Public policy for engineers: solar industry depends on policymakers’ goodwill
08/01/2008
The photovoltaic industry’s growth is almost entirely due to favorable government policies. The pros and cons of subsidies, as well as tax incentives, feed-in tariffs, and the need for new regulatory requirements, are discussed.
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The semiconductor industry has had a long and complex relationship with government. It grew out of government-funded research; the military was among its first customers. More recently, companies have turned to their governments for capital, for preferential tax treatment, and for research funding to fend off competitive threats. Much government assistance is viewed in nationalistic terms: From Albany, NY, to Beijing, government sees the semiconductor industry as a way to develop local economies, create local jobs, and compete in a globalized environment.
Still, most people in both industry and government would scoff at the idea of direct subsidies to integrated circuit manufacturers. A tax credit favoring the purchase of transistors over vacuum tubes would have been laughed out of Congress, even when the competition between the two was still an issue.
The photovoltaic industry is different, however. Its current growth is almost entirely due to favorable government policies. In direct competition with electricity generated from fossil fuels, solar cells almost always lose. In most jurisdictions, even the most aggressive suppliers agree that grid parity—the point at which photovoltaics are cost competitive—is likely years away. The existence of government subsidies, and the form those subsidies take, determines which photovoltaic markets are important and what products those markets require. Since the largest purchasers of solar cells reside in industrial democracies, the industry’s market outlook can shift with public opinion and election results.
Why support solar? And how?
From a policy standpoint, the first issue is whether solar energy—
or renewable energy in general— should be subsidized at all. Proponents of subsidies point out that the oil and natural gas industries received substantial government aid during their early histories and continue to receive tax breaks for exploration, favorable terms for drilling leases on government land, and so forth. In this view, the solar industry isn’t requesting special treatment; it only desires the same assistance received by other industries in their formative years. Moreover, subsidy proponents observe that renewable energy has many benefits that are not adequately reflected in its price. The free market does not pay a premium for electricity that comes from renewable sources and emits no pollutants, even though many people agree that such characteristics are desirable. Nor does the cost of renewable energy reflect the economic benefits of reduced dependence on foreign fuel supplies. Subsidies are a way for government to correct the market’s failure to fund a variety of common goods.
Pro-subsidy arguments have become particularly persuasive as public concerns about human-induced climate change and rising fossil fuel prices have increased. The Kyoto Protocol, adopted in 1997, set targets for CO2 emissions, leading directly to Germany’s feed-in tariff program, established in 2001 and then modified in 2004. Since 2004, Germany has become the world’s largest market for photo-voltaics; the industry’s rapid growth in the last few years is a direct result of Germany’s aggressive stance.
In the US the pro-subsidy argument has been most effective at the state level, particularly in California. At the national level, there has been a great deal of resistance to the idea that government should directly favor any particular energy source. In the anti-subsidy view, the most effective way to drive growth in renewable energy is through emissions and portfolio standards, leaving private industry free to decide how to meet those standards. This stance, accompanied by skepticism about the causes and consequences of climate change, has taken most direct renewable energy subsidies off the table. Instead, national solar policy focuses on the job creation potential of new technologies. For instance, the Solar America Initiative focuses on helping photovoltaic devices achieve grid parity.
America’s national renewables policy is likely to shift somewhat under the next administration. Senators John McCain (R-AZ) and Barack Obama (D-IL), the presumptive nominees of the two major parties, have both pledged to reduce CO2 emissions, probably through some form of cap-and-trade scheme. Such schemes, credited with substantial reductions in the sulfur dioxide emissions responsible for acid rain, set a region-wide limit on emissions of a particular pollutant or pollutants. Companies purchase or are granted a given number of credits, which they can use to offset their own emissions or sell to other companies. Companies thus decide for themselves whether to invest in cleaner facilities or pollution credits. Over time, the number of credits available goes down, both because the overall cap level goes down and because environmental organizations can buy and retire existing credits. Continuing to pollute becomes more costly, and reducing emissions becomes financially attractive.
Although both presumptive presidential nominees have proposed cap-and-trade policies, they differ on such details as the overall cap level and the rate of reduction. Senator Obama’s plan goes a step further in proposing to distribute the initial emissions credits via auction. He would use the proceeds to fund renewable energy research, as well as to help lower-income families with the higher energy costs likely to result from strong emissions limits. Senator McCain’s proposal, however, would simply assign the initial credits to existing companies.
Tax incentives from the bottom up
Beyond research-oriented funding, subsidies for solar energy come in a number of different forms. The most direct are tax credits and rebates paid to owners of renewable energy facilities. Examples include the federal renewable energy production tax credit and California’s Million Solar Roofs program. The production tax credit (PTC) is a per kilowatt-hour tax credit for energy generated by qualified energy resources, while the California program offers rebates for properly installed and maintained solar systems.
Although tax credits are one of the simplest forms of subsidy, they are also one of the most politically difficult to maintain. Such subsidies are always threatened as budget writers try to balance conflicting priorities without resorting to tax increases. By their nature, subsidies are vulnerable to claims that they represent “pork barrel politics” favoring “special interests” at the expense of the average taxpayer. Each new political cycle can bring a slightly different tax credit regime, or an expiring credit might be extended for varying periods of time—five years one time, but only two the next. The federal PTC was first enacted in 1992, with expiration at the end of 2001. It was re-enacted in 2002, expiring at the end of 2003. It was renewed for one year, in 2004. In 2005, it was extended until 2007, and after a further extension in 2006, the credit is now set to expire in 2008. However, the list of eligible resources was changed in 2004 and again in 2005; solar facilities placed in service after the end of 2005 are not eligible for this credit.
Yet solar system installers value consistency above all. Investors and lenders make decisions based on the cost of the project, which depends on the availability or absence of tax credits. Site owners may proceed with projects or not based on the availability of credits within the project timeframe. Stakeholders would usually rather have smaller, more consistent tax credits than large credits that appear and disappear as political winds shift.
Like most government policies, tax credits are something of a blunt instrument. The simplest credits provide a set dollar amount toward the installation of a solar array. The site owner has an incentive to minimize the total cost, even though a more expensive system with more-efficient cells might be more cost-effective over the long term. Credits tied to energy production, rather than to system installation, are likely to have more impact on a region’s energy supply. Beginning in 2007, California’s rebate program adopted incentives based on either the expected performance (for small systems) or the actual production (for large systems) of the installation.
Policy consistency is part of the reason why Germany’s feed-in tariff has been so successful. In Germany, renewable energy installations are guaranteed the right to sell electricity to the grid; they are guaranteed a preferential rate that can be as much as three to five times the going rate for electricity from fossil fuels. The rate for new installations is reduced over time, but once an installation is connected, the rate is guaranteed for approximately 20 years. Costs of the tariff are distributed among the utility’s customers, and therefore show up in household energy bills rather than in the federal budget. Site owners receive a guaranteed return on their investment, which they can use to support requests for appropriate funding. Utilities gain a fixed cost power source, independent of fuel prices. Because tariffs return more money if the site generates more electricity, the site owner has an incentive to install and maintain a high-performance array.
Portfolio standards build from the top down
Both feed-in tariffs and tax credits are bottom-up incentives: They encourage site owners to install renewable generation capability. Both are usually supplemented by renewable portfolio standards (RPS), and in some jurisdictions renewable portfolio standards are essentially the only renewable energy incentive. Renewable portfolio standards are a top-down incentive, requiring utilities to obtain some fraction of their energy from renewable sources. They vary widely in the types of renewables allowed, time frame, and the size of the renewable portfolio.
Researchers at Lawrence Berkeley National Laboratory examined 28 different studies of the cost impact of RPS, analyzing policies in 18 different states [1]. The expected change in electricity cost varied greatly, depending on the specific standard and the assumptions of the study model. For example, a model that assumes natural gas prices are high and renewable energy costs are low will give a different result than one that combines coal-fired conventional generation with a high renewable energy cost assumption. Although most studies found that the cost of RPS was negligible, small changes in the model assumptions produced large shifts in the results. Most of the RPS models examined also assumed the available renewable energy resource was adequate to meet the demand that such standards create. That assumption may not be true. For example, the New England states are small and densely populated, and known for gloomy winter weather. If the region does not produce enough renewable energy to meet its combined RPS requirements, the cost of renewable energy is likely to go up.
Making friends with the power grid
While subsidies and portfolio standards directly impact sales of photovoltaic installations, other policy issues have equally important indirect impacts. For example, the rules governing connections between the grid and a photovoltaic installation can have a significant effect on the installation’s cost as well as the cost recovery period. Utilities and site owners alike face obstacles because the electrical grid as currently structured assumes only a few large sources of electricity—conventional power plants. Connections to user sites are generally one-way: Current can flow from the grid to the site, but not from the site to the grid. This isolation protects both grid equipment and utility personnel from lightning strikes, short circuits, and other problems at user facilities.
Yet one of the arguments in favor of solar power is that it is a “peaker” technology. Electrical demand peaks during the brightest, sunniest parts of the day, but so does solar output. During peak periods, site owners would like to be able to sell excess electricity back to the grid, offsetting the cost of electricity they draw at night or in bad weather. From the site owner’s point of view, moreover, the electricity should be sold to the grid at peak rates, as would be paid to any other peak source. Summer peak rates can be several times higher than off-peak rates, so differential pricing would usually allow an installation to pay for itself more quickly.
To actually achieve this goal, the solar industry would like to see two new regulatory requirements. The first, net metering, requires an electrical connection capable of supplying power to the grid, coupled with a meter that can decrease as well as increase the customer’s balance. The second, demand pricing, requires a meter that can track hourly as well as total usage, differentiating between peak and off-peak consumption. Like feed-in tariffs, net metering and demand pricing encourage the site owner to make more-efficient decisions about the array installation and day-to-day power consumption. Running a power-intensive appliance at night might be more cost-effective, for example, sending the maximum power to the grid at peak hours, while timing the heaviest power draw for off-peak hours.
More sophisticated electrical metering is especially important for the solar industry because, unlike other renewable energy sources, it is accessible to retail customers. Mounting a rooftop solar array is far easier than building a wind turbine or geothermal plant. To be compatible with retail-level solar power, the physical equipment and the regulatory regime must be able to accommodate millions of individuals, few of whom are electrical engineers. Both the solar and power industries are seeking uniform standards for interconnections; developing such standards is a major goal of the Solar America Initiative.
Making friends with the public
While most of this article has considered ways in which government affects the solar industry, the industry’s prospects also depend on public perceptions. In particular, many of the materials used in solar cell manufacturing are hazardous. As the industry claims to be at the forefront of “green” technology, an immaculate environmental record is essential. First Solar, the leading supplier of CdTe cells, sets a good example. The company is committed to lifecycle management of its products and will accept decommissioned panels for recycling at its own expense at any time. At the other extreme, earlier this year The Washington Post reported especially egregious behavior by a Chinese manufacturer of silicon solar cells: The company was simply dumping silicon tetrachloride waste in a field next to its plant [2]. Companies that observe best practices are more likely to be seen favorably by voters and their representatives—and by shareholders. (Many stocks in the sector dropped by 10% or more the day after The Washington Post report.)
For small installations, appearance can be as important as power generation. Many homeowner’s associations restrict solar installations on aesthetic grounds. While such restrictions may eventually be overturned for public policy reasons, thin-film photovoltaic technologies can help make the issue moot. Among other companies, Uni-Solar supplies solar laminates that can be used in place of conventional roofing materials.
It may seem silly to mention homeowner’s association covenants, which typically affect a few dozen families, in the same article as major subsidies affecting millions of people. Yet a few thousand residential installations are enough to support a megawatt-scale manufacturing plant. A dozen large solar fields would completely consume the industry’s manufacturing capacity. Even small-scale policy decisions can cause large swings in the industry’s outlook.
Resources
- Cliff Chen, Ryan Wiser, and Mark Bolinger, “Weighing the Costs and Benefits of State Renewables Portfolio Standards: A Comparative Analysis of State-Level Policy Impact Projections,” Report LBNL-61580, March 2007. http://eetd.lbl.gov/ea/ems
eports/61580.pdf - A.E. Cha, “Solar energy firms leave waste behind in China,” The Washington Post, March 9, 2008, p. A1. http://www.washingtonpost.com/wp-dyn/
content/article/2008/03/08/AR2008030802595.html
The North Carolina State U. Solar Center maintains a database of renewable energy incentives in the US (www.dsireusa.org). The Solar Energy Industries Association (www.seia.org) and the European Photovoltaic Industry Association (www.epia.org) advocate for solar-friendly policies in the US and Europe, respectively, and have comprehensive information about current policy issues.
In 2001, Katherine Derbyshire founded Thin Film Manufacturing, a consulting firm helping the industry manage the interaction between business forces and technology advances. She has engineering degrees from the Massachusetts Institute of Technology and the U. of California, Santa Barbara. She can be reached at kderby [email protected].