Gov. Patrick builds a fast-growing industry with big subsidies
ON APRIL 17, 2007, Gov. Deval Patrick traveled to Marlborough to make two announcements. One was that Evergreen Solar was going to stay in Massachusetts and open a $150 million solar panel manufacturing plant. The other was a commitment to increase the state’s solar power generating capacity from 2 to 250 megawatts by 2017.
The Evergreen announcement received a lot of press attention, in part because the state was kicking in $44 million in grants and low-interest loans. By contrast, the solar pledge went virtually unnoticed. No one was quite sure what it meant.
Six years later, the picture is clearer. Evergreen and its factory in Devens are gone, unable to compete against low-cost Chinese solar panel makers, while the state’s solar capacity is growing remarkably fast. The governor’s original 250 megawatt goal will likely be reached this year, four years ahead of schedule. Industry officials say the state could reach its new goal of 400 megawatts by 2015.
The Patrick administration is fulfilling its solar commitment with the help of generous federal tax incentives and enormous state subsidies paid for by electric ratepayers across the state. The subsidies have not only enabled a pricey industry to take hold in Massachusetts, but to expand at a time when the economy is soft and electricity prices are falling.
Solar has many environmental and competitive advantages over other ways of generating electricity. There are no greenhouse gas emissions, sunlight is free, solar installations have no moving parts, and solar power is produced during the day when it is most needed. State subsidies have also given solar an almost unbeatable sales pitch.
“We lower energy costs,” says a stock prospectus issued by Solar City, a California-based solar developer that is very active in Massachusetts. “Our customers buy renewable energy from us for less than they currently pay for electricity from utilities with little to no up-front cost.”
Solar customers save money on their electric bills because they split with the solar developer a subsidy paid for by other utility customers. In other words, electric ratepayers across the state see their bills go up a tiny bit to pay for the subsidies that allow the electric bills of solar customers to go down, in some cases by half.
Despite the continuing need for subsidies, the trendline for solar costs is promising. The price of solar panels has been plummeting, and financing and other marketing costs have also been dropping. But weaning solar developers off subsidies won’t be easy. A number of technology, marketing, and regulatory hurdles remain, and the electricity market itself isn’t cooperating. The surge in production of natural gas, the primary fuel used to run the region’s power plants, has halted the upward momentum of electricity prices. That means solar will have to travel a longer road before its price becomes competitive.
Yet top officials in the Patrick administration say grid parity, the term industry insiders use for cost competitiveness with other fuels, is in sight. “We’re actually seeing the numbers come down pretty quickly,” says Rick Sullivan, the governor’s secretary of energy and environmental affairs. Asked whether solar grid parity will take five, 10, or 20 years, he says: “Certainly within 20 years, and I think it can happen faster than that.”
ANATOMY OF A SOLAR DEAL
The company’s most recent and biggest venture is a project on Cape Cod and Martha’s Vineyard to install nearly 50 megawatts of solar power scattered across more than 40 locations. The $200 million deal will help the state reduce its dependence on fossil fuels, allow 17 participating towns and two counties to cut their electric bills dramatically, and return a profit to Broadway. It’s what people in the solar business are fond of calling a win-win-win.
| “Look at the oil companies; they still get subsidies,” says Jonathan
Wienslaw, president of Broadway Electrical. Photo by J. Cappuccio.
The deal calls for Broadway to buy and install solar panels at a wide variety of locations across the Cape, everywhere from school rooftops in Dennis to a landfill in Orleans to the Barnstable airport. The company will own, operate, and maintain the solar facilities and link them into the regional power grid through the local utility, NStar.
Broadway is financing the project with the help of an equity partner out of Houston along with a federal investment tax credit equal to roughly 30 percent of the project’s cost. The tax credit will be paid to Broadway and its partner in cash.
Once the electricity starts flowing, Broadway will tap two revenue streams. One is a called a net metering credit. The credit is paid by NStar and its value is close to the retail price of electricity, which on the Cape ranges between 12 and 15 cents a kilowatt hour. Broadway and its client towns and counties will basically split the credit, with Broadway taking slightly less than half and the clients taking the rest. For Broadway, the credit represents a source of income. For the towns and counties, the credit will be used to reduce their electric bills for the next 20 years, cutting them nearly in half.
The other credit is called a solar renewable energy credit, or SREC. For every 1,000 kilowatt hours of electricity Broadway produces, it will be issued one solar credit. Solar credits have value because state regulators require companies that sell electricity in Massachusetts to buy solar credits equal to a small percentage of their sales. The price of the credits fluctuates with supply and demand, but is currently capped by regulators at 55 cents a kilowatt hour with a “soft floor” of 28.5 cents. (State regulators say they will do their best to maintain a floor price, but since there are no guarantees, the floor is considered soft.)
Jonathan Wienslaw, the president of Broadway Electrical, says he expects the solar credits from the Cape project to yield at least 28.5 cents. Combined with the net metering credits, each kilowatt hour of electricity will generate about 41 to 44 cents of revenue. The cost figure is more than twice as much as the initial 18.7-cent contracted price of Cape Wind electricity and six times the 7-cent price most utilities are charging for power now.
| Jonathan Wienslaw of Broadway Electrical in front of a solar inverter,
which converts solar panel electricity for use on the power grid. Photo by
The premium charge for solar is eventually passed on to electric ratepayers across the state. NStar, for example, recovers a portion of the net metering credit in its customer bills. The cost of the solar credit is rolled into the price of power that electricity suppliers charge their customers.
Wienslaw says the solar revenue numbers tend to overstate the size of the solar premium because the project will produce electricity for at least 20 years but the solar credits will be available for only 10. Spreading the costs and revenues out over the 20-year period would reduce the solar premium, he says. He also says the costs of solar are dropping and the premium on future projects will continue to shrink.
“We’re moving toward grid parity,” he says. “Solar is an emerging industry, so there have been some subsidies
to start it. But look at the oil companies; they still get subsidies.”
Stephen Comstock, tax policy manager at the American Petroleum Institute, which represents the oil and gas industry, says his members receive tax deductions for the cost of drilling and purchasing mineral rights, but no direct subsidies. “Our position is we don’t get subsidies,” he says.
The differing views of Wienslaw and Comstock reflect an ongoing national discussion about renewable energy, one that surfaced briefly in campaigns last fall. Elizabeth Warren and President Obama called for ending all subsidies for oil and gas companies, while Scott Brown and Mitt Romney dismissed the idea as insignificant and likely to lead to a hike in gasoline prices. What neither side discussed in any detail was whether oil and gas industries should be assessed a carbon tax for the climate effects of the products they produce. Proponents of solar and other renewable forms of energy say a carbon tax would help level the playing field among fuels.
Asked whether the absence of a carbon tax on fossil fuels represents a subsidy for his industry, Comstock says: “That’s not really a tax policy discussion. That’s a whole other debate.”
Benjamin Riggs Jr. lives in Newport, Rhode Island, and likes to sail. The 67-year-old semi-retired businessman admits he knew almost nothing about electricity and renewable energy three years ago, but he started doing some research when a company called Deepwater Wind began talking about putting wind turbines out in the ocean where he sails. He didn’t think the wind turbines made economic sense and tried to block them. He didn’t succeed, but his involvement got him interested in renewable energy issues. One thing led to another and he found himself researching the arcane issue of net metering.
Net metering was originally conceived as a way to encourage homeowners and businesses to produce their own renewable energy. They needed a regulatory system for the times when they produced more power than they needed. The excess power would flow to their utility and into the regional power grid, but how should the homeowner or business be compensated for that excess power?
Under net metering rules in 43 states, the homeowner or business is paid in the form of net metering credits valued at nearly the retail price of electricity instead of the wholesale price. To understand the concept, think of a home’s electricity meter. It spins in one direction when the home is receiving power from the local utility, but it spins in the opposite direction when the homeowner’s solar panels are generating excess power and sending the electricity to the utility. In either direction, the price is the same.
But many renewable energy developers are not simply selling excess power they can’t use but producing power and sending it all to their local utility. They are operating more like mini-power plants than homeowners or businesses trying to reduce their electric bill. Net metering has become the secret sauce of the solar developer’s sales pitch to customers. It’s what allows the developer to offer his customers lower electricity prices even though solar is not cost competitive yet.
“This isn’t about going green,” Riggs says. “The only thing green about it is the money.”
Riggs sent a letter expressing his concerns to state regulators in Rhode Island and won some support within the state bureaucracy and from local utilities. A National Grid official wrote to state officials in 2010 that “net metering is being turned into a means of selling electricity at above market rates.”
Elia Germani, chair of the Rhode Island Public Utilities Commission, wrote to legislative leaders in 2010, pointing out that the cost of net metering was borne by the utility’s customers in the form of higher rates. “We would encourage the state’s elected officials to consider the intent of the net metering law and determine to what extent current policy can be gamed at the expense of those Ocean State residents and businesses subsidizing it,” he wrote.
The following year, the Rhode Island legislature restricted net metering to entities that produce renewable energy to offset their own power needs. Surplus generation was limited and compensated at the wholesale price of power instead of the retail price. However, municipalities and universities, which typically have multiple electric meters, could count all of them when tabulating their power needs for net metering purposes.
In Massachusetts, renewable energy developers are doing exactly what their counterparts in Rhode Island were doing. In Carver, for example, Southern Sky Renewable Energy is building a six-megawatt solar farm on a privately owned capped landfill and will sell the net metering credits it receives to Cape Cod Hospital in Hyannis, 40 miles away. The deal will provide a revenue stream for Southern Sky and save the hospital an estimated $325,000 a year for 20 years on its electricity bill.
The cost of net metering—the difference between the wholesale price of power (3 to 5 cents a kilowatt hour) and the retail price (about 15 cents)—will be borne by NStar ratepayers.
Utilities across the country are starting to raise concerns about the fairness of net metering and its costs. California utilities are grumbling that net metering adds $1.3 billion to the bills of their customers. National Grid estimates that net metering in Massachusetts will eventually cost its customers $60 million.
Massachusetts officials have shown no interest in retreating on net metering, however. In fact, the Legislature expanded the program last year, passing laws tripling the size of renewable energy projects that can qualify for net metering and doubling the size of the overall net metering market to 6 percent of the state’s total electricity usage.
Are the incentives right?
Sen. Benjamin Downing, the chair of the Legislature’s Committee on Telecommunications, Utilities, and Energy, tries to maintain a long-term perspective about the state’s efforts to build a solar industry. The Pittsfield Democrat says he wants to balance concerns about short-term profits against concerns about the long-term environmental costs of doing nothing. Still, he knows a lot of money is at stake.
“We’re creating this market,” he says.? “Are we setting the incentives right?”
It’s not an easy question to answer. There a lot of moving parts with the solar business, which makes regulation difficult. Solar developers also don’t reveal much about their profitability.
“Some of the cynics think they’re making a boatload of money,” says Jack Hunter, a Carver official who helped negotiate solar deals with Southern Sky Renewable Energy as well as other developers. “Obviously, they’re making some money or they wouldn’t be doing it. But how much?”
Danny Van Cleef, executive vice president for business development at HelioSage Energy in Charlottesville, Virginia, which has projects in Ashburnham and Littleton in the works, says solar development is a juggling act. “It can be profitable,” he says, “but it’s not for the faint of heart.”
Solar City, the California solar developer, recently made an initial public offering of stock. Its prospectus indicated the company was growing quickly, adding customers and sales at a rapid pace. Still, the company hadn’t turned a profit yet and the offering price of its stock was scaled back at the last minute, reducing the company’s initial stock valuation from $1 billion to $600 million.
Investor skittishness about Solar City may have reflected uncertainty about the future of the solar industry. The 30 percent federal investment tax credit that has played a pivotal role in promoting solar development is scheduled to become a 10 percent credit in 2017. The price of solar panels, which represent the biggest cost of an installation, may be headed up. Their price has fallen about 70 percent over the last four years as Chinese suppliers, their warehouses full of product, have slashed their prices. But now the US government is preparing to impose tariffs on some Chinese manufacturers for dumping their products in this country below cost. Those tariffs are expected to stabilize or possibly increase the price of solar panels.
Net metering is under fire in some states, and in Massachusetts, the drop in price of solar credits is making developers nervous. In 2010 and 2011, the supply of solar credits failed to keep pace with demand, so the price hovered near the cap of 55 cents a kilowatt hour. In 2012, the surge in solar development in Massachusetts flooded the market with credits, driving down the price. Some credits have sold below the floor price of 28.5 cents, but state officials hope to use an auction this summer to bring prices back up. State officials are confident the auction process will work, but it has never been tested. Industry officials expect the price of solar credits to remain soft this year and possibly next year before rising in 2015.
There’s also debate about whether solar development is best served through freer markets or tighter regulation. Ron Gerwatowski, senior vice president of regulation and pricing for National Grid, says utility solar projects have the potential to be more cost effective than private developments because the revenues can be used to offset costs rather than pad profits.
Under provisions of the 2008 Green Communities Act, two of the state’s major utilities have built their own solar facilities. National Grid constructed a total of nearly five megawatts of solar at locations in Revere, Sudbury, Haverhill, Everett, and Dorchester. Western Massachusetts Electric built a total of 4.1 megawatts at two brownfield locations in Pittsfield and Springfield.
The cost of the projects varies quite dramatically; some have a net cost per kilowatt hour of 23 cents while others approach 60 cents. Utility executives say the costs are high in some instances because the facilities were built before solar panel prices began falling and were located in costly locations like brownfield sites.
Gerwatowski offers a comparison of a hypothetical 1-megawatt solar facility run by a utility and a private developer that shows the utility approach saves ratepayers money. The hypothetical facility costs the same and has the same power output. What differs is what is done with the revenues. The private solar developer’s revenues include $604,032 from the sale of solar credits and $117,742 from net metering, for a total of $721,774. The utility’s revenues include the same amount of solar credits and $55,816 from the sale of the electricity, for a total of $659,848. (Utilities can’t do net metering.)
| National Grid operates a solar farm next to the natural gas tanks in
Dorchester. Photo courtesy of National Grid.
Gerwatowski’s analysis indicates the utility project would rebate money to ratepayers every year after the first year because revenues would exceed expenses. By contrast, the revenues collected by the private developer would all be paid by ratepayers. The one flaw in the analysis is that it assumes very high solar credit prices; if the price of solar credits drops, as it is doing now, the utility probably wouldn’t be able to offset its expenses with revenues. It would be forced to recover those expenses from ratepayers. By contrast, the solar developer would have to absorb any loss from a drop in solar credit prices.
Carl Frattini, director of business development for Western Massachusetts Electric Co., says the one clear advantage utility solar projects have over private projects is that all costs and revenues, including the utility’s rate of return, are fully documented for state regulators. “I’m not saying it’s a better model,” says Frattini of the utility approach, “but there’s a lot of data available on it. That’s transparency. You can’t navigate toward the ultimate objective without transparency.”Dwayne Breger, the head of renewable and alternative energy development for the Massachusetts Division of Energy Resources, is the person in charge of calibrating the state’s solar incentives. He has a lot on his plate. He is tracking changes in the solar market, preparing for this summer’s solar credit auction, and already beginning to think about how the state will encourage solar development once the 400 megawatt goal is reached—all while keeping costs in check. It’s a delicate balancing act.
“To the extent there is a need for continuing subsidies —and I would suspect there will be a need after 400 megawatts is reached—we have to figure out how we keep this going and at the same time minimize the cost to ratepayers and the citizens of Massachusetts,” he says.