Has the Mass. solar gamble paid off?
Like other energy bets, costs high, hidden
HOW MUCH SHOULD we pay to promote solar energy in Massachusetts? Recent state government programs have resulted in the commitment of at least $10 billion of consumer funds—well over $1,500 for every man, woman, and child in the state. Is there a need for more government-directed subsidization, or have we reached a point of diminishing returns? Let’s look at the big picture.
There is a long history of government support for new energy technologies. Most often, the rationale for such support is that the technologies offer possible strategic value in the future but are currently viewed as too risky for private development. So legislators and regulators, persuaded by technology companies and other advocates, adopt subsidy schemes to overcome the risk-averse behavior of private developers. Those schemes have the danger of creating a moral hazard, promoting investment in new technologies that is excessive relative to their risk-adjusted value to society—leading to a behavior that generates unwarranted costs that are ultimately borne by consumers.
An early example of this phenomenon was the Price-Anderson Nuclear Industries Indemnity Act. Following a 1946 mandate for the development of civilian nuclear power plants, Congress passed the Price-Anderson Act to offer no-fault protection to electric utilities and component manufacturers from lawsuits that might emerge from accidents at commercial nuclear power plants. Why? Because the structure of the insurance industry was incapable of providing the extent of coverage needed to adequately address the risks of nuclear power.
As noted by the American Nuclear Society, “The Act has removed the deterrent to private sector participation in nuclear activities presented by the threat of potential liability claims following a large accident.” The federal government provides $10 billion in coverage that would be unavailable at any price to any power plant operator in America.
Burned by these experiences nationwide and by utility recalcitrance to allow other generators to hook up to their systems, Congress passed the Public Utility Regulatory Policies Act in 1978. This law stated that privately owned “qualifying facilities” should be permitted to have access to the grid through contracts with the utilities. Qualifying facilities were viewed as potentially offering efficiency in the production of electric power. The term included small-scale hydroelectric plants, cogeneration units (providing power and steam), municipal solid waste/energy facilities, biomass, and the like.
It was left to state regulators to figure out the rules that would govern qualifying facilities development. I served as chairman of the Massachusetts Department of Public Utilities during this process and—again—we were told that qualifying facilities development in our state was too financially risky for developers without long-term, fixed-price power purchase contracts from the local utilities. Persuaded, we ordered our state’s utilities to sign such contracts with qualifying facilities developers, based on projected “avoidable” costs that the utilities might otherwise face. We proudly announced that “these changes would stimulate the development of small power producers by making it easier for them to obtain financing for their generating projects and to compete actively to provide lower-cost power to utilities.” We put our ratepayers at risk for those contracts.
Within a decade, it became clear that the contracts we had mandated were out of market, selling power to utilities at a cost well above what would have been the case without them. Large commercial and industrial customers—vital to the state’s economy–were seeking to bypass the retail utility grid and buy power at the lower wholesale rates. Instability of the entire financial framework of the regulated utilities was a real threat. The question of how to handle hundreds of millions of dollars in “stranded costs” from the qualifying facilities, as well as the leftover costs from the nuclear units, was ever present. If recovery of these costs were forced upon the utilities, there would be multiple bankruptcies, as the level of stranded costs exceeded the equity of many companies.
The result was a new “social contract.” Under a 1997 state law, utilities would divest their generating assets, focusing for the future solely on the wires business, transmitting and distributing power. The generation part of the business would become competitive. Ratepayers, though, would be responsible for the lion’s share of the stranded costs, even after subtracting the value of asset sales, and they would pay down the accrued balance over several years.
We now arrive at the recent generation of legislators and regulators, who have likely made the same kind of risk-sharing mistake – again, for what appears to be good reasons. Concerns about climate change have prompted public officials to impose obligations on utilities to invest in renewable energy resources. One of these resources, solar energy, became a particular favorite in Massachusetts. Like nuclear power and qualifying facilities developers earlier, solar developers claimed that the marketplace was just too risky to install units across Massachusetts, so financial devices were created to enhance the risk-reward profile for them.
Most dramatically, solar technology has been encouraged by the availability of solar renewable energy credits. These are financial instruments that give you, or more typically the developer of your solar installation, a certain amount of money per kilowatt hour produced by your solar cells. The so-called SREC program included two generations of solar incentives with different levels of compensation that can be accumulated for 10 years. The cost of the SRECs is paid by your servicing utility and passed along to all consumers. The availability of second generation SRECs ended in November 2018. The third generation of solar incentives is commencing through a program designed by the Massachusetts Department of Energy Resources, dubbed the SMART program.
The first generation of SRECs had an estimated nominal price of 30.9 cents per kilowatt hour produced by solar cells; the second generation, 19.7 cents per kilowatt hour. In recent filings at the Department of Public Utilities, the utilities reported that the cost of this program that has and will be charged to ratepayers is $6.5 billion. That amount does not include the additional subsidy that many solar users receive—the net metering credit—that allows you to “run the meter backwards” as you produce electricity on your roof and sell energy back to the utility. The net metering credit adds an additional burden on non-solar-installed ratepayers because it gives a full retail credit to consumers, but the actual system costs avoided are less. Those unavoided costs are simply shifted to other customers. Although it’s difficult to calculate, it appears that the cumulative cost to consumers of these credits is about $500 million since 2009.
In reviewing the DOER’s SMART revision of the program, the state DPU recently established a much lower credit (8.5 cents), estimated a program cost of about $3 billion over its 25-year lifetime, and required that the amounts collected be itemized on consumers’ bill. This order will change the future trend line and brings welcome transparency to the program, but the original programs will stay in force and in the dark until the availability of SRECs expires. Interestingly, too, there has been a huge instantaneous response to the SMART program, with applicants hoping to sop up hundreds of megawatts of allowed credits within just weeks of the DPU order. This response suggests that even the reduced subsidies in the new program are excessive relative to the magnitude needed to promote the industry.
Those of us most concerned with climate change must also have some concern for the amount that Massachusetts businesses and consumers have to pay for electricity. I fear that the solar program put this balance out of whack. While solar cells have made a noticeable difference in the magnitude of the peak demand that has to be met during hot summer days—reducing fossil fuel use during those hours—they do little or nothing to help meet peak demands during cold winter days and nights when the regional grid has to add old, dirty, and inefficient oil and coal units to meet peak demands. Over the course of the year, they have displaced nonpeak period energy production that would have entered the market at a much lower total cost to consumers. In short, we have now been burdened with yet another layer of “stranded costs” that adversely affects people’s incomes and the economy of the state.What’s next on the list of well-intentioned financial mandates that will help reduce the risk for the developers of new energy technologies by passing along costs to the rest of us? Rest assured, the government will be asked to gamble with our money. And investors and advocates will do their best to keep things hidden so the rest of us don’t understand the costs they are asking us to bear. Some advocates now want unwarranted energy storage incentives. Some even argue for a return to expanded solar incentives. Let’s keep an eye on things and demand cost-effectiveness and transparency with regard to the amounts promised on our behalf.
Paul F. Levy was chairman of the Massachusetts Department of Public Utilities from 1978 to 1979 and then again from 1983-1987.