This entry is in response to an opinions column appearing in the Arizona Republic entitled “Panel should not treat solar firms as utilities”. Click here to read it at their website. In case the website changes and that link doesn’t work, click here for the PDF version. I would have put the following in the comments section of the Republic’s website but it obviously got a bit long…
It is suggested that these third party solar integrators should be regulated as a utility because they ARE selling power. There are several ways to properly allow non-profits and many other organizations a realistic approach to getting solar affordably installed on their rooftops.
I am a solar installer here in Phoenix. Go to www.cambioenergy.com and check us out so you know that the following is not invented.
We should start with some background on a conventional installation of a solar electric system. A for-profit company has several incentives and rebates available to them that reduce the cost of their system by nearly three quarters.
1. Utility Rebate: depending on the size of the system this rebate can either be taken all at once right off the top of the total system price or it can be taken over time (10-20 years) annually as the system produces electricity.
2. Federal 30% Tax Credit: this incentive is a tax credit, which means it comes into play as a reduction of your tax liability as long as the business entity pays federal taxes. So if my pretend corporation’s tax liability for 2009 ends up being $500,000 and my Federal Tax Credit is for $400,000, then now I only have to pay $100,000 in federal taxes. If your tax liability is only $300,000 and my tax credit is for $400,000 then the remaining $100,000 that I could not take advantage of in 2009 will transfer over to my 2010 taxes.
3. State Tax Credit: This tax credit varies from residential to commercial installations, but it works the very same as the federal incentive as far as taxes are concerned.
4. Accelerated Depreciation: This is another benefit to corporations buying solar systems that allows them to write off a certain percentage of the total system price from their taxable income for 5 years. So, if you can write a couple hundred thousand dollars off your taxable income then you will once again be paying much less in taxes thanks to the solar system.
These tax credits allow business owners to greatly reduce the cost of their system so they can buy it outright. These commercial systems can pay for themselves in under five years, which means after year 5 (and these systems last well over 30 years) the power produced by the system is FREE money. These tax incentives and rebates have helped make solar an incredible investment with a huge return thanks to businesses owning the system outright.
A problem arises when a not-for-profit organization, such as a school, wants to install solar. They have no tax liability and would therefore be unable to take advantage of federal and state tax credits.
So, some solar installers have come up with a method to allow them to at least have solar and save some money. In this situation, the solar installer (or an outside 3rd party investor) buys the system like any for-profit company would. They take advantage of all the fabulous tax credits and rebates like always.
But, they install it on top of a school instead of on top of their own building. The power produced by the system is owned by the company that originally bought the system. So the only way the school can get this power is if they buy it from the owner of the system much like they used to do from their region’s public utility; in the case as mentioned in the Arizona Republic opinion column I’ve attached, they are buying it from the solar installer/integrator. Under the current rule in Arizona, this means they are selling power and that they are a Utility and should thus be regulated as such.
Ok, so the school is now buying solar power from the solar installer, and their original utility power bills have decreased significantly. Let’s say (and we will use tiny round numbers for simplicity) that the school used to pay an average $1000 per month in utility bills (APS/SRP/etc.). Let’s say with solar they are now only paying $50 to their public utility for a savings of $950. Now let’s say the school is locked into a 15 year contract with the solar installer at a certain price per unit of power that totals $900 per month. The school is now paying a total of $950 per month as opposed to $1000 per month, so they are saving money, a $50 per month surplus.
This surplus may seem very small, but the price of public utility power is on the rise, and will more than likely never ever come down again. That means that without solar, the school’s former $1000 per year electricity bill would likely increase by about 5% per year (much more if Cap & Trade legislation passes)…$1000 becomes $1050 becomes $1100 becomes $1160. You can see that these bills are going to continue increasing by more and more, and let’s not forget that a real school pays WAY more than $1000 per month in electricity.
Now remember that the school locked into a fixed power rate with the solar integrator for 15 years (perhaps with or without some slight increases written into the contract every 5 years). This means that the $900 per month that they are paying to the solar company will not increase like their old utility power would have. So the $50 annual surplus is going to become greater and greater…$50 savings becomes $100 becomes $150 becomes $210.
Now do you remember how whoever bought this solar system (in this case the installer) would have it paid off in only a few short years (much less than the length of the 15 year contract)? Well that is still going to happen. In a few years, the owner of this system will have recouped their investment. They got to take advantage of all of the tax incentives and rebates as the system buyer, and will be making free money from whoever is buying their power once the system is paid off in full. In this case, that is the school.
The school is simply buying power from a new utility. In reality, the solar company is just a new utility company with a sweet business model. In fact, once the 15 year contract is up with the school, the solar installer will adjust the rate up and sign them up for another long contract. After all, the solar system will be outputting power for over 30 years. If only the school could have found a way to purchase the system outright in the first place by taking advantage of the credits and rebates, get it paid off in a few years, and pocket the decades of power savings for themselves.
So, while this system is beneficial to the school it is installed on, it is extremely beneficial for the company that is selling power…which is fine. As long as the school is aware that they are essentially passing on all of the benefits that come with buying a solar system outright then all is well. It is a perfectly legitimate business model by the solar installer. As I said, as long as there is full disclosure to the school or other non-profit organization as to what is going on then no one is doing anything wrong.
But there are now, and will be more ways in the future, that these schools can take better advantage of the rebates unavailable to not-for-profit organizations. But I won’t make this thing 10 pages long; this explanation was simply meant to help make clear the situation with regulating solar power companies that sell power as utilities.
I will just end with an explanation as to why many like the Arizona Corporation Commission (ACC) are fighting to uphold this regulation. And no, I am NOT taking sides; this is meant to be a strictly objective explanation. You decide for yourself, and I welcome any comments you may have. We have already seen, in the past year or so, a plethora of solar installers surface that have absolutely no business even thinking about installing solar power. They aim to take advantage of what they believe is a fad, the green movement. Many solar installers have very little to no experience in the electrical field and claim to save you thousands of dollars by installing solar on your rooftop while purchasing the power from them. While there are several good ones out there, there are many more that may only bring nightmare and horror into your lives thanks to their contractor inadequacies.
With regulation, the ACC can make this scheme by bad solar contractors much more difficult ensuring that you are only getting involved with proper, established solar integrators; their goal is to uphold the integrity of the solar industry. An example would be assuring that solar companies selling power do not gouge their customers buy overcharging for power, etc.
So while I do not want to outwardly say whether I feel there should or should not be staunch regulation to solar installers/utilities, I want to be sure that the inhabitants of this state are well-informed to make their own decisions. Perhaps once I am made better aware of the repercussions of regulation or deregulation, I will be more prepared to take sides and put up a fight. But I have a feeling my allegiance will fall somewhere in the middle. While some regulation will likely be necessary to uphold integrity, overregulation will inhibit industry growth and mainstream adoption.
Again, I welcome your comments, If I have been at all unclear I’d be glad to go into further detail…