that is distributed by utilities and private power corporations,

solar installations do not involve the distribution grid and the conventional electric power

market in its electricity pricing method. Therefore, the rates that are presented in this

thesis are the price at the production point, but are also the prices paid by the end-use

consumer.

6.2 Electricity rates for stand-alone solar system

The electricity rate projection for an independent solar installation that was not

facilitated through an SPPA demonstrated an average rate that was higher than the

conventional utility average. These rates showed a significant increase in price, and while

the rate was initially lower than the rates seen throughout the state, it increased much

more quickly than the standard rate. The standard rate was adapted from the trajectory

found by NEPOOL-GIS and NE-ISO. Projection 1, below, presents the stand-alone solar

rate trend alongside the conventional rate trend:

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Projection 1: Stand-alone solar installation rates versus conventional rates in Massachusetts91,92

This projection is based on a 25-year standard loan. This loan addresses the amortization

of the total installation cost ($22085.73), dividing the total amount into a series of

principal payments and interest payments. These payments are fixed at $1399.33/year,

and include the effects of the discount rate (set at 8%). The total annual energy value is

calculated by adding the effects of incentives to this amortization amount; the total

incentive amounts follow the phases described earlier in this chapter. The following

formula was manipulated for each phase to calculate the annual energy value:

[1]

where Cn is the total annual cost to the consumer, A is the amortized rate (the sum of

principal and interest payments per year), K is the total installed cost, N is the lifetime of

the loan, and Wn is the total power produced by the project in watts for year n. The first

term that is subtracted from A is the federal incentive amount for year n. The second term

is the state incentive amount and the third term is the capacity-based incentive for the

0 0.02 0.04 0.06 0.08 0.1

0.12 0.14 0.16 0.18 0.2

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Stand-alone solar electricity rate Massachusetts Standard Electricity Rate

  72  

same year. The calculations illustrate the value of the total cost in year n. The following

three formulas help to illustrate the price trend for each phase described earlier.

n=1 to n=3:

[2]

n=4 to n=17

[3]

n=18 to n=25

[4]

This projection illustrates the impacts of reduced solar incentives in

Massachusetts. In years n=4 and n=18, the rate for electricity increases significantly,

ultimately stabilizing at about $0.16/kWh. Given this trajectory of prices, this project

would likely attract consumers who are looking for projects with a shorter lifespan. The

electricity rates are based on production (output), and not consumption of electricity;

rates do not necessarily decrease when demand increases because the project is not

entered into the electricity market. Therefore, if the consumer reduces consumption, the

total annual electricity bill can remain relatively low and stable. In the projection above,

the term addressing the incentives from net metering was omitted because the assumed

consumption of electricity (5kW) exceeded electricity production. However, if

consumption were to be reduced, this term would likely have an impact on rates.

Therefore, a consumer may increase electricity use during the first 3 years of the solar

installation and then decrease use at n=4 and n=18. If the consumer reduces use by a

  73  

sufficient amount at these two points- either by changing daily routines or by investing in

energy efficient products- the total bill for this project could remain stable and attractive

for 25 years. However, increasing price is a deterrent for consumers and solar promotion

is limited by the assumption that rates will increase with time. Stand-alone installations

are therefore not the most effective method for advancing further solar energy

developments in Massachusetts.

6.3 Electricity rates for SPPA-backed solar project without SREC

Due to the 1MW entry interval, the SREC auction program is catered towards

large-scale solar installers such as solar leasing companies. In order to assess the impact

of the SREC auction on SPPA rates, however, this analysis first examines the electricity

rates that result from a facilitation by the SPPA without entry into the auction. The

electricity rate trend was placed alongside the trend from the first projection to highlight

the influence of the PPA business model alone. The SPPA-backed project trends were

found using an IRR (internal rate of return) of 15% and a PPA escalation rate of 1%.

Although some firms argue that an 8% IRR is still sustainable, this projection aims to

depict the “worst-case scenario”, and therefore a higher IRR was used. The cash flow

model for the SPPA-backed solar project can be found in Appendix C.

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Projection 2: SPPA-backed solar rates versus stand-alone solar rates in Massachusetts

The annual energy cost per kWh incurred by the SPPA-based company is found

by manipulating Formula 1; in this new formula, the amortization rate is exchanged with

a term that does not include the effect of the 5% interest rate incurred by the standard

loan. This term, X, is the total installation cost divided by the lifetime of the project and

includes the effect of the annual discount rate. Similar to Formulas 2 through 4, the

effects of the various incentives are addressed and their expirations are reflected in the

use of three different formulas. The SPPA fixed rate is set based on the IRR (15%) and

escalation rate (1%), and in this projection falls at $0.158/kWh, which is $0.02/kWh

higher than the average of the annual energy costs to the solar company.

The fixed rate for the SPPA-backed project is the higher than the average rate of

the stand-alone project, and is subsequently higher than the average standard rate in

Massachusetts ($0.158/kWh compared to $0.12/kWh). However, price stability is highly

effective in encouraging consumers to invest in solar through an SPPA. Because the

stand-alone project is vulnerable to the output decrease and consequent rate increases,

0 0.02 0.04 0.06 0.08 0.1

0.12 0.14 0.16 0.18 0.2

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Elec

tric

ity r

ate

($/k

Wh)

Year (n)

Stand-alone electricity rate

SPPA fixed rate

  75  

and because the Massachusetts standard rate is so highly dependent on the wholesale

price of natural gas, the SPPA provides the most stable trajectory for rates in the long-

term. Furthermore, when the additional opportunity cost of the administrative overhead is

addressed, the SPPA option becomes more attractive. If the SPPA-backed rates are

decreased such that its intersection with the stand-alone rate is at a lower n, consumers

will be further incentivized to choose the SPPA option.

6.4 Electricity rates for SPPA-backed solar project with SREC

The impact of the Massachusetts SREC auction on electricity rates is significant.

The lower rate advantage that SPPA-based business models boast is one that is heavily

dependent on the continuation of the SREC program. The following projection

incorporates the influence of the SREC auction by subtracting an additional variable from

the Cn presented earlier. Further, the formula for estimating the annual energy value is

manipulated, such that:

[5]

where S is the ACP from the SREC auction for year n, as outlined in Chapter 4 of this

thesis. The ACP figures, which are presented in units of $/MWh, are converted to $/kWh

and inserted into the formula. The new cost in year n is then calculated into the present

value. Projection 3, below, presents the resulting electricity rate trend alongside the

projections for an SPPA-backed system that is not entered in the SREC auction.

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Projection 3: SPPA-backed, SREC-producing solar rates in Massachusetts

As in the second projection, the fixed contract rate for consumers is calculated using the

assumptions that the IRR=15% with an escalation of 1%. The rates of SREC-entered

projects are roughly $0.04 lower ($0.12/kWh) for consumers than the rates produced

without entry into the auction. The SREC auction clearly gives PPA-based businesses a

significant advantage by allowing them to have a lower electricity rate trajectory, from

which they offer a roughly constant price to their consumers. The slopes of the

trajectories are the same. Yet compared to the graphic presented in Projection 2, the

SREC-entered project achieves a more cost-effective rate trajectory after year n=3. Rate

details for the SPPA-backed, SREC-entered project can be found in Appendix C.

What is even more attractive about the SPPA-based business for end-use

consumers is the cost that is not described in the projections above. Households are often

reluctant to invest the required and significant time into the installation, operation, and

maintenance of a solar installation. Consumers are willing to pay a few cents more if they

0 0.02 0.04 0.06 0.08 0.1

0.12 0.14 0.16 0.18 0.2

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

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tric

ity r

ate

($/k

Wh)

Year (n)

SPPA-backed electricity with SREC entry

SPPA-backed electricity rate without SREC entry

Electricity rate from stand-alone project

  77  

are given the option to lease the solar installation. SPPA-based businesses will continue

to thrive as long as utility regulations are supportive and SPPA fixed rates become

comparable to the costs of other sources of energy.

6.5 Electricity rates for “solar friendly” policies and “solar unfriendly” policies

In order to assess the likelihood of this cost competitiveness in the near future,

rates were calculated based on hypothetical “friendly” and “unfriendly” solar policies.

These policies either incentivized or disincentivized the growth of the solar industry in

Massachusetts through changes in tax exemptions and per kWh capacity-based rebates.

Table F outlines the changes that were used in formulating the projections, using the

policies described in Chapter 3 as a foundation. While this table only presents four

discrete policies, it is worth noting that each acts as an umbrella for other more minor

policies.

Table F: Comparison of solar “friendly” and “unfriendly” policies

Current Solar Policies Unfriendly Solar Policies Friendly Solar Policies Federal Investment Tax Credit: 30%

Federal Investment Tax Credit: 10%

Federal Investment Tax Credit: 35%

State Investment Tax Credit: 15%

State Investment Tax Credit: 15%

State Investment Tax Credit: 15%

Capacity Based Incentive (State): $0.40/W up to $4250

Capacity Based Incentive (State): $0.30/W up to $3000

Capacity Based Incentive (State): $0.50/W up to $3000

Net Metering (Flat Buy Rate): $0.14294/kWh

Net Metering (Flat Buy Rate): $0.12/kWh

Net Metering (Flat Buy Rate): $0.15/kWh

Solar Renewable Energy Credit: ACP Table (Chapter 2)

Solar Renewable Energy Credit: None

Solar Renewable Energy Credit: ACP is 5% higher/year

There is currently uncertainty regarding the continuation of the Federal ITC for

solar technologies, which is due for renewal in 2016. In the wake of the Emergency

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Economic Stabilization Act of 2008, the ITC was allotted an 8-year extension.59 Since its

implementation in 2006, the ITC has facilitated a 1600% growth in the solar industry,

with 625 solar manufacturing facilities across 48 states.50 The policy options in 2016

would be to (1) continue the 30% credit, thereby maintaining the trajectory from

Projection 2, (2) decrease the ITC, and (3) increase the ITC. Currently, the federal

government plants to reduce the credit to 10%; 35% was chosen as the value for the

“friendly” ITC because it indicates the significance of a change in the credit amount.

The capacity-based incentive is currently in its 17th block and while there is not

much debate as to whether or not it will continue, the funding allocation for this program

varies from year to year. For purposes of this thesis, rates were changed by $0.10/W for

each policy option. The State Investment Credit is also a relatively stable policy

mechanism that allows for generous tax returns; since Massachusetts has one of the

friendliest tax policies for solar technologies, and because this policy is planned to

continue beyond 2016, the 15% value was maintained for the three policy options. Net

metering rates are facilitated by the local utility, which buys electricity back at a rate that

is competitive with the price determined by the power distribution market. In this

projection, the rate schedule for National Grid in the Boston area was used to make

reasonable predictions for both friendly and unfriendly policies.118

The trajectories that resulted from these changes in inputs forecast a divergence in

Massachusetts’ path toward a renewable energy transition. 2016 will be a crucial year for

furthering solar industry growth on a federal level, which will subsequently influence the

sway of state-level legislation. Electricity rates (SPPA-backed, SREC entered) based on

changes in current solar policies are described in the projection below:

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Projection 4: Solar rates for “friendly” and “unfriendly” policies

On average, the rates under “friendly policies” ($0.08/kWh) are approximately

$0.04/kWh less than rates under current policies. Rates under “unfriendly policies”

($0.25/kWh) are roughly $0.13/kWh more than those under current policies. Further

details of each project can be found in the cash flow analysis in Appendix C.

The significance of evolving solar policies in the United States is demonstrated by

these projections, which present both best-case and worst-case scenarios. Furthermore,

these figures should be viewed as the range of possibilities for solar electricity rates in

Massachusetts after 2016, and not an exact forecast of rates. While solar energy has the

potential to be more cost-effective than conventional resources, this requires the leverage

provided by the continuation and enhancement of current solar policies. The best-case

scenario is significantly lower than the standard Massachusetts rates. However, this

should be viewed as an extreme, and likely unachievable, given current political

limitations.

0

0.05

0.1

0.15

0.2

0.25

0.3

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

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($/k

Wh)

Year (n)

Rate under current policies Rate under "friendly" policies Rate under "unfriendly" policies

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CHAPTER 7

Discussion of Policy Recommendations

7.1 Goals

The overarching goals in future energy policies should be to increase the use of

solar for electricity generation and to sustain solar energy markets. The solar industry is

largely bolstered by direct government incentives such as tax credits. However, in order

to maintain growth in both consumption and investment, the policy emphasis must be

shifted towards the support and regulation of the solar market. Policies must address

consumer rationale and the problems of maximizing profit in electricity markets. They

should also aggressively incentivize solar installation, but then transition to a role that is

more supportive of natural behavior of the market.

Consumption of solar energy for electricity generation has grown by an average

of 71% per year in the period between 2010 and 2014 (see Chapter 3). The coal industry

underwent a similar trajectory in the first 4 years of its dramatic rise, and over 25 years

maintained an average growth rate of 32% (see Chapter 4). In order for solar energy to be

successful in the long term, as coal has been in the past, it must continue its rapid growth

in the short term and look to transition to accommodate to longer term policies. This

transition, if growth continues at the current rate, should happen in 2050. This year was

chosen for two reasons: it reflects the timescale for most federal and state tax incentives

and it is when solar energy is projected to reach its critical capacity in NREL’s 80%

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Renewable Energy Plan. This plan outlines the energy make up required to have 80% of

total electricity generation in the United States come from renewable energy. The study

was used because it represents an aggressive but practical goal. The installed solar

electricity generation estimated by NREL in this scenario is roughly 20%, with the

contribution from Concentrating Solar Power (CSP) slightly greater than that from PV. In

order to achieve this threshold of solar generated electricity, new and aggressive policies

must be implemented starting in 2016, when current federal solar incentives are planned

to expire.54

Figure 19: Generation mix in 2050 for NREL projections135

                                                                                                               135 Mai, T.; Wiser, R.; Sandor, D.; Brinkman, G.; Heath, G.; Denholm, P.; Hostick, D.J.; Darghouth, N.; Schlosser, A.; Strzepek, K. (2012). Exploration of High-Penetration Renewable Electricity Futures. Vol. 1 of Renewable Electricity Futures Study. NREL/TP-6A20-52409-1. Golden, CO: National Renewable Energy Laboratory.

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The recommendations below are outlined first for Massachusetts-based policies

and then for federal policies. Because Massachusetts has conditions that are unique, the

policies recommended here are not necessarily the policies that should be implemented in

other states. Additionally while the federal policy recommendations follow the

overarching goals described above, they should be seen as facilitating interstate policies,

not overwriting them.

7.2 Policy Recommendations for Massachusetts

The primary goal for Massachusetts should be to continue the growth that it has

already spurred. The solar electricity rate projections detailed in Chapter 6 show that

facilitating the expansion of the SPPA industry would have a significant and depreciating

impact on rates. The three primary recommendations for both short-term and long-term

Massachusetts-based policies are:

Implement revised capacity-based incentives and production-based incentives

Currently, the capacity-based incentive for solar is rated at $0.40/W for up to

$4250. This incentive is in its 16th block, and has been at relatively the same level since it

was first implemented. The production-based incentive is given in the form of SRECs

with an ACP of $520/MWh.110 The SREC market has a significant impact on electricity

rates, as seen in the projections, and can singlehandedly lower rates by $0.04/kWh. In

order to decrease electricity rates and consequently stimulate increased solar industry

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growth, a capacity-based incentive of $0.50/W is recommended for up to $5000.

Additionally, the continuation of the SREC auction is recommended with a 5% increase

for ACP rates.

Implement FIT in short-term, net metering in long-term

The financial ramifications of the FIT in Germany and Spain demonstrate the

impact that this policy instrument can have on national economies. For Massachusetts,

the FIT is recommended for the period up to 2050; after this point, the state should

transition to a net metering policy. The FIT is recommended for its ability to stimulate

short-term growth. The structure of the policy encourages the maximization of installed

capacity both on an independent and grid-wide scale. In Germany, this maximization

imposed a burden on the power grid, which then made retail electricity prices go

negative. This was due in large part to the fact that Germany deregulated the wholesale

electricity markets while maintaining heavy moderation of retail prices. To reduce the

risk of overgeneration into the Massachusetts grid, it is recommended that the FIT

mechanism have a VOST regulated by a price floor. This will prevent electricity

suppliers in the wholesale market from holding back generation when prices decrease due

to overproduction. The German FIT did not protect against discrepancies between high

retail electricity prices and low wholesale prices. The recommended policies do not

completely relinquish control over the wholesale electricity markets, and thereby

combine to bring wholesale and retail prices closer together.

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The FIT should be used until 2050 to increase solar industry growth. After 2050

Massachusetts should transition net metering, a longer-term policy instrument. Net

metering policies have traditionally meant that utilities purchase electricity from

renewables-based generating facilities at the full retail rate. However, in order to protect

against the retail/wholesale price discrepancy, it is recommended that the policy base the

tariff rate on wholesale market behavior. Suppliers enter the market, and depending on

the results of electricity supply and demand, a price is set. To combat the potential price

volatility in the wholesale market, constraints should be placed in the form of a price

floor and ceiling.

Transitioning from the FIT to net metering is a viable option to both perpetuate rapid

growth and to sustain incentives after the critical capacity is reached. Further, because the

wholesale electricity rate is used for net metering instead of the retail rate, the second

stage of this policy slows the momentum of growth but does not reduce solar-based

capacity already in place. It incentivizes facilities that were originally attracted to grid

interconnection by the FIT to remain interconnected.

Target residential solar by streamlining installation process

One of the most important obstacles for consumers looking to install a solar

system is the complicated system of administration that is required. In Germany, solar

installations must undergo three administrative steps. The first is to submit a grid

connection application with an installation design and circuit diagram. Next, the

application is reviewed by the utility to determine a connection point. Then the

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installation is commissioned and the system is installed.136 The administrative network is

simple and streamlined.

In the United States, 64% of residential solar installation cost is in soft costs.

Once consumers express an interest in installing a system, they must undergo a series of

bureaucratic steps in order to finally receive approval. Households must pay an additional

cost for “customer acquisition” before they can even begin to apply for approval; this cost

includes contract negotiation, system design, pro-forma preparation, and lead generation.

The system of paperwork, permitting, and interconnection that a project must go through

is complicated and immense. This, in itself, dissuades many households from installing

solar systems on their roofs.137

                                                                                                               136 Miller, Ian R. Barriers to Tax Equity Syndication for Solar Development. Rep. Washington, D.C.: American Council on Renewable Energy, 2013. Print. 137 Friedman, Barry, Kristen Ardani, David Feldman, Ryan Citron, and Robert Margolis. Benchmarking Non-Hardware Balance-of-System (Soft) Costs for U.S. Photovoltaic Systems, Using a Bottom-Up Approach and Installer Survey. Tech. no. 6A20-60412. 2nd ed. Golden: National Renewable Energy Laboratory, 2013. Print.

  86  

Figure 20: Administrative scheme to solar installation in the United States137

By streamlining this network to a much simpler process, similar to Germany,

Massachusetts’ residential sector can more efficiently install solar systems. This can be

accomplished by streamlining the agencies involved in approving sites for installation.

Another significant factor would be to use one application for permitting,

interconnection, and financial incentive eligibility. New York has already begun to

explore this option just for financial incentive eligibility; the New York State Energy

Research and Development Authority (NYSERDA) currently uses the Consolidated

Funding Application (CFA) to allow a project to submit applications to multiple

Customer Acquisition • Marketing and Sales • Sales calls • Site visits • Contract Negotiation • Bid/pro-forma preparation

System Design

Permitting  • Permitting  preparation  • Permit  package  submital  

Inspection • Permitting inspection

Interconnection  • Interconnection  paperwork  • Interconnection  approval  • Physical  interconnection  

Financial  Incentive  Approval  Process  • Determination  of  eligibility    • Application  paperwork  • Site  inspection  • Approval  

System installation

  87  

incentives through one intermediary.138 If this kind of software and system can be

expanded to encompass customer acquisition, permitting, inspection, interconnection, and

financial incentive applications, the soft cost of solar in Massachusetts would decrease

substantially.

7.3 Policy recommendations for the United States

The tax incentives that drove solar growth in the United States are set to expire in

2016. This means that the federal government is approaching a deadline for the decision

to extend, enhance, or allow current solar policies. The recommendations that follow are

based on the impact of various policies on electricity rates, as illustrated in Chapter 4.

The purpose of these recommendations is not to impose federal power onto state-level

market activities, but rather to facilitate state policies in supporting the growth of solar

for the long-term.

Maintain or enhance current tax incentives

This is perhaps the simplest strategy, but is also one of the most significant. The

federal solar tax incentive is the driving force lowering solar electricity rates. In order to

continue to support the growth of clean energy, the federal government should enhance,

or at the least extend, current tax policies. Additionally, the tax incentives both

established and planned should focus not on the upfront cost of solar installations;

                                                                                                               138 "NYSERDA Consolidated Funding Application Information." Consolidated Funding Application. New York State Energy Research and Development Authority, 17 June 2013. Web.

  88  

instead, they should emphasize and encourage the reduction in the marginal operating

cost of installations by incentivising production.

Upfront costs are currently the greatest barrier for many households interested in

installing a solar system. An incentive that targets these costs, however, only encourages

installation- not the continued use of the solar system. Production-based incentives

maintain the interest of consumers in generating electricity from their solar systems.

Furthermore, the majority of the upfront cost falls under soft costs. As outlined earlier in

this chapter, the reduction of solar soft costs should fall primarily under the jurisdiction

of the state and not the federal government. This is because the bureaucratic steps that a

system must undergo are fixed at the state and municipality level. Permitting is regulated

by the state (or town), interconnection to the utility is facilitated on a state-regional scale,

and financial incentive applications are approved by state agencies. Federal decisions to

minimize upfront costs can therefore only address capital costs, and not the soft costs that

are currently a greater barrier for large-scale solar entry. By implementing federal upfront

cost incentives, the government therefore not only infringes on state jurisdiction, but also

neglects to address the core issue of administrative overhead.

Restructure electricity market and allow for deregulation of the market

The deregulation of electricity markets has allowed for the entry of independent

solar-based generators into the grid. In states that have deregulated markets, consumers

have a choice in selecting their suppliers and distributers thereby attracting significant

amounts of direct investment into the renewables industry in the state. A recommendation

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for a federal policy, therefore, is to deregulate electricity markets in all states. This would

decrease the control that the utilities currently have over retail electricity rates, effectively

shifting this from a monopoly controlled market to one that is competitive. The retail

electricity rate should be a reflection of wholesale electricity market behavior, and should

not be plastically controlled by the government. Certainly, price constraints (such as a

price floor and ceiling) in the wholesale electricity markets could and should be used.

However, by strictly moderating retail rates to consumers, such as in Germany, the

government creates artificial market behaviors that do not reflect realistic conditions in

the state.

Many utilities are opposed to the deregulation of markets. They claim that while

electricity rates would decrease, grid volatility would increase.139 Additionally, since the

utilities would still be responsible for distribution and maintenance of the grid, they

require additional funding. This funding, in the past, was acquired through higher rate

charges.23 However, by allocating government funding to the maintenance of the grid, the

primary reason for regulating the wholesale electricity market is eliminated.

Set a VOST on tiered rate schedule

The policy recommendation on a FIT-net metering transition (under

“Massachusetts policy recommendations”) requires significant review of the conventional

FIT mechanism. In the recommendation for Massachusetts, it was noted that a VOST

should be based on the wholesale market, its price ceiling, and its price floor. Unless                                                                                                                139 A Primer on Electric Utilities, Deregulation, and Restructuring of U.S. Electricity Markets. Tech. 2nd ed. Washington, D.C.: Department of Energy, 2002. Print.

  90  

coupled with other pricing regulations, the VOST can become variable depending on the

political stance of the utility that controls it. The conventional FIT used in Germany and

Spain employed the retail electricity rate as the VOST to catalyze renewables-based

generation. However, there is a likelihood that utilities would undervalue the VOST in

order to maximize the financial performance of the utility. Additionally they could only

allow a certain capacity of solar to enter the wholesale electricity market based on the

number of facilities- nearly all fossil fuels based- already supplying generation.

In order to protect against the volatility of setting a VOST, and to make the VOST

truly a “fair compensation” for the production of solar power, the federal government

should set regional VOST rate schedules based on solar potential. The following map

divides the United States into five regions of VOST standardization. The division of the

states is based on horizontal irradiance, illustrated in Appendix B. The following table is

the resulting categorization, with Region 1 representing states with greatest solar influx.

Table G: Categorization of states based on solar irradiance

Region 1 Region 2 Region 3 Region 4 Region 5 California Idaho Minnesota Kentucky Ohio Arizona Wyoming Iowa Tennessee Pennsylvania Texas Oregon Missouri Virginia West Virginia

New Mexico Nebraska Arkansas North Carolina Vermont Nevada Montana Louisiana South Carolina Connecticut

Utah Washington Mississippi Georgia New Hampshire Colorado North Dakota Illinois Alabama Massachusetts Kansas South Dakota Wisconsin Florida Rhode Island

Oklahoma Maine New York Michigan New Jersey Indiana Maryland Delaware

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Each region would have a VOST schedule, from which utilities are assigned an

average VOST that must be maintained in the wholesale electricity market. This average,

used with a price floor and ceiling, would help stabilize and moderate the FIT as it is used

to rapidly increase installed solar capacity. This policy would not require that all states

undergo a FIT-net metering transition, however. It should primarily be used as an

indicator and mediator of the wholesale market; whether renewables-based generation is

incentivized through net metering or a FIT, the pricing would be stable.

Focus on utility scale in west, residential scale in east

While solar is the most rapidly growing renewable energy resource in the United

States as a whole, the rates of growth differ throughout the nation. In areas with less

direct solar input, such as the Midwest, wind is the renewable resource with the greatest

prospect for growth. In areas with high solar potential, such as the Southwest, different

policy mechanisms are being looked at to further enhance the growth of the industry. In

order to address the varying landscape that makes the United States rich in renewable

resources, the federal government should avoid streamlining solar goals for the entire

nation.

The policy recommendation to implement utility-scale solar in the west and

residential scale (rooftop) solar installations in the east is based on three factors: property

value, population density, and solar potential. Utility scale solar in this case means a solar

system with a nameplate value of at least 1MW. These systems can either use PV

technology or CSP technology, in which sunlight is concentrated through the use of

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mirrors. In areas with less expensive property and low population density, large solar

systems can be installed more easily than in expensive urban areas. These locations are

illustrated in Figures 21 and 22. Solar potential also influences the ability of a location to

host a utility-scale installation; it is much more cost effective to maximize solar output

when constructing a large generating facility. This is shown on the solar irradiance map

from Appendix B. In addressing these factors, it is clear that the states on the western half

of the United States are more suitable for large installations. Locations on the eastern half

tend to be denser in terms of population, making them less viable as locations for utility

scale solar developments.

Figure 21: Property values based on property tax as a proportion of income140

                                                                                                               140 "Map: The United States of Ratios." IDV Solutions. 28 Jan. 2013.

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Figure 22: Population density in the United States141

Based on the figures above, the optimal locations for utility scale solar systems

are in the Southwestern region (Arizona, New Mexico, Colorado, Utah, Nevada,

Wyoming, and Idaho) and northwest Texas. On the other hand, North Atlantic states and

California should focus more on residential scale solar systems, as both property values

and population density in these regions are high.

                                                                                                               141 "Map of United States Population Density." Map. Encyclopedia Britannica. 2011. Web.  

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CHAPTER 8

Conclusion

The solar energy industry is on the tipping point of the clean energy transition in

the United States. The historically high costs of solar have been declining at record rates,

and the capital cost of solar is no longer the greatest obstacle for its installation. Policies

that target solar energy have been effective in galvanizing direct investment into solar

projects, and even states with limited solar potential have become leaders in clean energy

developments. Furthermore, residential electricity rate projections illustrate that solar cost

competitiveness with fossil fuels is within reach. Now, the policy focus must be turned to

mitigate upfront soft costs and the administrative burden of solar projects. By making

solar energy financially and systematically more accessible, the federal and state

governments can catalyze the expansion of renewable energy on a much larger scale.

Once solar becomes an attractive energy option based on low cost, renewable energy

competitiveness will be achieved.

There are several methods to encourage a decrease in the price of solar electricity

generation. Germany and Spain adopted a regulatory approach in which the government

set stringent standards and regulated generation centrally. The United States, however,

has already established a market-based approach that relies on consumer and firm

behavior. The government takes an approach that is more supportive than regulatory.

Incentives comprise the majority of renewable energy policies. Future policymaking must

therefore be discussed from a market-based approach as well, aiming to decrease solar-

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generated electricity rates in a realistic and sustainable way. To the individual consumer,

moral persuasion will only go so far; maximized profit and minimized cost will be the

true catalysts in behavioral change.

Projections show that an independently installed solar project in Massachusetts

could produce electricity at an average cost of $0.13/kWh. This rate, however, increases

by 5% annually due to decreased power output. The SPPA-based company, which installs

and operates solar projects, acts as an intermediary between the consumer and utility.

Projects that are facilitated by an SPPA-based company can achieve rates that are not

only comparable to the standard rate but also more stable. The projected electricity rate

for a solar project entered into the Massachusetts SREC auction is $0.118/kWh.

Currently, the average electricity rate in Massachusetts is $0.116/kWh; 68% of the

electricity is generated from natural gas. The SPPA industry has clearly had a significant

impact on the financial viability of solar, and is largely responsible for the increase in

direct investment.

The solar electricity prices that are facilitated by SPPA contracts tend to be lower

and less volatile than the prices from stand-alone solar projects. The SPPA-based

company accepts the administrative burden of the solar installation process. Ultimately,

the company reduces not only electricity rates, but the opportunity cost of time spent on

paperwork as well. However, whether or not the SPPA is necessary for the continued

adoption of solar technologies is questionable. The policy recommendation for

Massachusetts that streamlines the administrative process for solar installations implies

that upfront soft costs can be minimized. The federal policy recommendation that

encourages the Northeast to emphasize residential solar development creates

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opportunities for states and municipalities to forego the SPPA intermediary and directly

eliminate the soft costs that currently make SPPA-based installations more attractive.

The future of the SPPA business model will be dictated by federal solar energy

policies. The long-term viability of the SPPA business model relies on high upfront costs

and a complex administrative system. Consumers turn to SPPAs for solar installations so

that they can avoid these costs. The policy recommendations proposed here target the

same costs that have made SPPAs attractive to consumers in the past, and in the long

term may make this method of solar financing obsolete. Price stability, which is

addressed in SPPAs through set contract rates, could also soon be achieved by the stand-

alone projects, as the net metering policy recommendation would attenuate price

volatility. While the SPPA has helped to spur important solar industry growth, it may

soon be as antiquated as the utilities they are currently pushing out.

The solar energy industry is dynamic; it relies upon the fluidity of market

behavior for growth. Future energy policies may dictate a separation from SPPA-based

solar projects, incentivizing independent solar projects in their place. When individual

households are able to install and finance their own solar installations, the United States

will be able to realize the potential of this powerful resource. The phasing out of the

SPPA business model does not necessarily imply the devolution of renewable energy

advancements, but could rather indicate a sociopolitical readiness for a clean energy

transition. Decades in the making, the energy tipping point may finally be a reality.

  97  

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Appendix A

Explanation of photovoltaic technology and solar installations

Photovoltaic technology

Silicon-based photovoltaic technology is currently the most commonly used solar

technology, and comprises 85% of the solar energy market in the United States. Silicon

solar systems fall under one of three categories, based on the primary material used.

Single crystal silicon, thought it is the most efficient material, is also the most expensive

to manufacture as high purity silicon must be melted and then reformed slowly.

Multicrystalline silicon is less efficient and less expensive because it can be directly

molded. Amorphous silicon absorbs solar radiation 40 times more efficiently than single

crystal silicon. The majority of silicon-based solar cells used in residential installations

use multicrystalline silicon.142

All three crystalline technologies are based on a lattice structure that forms a solid

semiconductor. Silicon (Si) has 14 electrons and 4 valence electrons. In a crystalline

solid, each Si atom shares one valence electron in a covalent bond with each of four

neighboring Si atoms. Units of 5 Si atoms in series form the crystal lattice semiconductor.

The amount of energy that is required to dissociate an electron from a covalent bond is

the semiconductor’s band gap energy, and is crucial to photovoltaic technology. This

energy is provided by photons of light, and the amount is very specific to the

semiconductor’s material. Generally, photovoltaic cells require a band gap energy of 1.0

                                                                                                               142 "Crystalline Silicon Photovoltaic Cells." Energy Basics:. U.S. Department of Energy, n.d. Web. 15 Dec. 2012.

  108  

to 1.6eV.143 Photons that provide less energy will have no effect on the semiconductor,

while photons that provide more energy will transfer the extra energy as heat. This

necessary specificity in photovoltaic cells is the one of the greatest limiting factors for

this technology, as most cells cannot use up to 55% of incident solar energy because it

falls above or below their band gap energies.144

In Si-based PV cells, two semiconductors are put in direct contact. These

semiconductors are “doped”, meaning that a foreign element is introduced into the crystal

lattice structure. In this case, a Group 15 element (ex. phosphorus) and a Group 13

element (ex. boron) are used; the Group 15 element contains one fewer electron than Si

while the Group 13 element contains one additional electron. The semiconductor that

contains the Group 15 element is therefore “p-type”, as the missing electrons form

positively charged holes in the structure. “N-type” doping describes the introduction of

the Group 13 element and subsequent distribution of delocalized electrons, known as

“free carriers”.

When the energy of a photon exceeds the Si band gap energy, an electron-hole

pair is formed in the semiconductors. The electron that is typically bound to the valence

band (filled molecular orbital) is sent to the conduction band (unfilled molecular orbital).

This transfer leaves the valence band with a positively charged hole that is filled with an

electron from the neighboring hole; this transfer allows the electron continues to

“migrate” throughout the crystal structure. When n-type and p-type semiconductors are

put into contact, this transfer occurs between the semiconductors, forming a charge                                                                                                                143 Liao, Bolin, and Wei-Chun Hsu. "An Investigation of Shockley-Queisser Limit of Single P-n Junction Solar Cells." MIT.edu. Massachusetts Institute of Technology, n.d. Web.

144 Crandall, R., and W. Luft. The Future of Amorphous Silicon Photovoltaic Technology. Tech. N.p.: Online.

  109  

imbalance in the junction. This junction acts as a diode and directs the electric field from

the n-side to the p-side. When the energy levels are aligned, the valence and conductor

bands “bend” downward toward the lower level n-type material. Finally, an external

circuit is attached to the junction and a voltage equal to the energy of the electron in the

conduction band (or the hold in the valence band) is generated. All of these processes

take place in a solar cell.145

Solar Installation Systems

PV systems are fairly simple, and have four primary components: PV modules,

inverters, a racking system, and interconnection wiring. While the number of modules in

a system determines the amount of power (voltage) output that can be achieved, the

inverter limits the AC watts that can be distributed to end-use customers.146 The ultimate

power output of a solar installation is therefore dictated by the inverter used. In the

Northern Hemisphere, installations are usually mounted to face the south to maximize the

amount of incident sunlight.

Each PV cell in a solar system is framed into a solar module with other identical

cells. Typically, 36 cells are configured in series to form a solar module. This is done to

maximize voltage. The modules are then installed in series and in parallel. Configuring

solar modules in series allows the system to achieve a higher output voltage while

maintaining the same current. This is done by connecting the negative terminal of one

                                                                                                               145 Anderson, Jim. Physics and Chemistry: In the Context of Energy and Climate at the Global and Molecular Level. N.p.: Harvard University, n.d. Print. 146 "How a PV System Works." Florida Solar Energy Center. University of Central Florida.

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panel to the positive terminal of the neighboring panel; the total voltage would then be

the sum of the modules’ individual voltages. This method streamlines power production

and limits distribution to one end use. Solar panels are put in parallel by connecting the

positive terminal of one panel to the positive terminal of another. This is done in order to

increase the flexibility of the panels’ end use options. In many instances, solar systems

are configured in series and then in parallel to maximize both voltage and current. The

modules are configured in series on a “string”, according to the voltage limit set by the

inverter. Modules in parallel are then added until the voltage maximum is reached; the

voltage can also be moderated by applying capacitors on to the inverter.147

Once the modules are put in series, the system is either roof-mounted or ground-

mounted. In areas with a high population density, roof-mounted systems are necessary.

Ground-mounted systems tend to be used for utility scale solar installations. After the

mounting method is determined, an inverter is installed. The inverter is used to convert

direct current (DC) to alternating current (AC), as grid-distribution is designed to deliver

AC current only. Once the inverter is installed and connected to the solar modules, the

system is interconnected to the utility to take advantage of financial incentives.148

                                                                                                               147 Honsborg, Christiana, and Stuart Bowden. "Module Circuit Design." PVEducation.  

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Appendix B

Maps of renewable energy potential in the United States

Annual average wind speed at 80m148

Average horizontal solar irradiance149

                                                                                                               148 "Annual Average Wind Speed." Map. National Renewable Energy Laboratory. Golden: 2012.

  112  

Appendix C

Data for projections in Chapter 6

Project conditions and assumptions

The solar project used to model the projections in Chapter 6 is hypothetical, based on databases of weather conditions gathered from weather stations in Massachusetts.

Location Boston, MA Direct Normal 1386.6 kWh/m2 Global Horizontal 1431.6 kWh/m2 Wind Speed 5.4 m/s Dry-bulb Temp 10.3 C Solar Module SunPower SPR-E20-327 Efficiency 20.06% Ground mounted

Inverter SMA America: SB5000TL-US-22 (208V) Nominal AC Voltage 208V Modules per string 9 Strings in parallel 2 Number of inverters 1 DC to AC Ratio 1.1.8 NAMEPLATE CAPACITY 5.88791 kWdc Area 29.4 m2 Worst case calculation

Year to year decline in output 0.50% Direct Cost $19,066.05

BOS, equipment .49$/Wdc Installation Labor .77$/Wdc

Installaer margin/overhead .91$/Wdc Indirect Capital Cost $3,019.68

Permitting .12$/Wdc Engineering .18$/Wdc

                                                                                                                                                                                                                                                                                                                                         149 "Average Horizontal Solar Irradiance." Map. SolarGIS. N.p.: n.p., 2013. N. pag. Print.

  113  

Grid interconnection (National Grid) $300 fixed Land preparation $300 fixed

Land $0 fixed

Sales Tax 5%, later taken out by rebate TOTAL INSTALLED COST $22,085.73

Total installed Cost per Capacity (per Wdc) $3.75

Operation and Maintenance $20 kW/yr 25 year standard loan Federal income tax rate 28%/yr State income tax rate 4%/ yr INCENTIVES

Federal Investment Tax Credit 30% State Investment Tax Credit 15%

Capacity Based Incentive (State) .4 $/W up to $4250-

Net metering Flat Buy Rate, 0.14294 $/kWh

  114  

Cash flow models for projections in Chapter 6

Projection 1: Stand-alone solar project

Year 1 2 3 4 5 6 7 8 9 10 11 12 Energy (kWh) 7,669 7,630 7,592 7,554 7,517 7,479 7,442 7,404 7,367 7,331 7,294 7,257 Energy Value 1,001.10 1,024.94 1,048.98 1,073.41 1,097.76 1,122.75 1,147.21 1,171.85 1,197.08 1,222.92 1,249.31 1,275.25 Operating Expenses Total operating expense ($) 117.76 120.7 123.72 126.81 129.98 133.23 136.56 139.98 143.48 147.06 150.74 154.51 Financing Debt balance ($)

-19,000.06

-18,601.97

-18,183.96

-17,745.06

-17,284.21

-16,800.32

-16,292.24

-15,758.75

-15,198.58

-14,610.41

-13,992.83

-13,344.37

Total P&I debt payment ($)

See below

Federal CBI 2,355.16 Total CBI 2,355.16 State PTC 0 0 0 0 0 0 0 0 0 0 0 0 Federal ITC 5,500 State ITC 1,000 Tax effect on equity After tax net equity cost flow ($) 4,026.87 -1,468.80 -1,471.82 -1,474.91 -1,478.08 -1,481.33 -1,484.66 -1,488.08 -1,491.58 -1,495.17 -1,498.84 -1,502.61 After tax cash flow ($) 5,027.97 -443.86 -422.84 -401.51 -380.33 -358.58 -337.45 -316.23 -294.49 -272.25 -249.53 -227.36

Year 1 2 3 4 5 6 7 8 9 10

Total P&I ($) 1,399.93 1,399.93 1,399.93 1,399.93 1,399.93 1,399.93 1,399.93 1,399.93 1,399.93 1,399.93

Tax incentives 301.2616 301.2616 301.2616 124.5716 124.5716 124.5716 124.5716 124.5716 124.5716 124.5716 Payment before CBI ($/kWh) 1098.67 1098.67 1098.67 1275.36 1275.36 1275.36 1275.36 1275.36 1275.36 1275.36

Output (kWh) 7,952 7,912 7,872 7,833 7,794 7,755 7,716 7,677 7,639 7,601

Output (W) 907.1608899 902.59770

63 898.03452

28 893.58541

88 889.13631

48 884.68721

09 880.23810

69 875.78900

3 871.45397

86 867.11895

42 Energy Value before CBI ($/kWh) 0.138162525

0.138861021

0.139566616

0.162818639

0.163633359

0.164456273

0.165287506

0.166127185

0.16695358

0.167788238

CBI ($) 362.8643559 361.03908

25 359.21380

91 357.43416

75 355.65452

59 353.87488

44 352.09524

28 350.31560

12 348.58159

14 346.84758

17 Energy Value after total incentives ($) 735.80 737.63 739.45 917.92 919.70 921.48 923.26 925.04 926.78 928.51

Rate ($/kWh) 0.09253069 0.0932291

86 0.0939347

8 0.1171868

04 0.1180015

23 0.1188244

38 0.1196556

71 0.1204953

5 0.1213217

45 0.1221564

03

  115  

Projection 2: SPPA-backed project without SREC entry

Year 0 1 2 3 4 5 6 7 8 9 10 11 12 Energy (kWh) 0 7,669 7,630 7,592 7,554 7,517 7,479 7,442 7,404 7,367 7,331 7,294 7,257 Energy Price ($/kWh) 0 0.158 0.16 0.161 0.163 0.164 0.166 0.168 0.169 0.171 0.173 0.175 0.176 Energy Value ($) 0 1,211.51 1,217.50 1,223.53 1,229.59 1,235.67 1,241.79 1,247.94 1,254.11 1,260.32 1,266.56 1,272.83 1,279.13 Operating Expenses Total operating expense ($) 0 117.76 120.7 123.72 126.81 129.98 133.23 136.56 139.98 143.48 147.06 150.74 154.51 Total operating income ($) 0 1,093.75 1,096.80 1,099.81 1,102.77 1,105.69 1,108.56 1,111.37 1,114.14 1,116.84 1,119.50 1,122.09 1,124.62 Financing

Debt balance ($) 0 -

9,713.58 -

9,476.64 -

9,223.11 -

8,951.84 -

8,661.57 -

8,350.99 -

8,018.66 -

7,663.08 -

7,282.60 -

6,875.49 -

6,439.88 -

5,973.78 Interest payment ($) 0 679.95 663.36 645.62 626.63 606.31 584.57 561.31 536.42 509.78 481.28 450.79 418.16 Principal payment ($) 0 236.94 253.53 271.28 290.27 310.58 332.32 355.59 380.48 407.11 435.61 466.1 498.73 Total P&I debt payment ($) 0 916.89 916.89 916.89 916.89 916.89 916.89 916.89 916.89 916.89 916.89 916.89 916.89 Total CBI 2,355.16 Total PBI 0 0 0 0 0 0 0 0 0 0 0 0 0 State PTC 0 0 0 0 0 0 0 0 0 0 0 0 0 Federal ITC 5,500 State ITC 1,000 Tax Effect on Equity (State) State depreciation schedule (%) 0 20 32 19.2 11.52 11.52 5.76 0 0 0 0 0 0 State depreciation ($) 0 4,356.47 6,970.35 4,182.21 2,509.32 2,509.32 1,254.66 0 0 0 0 0 0 State Income Taxes ($) 0 -63.5 -261.48 -149.12 -81.33 -80.4 -29.23 22 23.11 24.28 25.53 26.85 28.26 State tax savings ($) 0 1,063.50 261.48 149.12 81.33 80.4 29.23 -22 -23.11 -24.28 -25.53 -26.85 -28.26 Tax Effect on Equity (Federal) Federal depreciation schedule (%) 0 20 32 19.2 11.52 11.52 5.76 0 0 0 0 0 0 Federal depreciation ($) 0 4,356.47 6,970.35 4,182.21 2,509.32 2,509.32 1,254.66 0 0 0 0 0 0 Federal Income Taxes ($) 0 -146.72

-1,757.12

-1,002.09 -546.52 -540.27 -196.41 147.86 155.29 163.18 171.55 180.44 189.9

Federal tax savings ($) 0 5,646.72 1,757.12 1,002.09 546.52 540.27 196.41 -147.86 -155.29 -163.18 -171.55 -180.44 -189.9

Annual Energy 7,669 kWh PPA Price $0.1580/kWh

Nominal LCOE $0.1690/kWh Real LCOE $0.1376/kWh

  116  

Projection 3: SPPA-backed project with SREC entry

Year 1 2 3 4 5 6 7 8 9 10 11 12

Energy (kWh) 7,669 7,630 7,592 7,554 7,517 7,479 7,442 7,404 7,367 7,331 7,294 7,257 Energy Price ($/kWh) 0.116 0.117 0.118 0.119 0.12 0.122 0.123 0.124 0.125 0.127 0.128 0.129 Energy Value ($) 887.48 891.87 896.28 900.72 905.18 909.66 914.16 918.69 923.24 927.81 932.4 937.01 Operating Expenses Total operating expense ($) 117.76 120.7 123.72 126.81 129.98 133.23 136.56 139.98 143.48 147.06 150.74 154.51 Total operating income ($) 769.72 771.17 772.57 773.91 775.2 776.43 777.6 778.71 779.76 780.74 781.66 782.51

Financing

Debt balance ($) -

9,713.58 -

9,476.64 -

9,223.11 -

8,951.84 -

8,661.57 -

8,350.99 -

8,018.66 -

7,663.08 -

7,282.60 -

6,875.49 -

6,439.88 -

5,973.78 Interest payment ($) 679.95 663.36 645.62 626.63 606.31 584.57 561.31 536.42 509.78 481.28 450.79 418.16 Principal payment ($) 236.94 253.53 271.28 290.27 310.58 332.32 355.59 380.48 407.11 435.61 466.1 498.73 Total P&I debt payment ($) 916.89 916.89 916.89 916.89 916.89 916.89 916.89 916.89 916.89 916.89 916.89 916.89

Total IBI

Total CBI 2,355.16

Total PBI 437.12 434.94 432.76 430.6 428.45 426.3 424.17 422.05 419.94 417.84 0 0

Federal PTC 0 0 0 0 0 0 0 0 0 0 0 0

State PTC 0 0 0 0 0 0 0 0 0 0 0 0

Federal ITC 5,500

State ITC 1,000 Tax Effect on Equity (State) State depreciation schedule (%) 20 32 19.2 11.52 11.52 5.76 0 0 0 0 0 0 State depreciation ($) 4,356.47 6,970.35 4,182.21 2,509.32 2,509.32 1,254.66 0 0 0 0 0 0 State Income Taxes ($) -58.98 -257.1 -144.9 -77.26 -76.48 -25.46 25.62 26.57 27.6 28.69 13.23 14.57 State tax savings ($) 1,058.98 257.1 144.9 77.26 76.48 25.46 -25.62 -26.57 -27.6 -28.69 -13.23 -14.57 Tax Effect on Equity (Federal) Federal depreciation schedule (%) 20 32 19.2 11.52 11.52 5.76 0 0 0 0 0 0 Federal depreciation ($) 4,356.47 6,970.35 4,182.21 2,509.32 2,509.32 1,254.66 0 0 0 0 0 0 Federal Income Taxes ($) -116.32

-1,727.74 -973.73 -519.17 -513.94 -171.09 172.16 178.58 185.45 192.81 88.94 97.93

Federal tax savings ($) 5,616.32 1,727.74 973.73 519.17 513.94 171.09 -172.16 -178.58 -185.45 -192.81 -88.94 -97.93

Annual Energy 7,669 kWh PPA Price $0.1157/kWh

Nominal LCOE $0.1243/kWh Real LCOE $0.1008/kWh

  117  

Projection 4: Project under “unfriendly” solar policies

Year 1 2 3 4 5 6 7 8 9 10 11 12

Energy (kWh) 7,669 7,630 7,592 7,554 7,517 7,479 7,442 7,404 7,367 7,331 7,294 7,257 Energy Price ($/kWh) 0.252 0.255 0.257 0.26 0.262 0.265 0.268 0.27 0.273 0.276 0.278 0.281 Energy Value ($) 1,933.27 1,942.84 1,952.45 1,962.12 1,971.83 1,981.59 1,991.40 2,001.26 2,011.16 2,021.12 2,031.12 2,041.18 Operating Expenses Total operating expense ($) 117.76 120.7 123.72 126.81 129.98 133.23 136.56 139.98 143.48 147.06 150.74 154.51 Total operating income ($) 1,815.51 1,822.13 1,828.73 1,835.31 1,841.85 1,848.36 1,854.84 1,861.28 1,867.69 1,874.05 1,880.38 1,886.67

Financing

Debt balance ($) -

10,007.98 -

9,763.86 -

9,502.64 -

9,223.15 -

8,924.08 -

8,604.09 -

8,261.69 -

7,895.33 -

7,503.32 -

7,083.87 -

6,635.05 -6,154.83 Interest payment ($) 700.56 683.47 665.19 645.62 624.69 602.29 578.32 552.67 525.23 495.87 464.45 430.84 Principal payment ($) 244.12 261.21 279.5 299.06 320 342.4 366.36 392.01 419.45 448.81 480.23 513.84 Total P&I debt payment ($) 944.68 944.68 944.68 944.68 944.68 944.68 944.68 944.68 944.68 944.68 944.68 944.68

Total CBI 1,766.37

Total PBI 0 0 0 0 0 0 0 0 0 0 0 0 Tax Effect on Equity (State) State depreciation schedule (%) 20 32 19.2 11.52 11.52 5.76 0 0 0 0 0 0 State depreciation ($) 4,356.47 6,970.35 4,182.21 2,509.32 2,509.32 1,254.66 0 0 0 0 0 0 State Income Taxes ($) -59.01 -233.27 -120.75 -52.79 -51.69 -0.34 51.06 52.34 53.7 55.13 56.64 58.23 State tax savings ($) 1,059.01 233.27 120.75 52.79 51.69 0.34 -51.06 -52.34 -53.7 -55.13 -56.64 -58.23 Tax Effect on Equity (Federal) Federal depreciation schedule (%) 20 32 19.2 11.52 11.52 5.76 0 0 0 0 0 0 Federal depreciation ($) 4,356.47 6,970.35 4,182.21 2,509.32 2,509.32 1,254.66 0 0 0 0 0 0 Federal Income Taxes ($) -116.52

-1,567.56 -811.42 -354.72 -347.33 -2.31 343.13 351.75 360.85 370.46 380.6 391.33

Federal tax savings ($) 2,116.52 1,567.56 811.42 354.72 347.33 2.31 -343.13 -351.75 -360.85 -370.46 -380.6 -391.33

 

Annual Energy 7,669 kWh PPA Price $0.2521/kWh

Nominal LCOE $0.2708/kWh Real LCOE $0.2195/kWh

  118  

Projection 4: Project under “friendly” solar policies

Year 1 2 3 4 5 6 7 8 9 10 11 12 Energy (kWh) 7,669 7,630 7,592 7,554 7,517 7,479 7,442 7,404 7,367 7,331 7,294 7,257 Energy Price ($/kWh) 0.082 0.083 0.084 0.084 0.085 0.086 0.087 0.088 0.089 0.09 0.091 0.091 Energy Value ($) 628.88 631.99 635.12 638.26 641.42 644.6 647.79 650.99 654.22 657.45 660.71 663.98 Operating Expenses Total operating expense ($) 117.76 120.7 123.72 126.81 129.98 133.23 136.56 139.98 143.48 147.06 150.74 154.51 Total operating income ($) 511.12 511.29 511.4 511.45 511.44 511.36 511.22 511.02 510.74 510.39 509.97 509.47 Financing

Debt balance ($) -

9,271.99 -

9,045.82 -

8,803.82 -

8,544.88 -

8,267.81 -

7,971.34 -

7,654.12 -

7,314.70 -

6,951.52 -

6,562.92 -

6,147.11 -

5,702.20 Interest payment ($) 649.04 633.21 616.27 598.14 578.75 557.99 535.79 512.03 486.61 459.4 430.3 399.15 Principal payment ($) 226.17 242 258.94 277.07 296.46 317.22 339.42 363.18 388.6 415.81 444.91 476.06 Total P&I debt payment ($) 875.21 875.21 875.21 875.21 875.21 875.21 875.21 875.21 875.21 875.21 875.21 875.21 Total CBI 3,238.35 Total PBI 383.44 381.52 379.62 377.72 375.83 373.95 372.08 370.22 368.37 366.53 0 0 Tax Effect on Equity (State) State depreciation schedule (%) 20 32 19.2 11.52 11.52 5.76 0 0 0 0 0 0 State depreciation ($) 4,356.47 6,970.35 4,182.21 2,509.32 2,509.32 1,254.66 0 0 0 0 0 0 State Income Taxes ($) -34.9 -268.43 -156.3 -88.73 -88.03 -37.09 13.9 14.77 15.7 16.7 3.19 4.41 State tax savings ($) 1,034.90 268.43 156.3 88.73 88.03 37.09 -13.9 -14.77 -15.7 -16.7 -3.19 -4.41 Tax Effect on Equity (Federal) Federal depreciation schedule (%) 20 32 19.2 11.52 11.52 5.76 0 0 0 0 0 0 Federal depreciation ($) 4,356.47 6,970.35 4,182.21 2,509.32 2,509.32 1,254.66 0 0 0 0 0 0 Federal Income Taxes ($) 45.45

-1,803.85

-1,050.33 -596.28 -591.58 -249.27 93.41 99.24 105.5 112.23 21.42 29.65

Federal tax savings ($) 6,554.55 1,803.85 1,050.33 596.28 591.58 249.27 -93.41 -99.24 -105.5 -112.23 -21.42 -29.65

Annual Energy 7,669 kWh PPA Price $0.0785/kWh

Nominal LCOE $0.0843/kWh Real LCOE $0.0684/kWh