The solar disconnect

THE US ENERGY Information Administration says solar power is expensive relative to other types of electricity generation, yet cities, towns, and schools across Massachusetts are finding that solar can save them lots of money.

The federal agency, which tries to compare the cost of electricity produced from various sources, says solar is one of the most expensive types of electricity generation. The average cost nationally is estimated at 13 cents per kilowatt hour, but it would probably be much higher in New England where sunlight and land for solar farms are more limited.

Yet local headlines suggest solar is a money saver for many municipalities. The Telegram & Gazette recently reported that a solar deal may cut Southbridge’s electricity bills in half. Westford estimates a deal it negotiated with a solar developer will cut its annual electric bill by more than 20 percent. Sixteen public housing authorities expect to save $60 million over the next 20 years by signing solar deals.

How can these towns and housing authorities be saving money by tapping into what the federal government says is a high-priced form of power? The cost of solar panels has fallen dramatically in recent years and the price of electricity is hitting all-time highs this winter. Yet despite these favorable conditions, solar in the Northeast is not cheap. Cities and towns are saving money on solar because of a complex system of state and federal subsidies.

Here’s how one fairly typical deal works:

Nexamp, a solar developer based in Boston, built a 3.2 megawatt solar farm on private land in Hubbardston, a town located south of Route 2 in Worcester County. After completing the project, Nexamp sold the facility to California-based SunEdison, which manufacturers solar components and develops solar projects around the world. Nexamp declined to comment for this story, but Nexamp’s customers and SunEdison did provide details.

“Massachusetts happens to be one of the more complicated markets to finance solar,” says Jarryd Comerford, a sales director for SunEdison in the Northeast.

The solar farm in Hubbardston took advantage of three main subsidies: a 30 percent tax credit from the federal government and two types of credits paid for by Massachusetts electricity ratepayers. The federal tax credit is based on the total cost of the project, which was not disclosed. Typically, the tax credit is sold at a discount to a financial institution that uses the credit to reduce its tax liability, while the cash raised from the sale of the tax credit is used by the solar developer to defray the cost of the project.

Solar farms in Massachusetts don’t operate like most power generating facilities, which receive cash for the power they deliver to the grid while competing on price with other generators. Instead, solar farms in Massachusetts sell power into the grid and receive back two types of credits, both paid for by electric ratepayers.

One is called a net metering credit. To understand the concept of net metering, think of a homeowner with solar panels on his roof. The homeowner generates power during the day and feeds it into the electric grid, generating credits. At night, after the sun goes down, the homeowner may have to draw power from the grid to power his appliances. At the end of the month, the homeowner’s utility uses the customer’s meter readings to net out his credits and his power purchases, thus the term net metering.

It’s worth noting that net metering credits directly offset utility charges. On a customer electric bill, power is just a portion of the total charge; there are also fees for transmission, distribution, and regulation. A net metering credit, which includes all these charges, is equivalent to the retail price of electricity instead of just the power cost.

Because the Hubbardston solar farm doesn’t use electricity on-site, it negotiated host customer agreements with Middlesex Community College in Bedford and the towns of Webster and Westford. All three host customers are more than 30 miles from Hubbardston, which is why the billing arrangement has been dubbed virtual net metering.

The 20-year deal with Westford calls for the municipality to buy net metering credits generated by the solar farm at an initial price of 8.6 cents a kilowatt hour, rising 1.75 percent each year over the life of the contract. John Mangiaratti, the assistant town manager in Westford, says the deal is attractive because the community is paying 8.6 cents for a credit that can be used to offset a utility charge that was 16.8 cents this past fall and rose to 24 cents this winter.

Mangiaratti says savings for Westford should total at least $300,000, reducing the municipality’s annual electric bill from $1.4 million to $1.1 million.

The solar farm also receives solar renewable energy credits, or SRECs, for the power it feeds into the grid. State regulators require companies that sell electricity in Massachusetts to purchase SRECs to comply with renewable energy requirements.  The price of SRECs varies with supply and demand, but the credits currently sell for about 27 cents per kilowatt hour, according to the website SREC Trade.

Adding the two credits together, SunEdison should receive about 40 cents per kilowatt hour for the solar power it generates — roughly 15 cents per kilowatt hour from the sale of net metering credits to Westford and about 25 cents per kilowatt hour on the sale of SRECs.

Tim Roughan, director of distributed resources at National Grid, says the cost of the credits paid to solar developers is passed along to ratepayers. In a sense, all of the utility’s ratepayers pay a little more on their bills so solar developers and their host customers can profit from the sale of solar power.

Roughan says he believes the costs could be better calibrated. He estimates a solar developer needs to make 18 to 25 cents per kilowatt hour to cover its costs and make a 15 percent return on investment. “They’re getting all of that and more,” he says of the Hubbardston solar farm and others like it.