Solar installers selling solar power? Should they be regulated?

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…

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This entry was posted on Saturday, October 24th, 2009 at 12:44 pm and is filed under Incetives & Rebates, Solar Education. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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  • Bob8930 (Redirected from azcentral.com)

    Today’s PV solar panel technology is inadequate to meet the market needs. Costs are too high, large areas are required to provide a small amount of power, the peak energy curve is mis-matched with peak energy usage and there are no effective solutions for a needed energy storage solution.

    The appropriate solution for these problems is to invest government money into research to solve these problems. The Spanish, for example, have developed a thermal solar solution that addresses some of these problems (it is still a very expensive source of energy).

    Unfortunately our government has underfunded the development of an adequate solution and, instead putting taxpayer money
    into subsidizing the implementation of obsolete technologies. The reason for this decision is that it does meet a need important to our politicians – it gives an impression that progress is being made on developing alternative energy solutions, and an illusion of progress is far more important to politicians and renewable energy zealots than actual results.

    The discussion above focuses on how best to exploit the availability of taxpayer dollars, and has nothing to do with solving our energy problems. For example, the article states that the power company somehow benefits from the sale of electrical power from a solar panel system. That is not true. The power company is obligated to buy the power at a retail rate, say $0.08/ kW hr, absorb the overhead costs of distribution and power loss, then resell it to the customer at the same price. The ACC recognizes this cost and allows the power company to pass on the losses to the customer as a renewable energy surcharge. At the same time the power company is underutiliziing existing power generation capacity which produces power at a much lower cost, as most of the power is delivered at mid-day which is off-peak. The customer also has to absorb the cost of underutilized capital as part of the electrical bill.

    To re-use an oft-repeated cliché, this blog is a discussion on how best to rearrange the deck chairs on the Titanic.

  • http://www.cambioenergyblog.com CambioEnergy

    Bob, I appreciate your response; you touch on several misconceptions that can be cleared up once and for all.

    Today’s PV solar panel technology is by no means inadequate to meet the market needs. It is technology that is constantly improving and becoming more efficient, and thanks to its becoming more and more mainstream here in Arizona, throughout the United States, and across the planet, cost is now falling dramatically. Though we have not reached grid parity for PV specifically, a point where the price per kWh of PV-produced electricity is the same as the price per kWh of grid-supplied electricity, we have reached a point where PV’s implementation has become a win-win with a great payback and an ROI much higher than any commonly available investment means.

    Large areas are, and will forever be required to provide energy powered by the sun. But there are countless wide areas available on top of in-town structures including homes, schools, businesses, warehouses, parking lots…there is a practically an infinite amount of vast space currently available for solar. Having said that, there is no doubt that the efficiency of a solar module, the number of Watts produced per square meter, is always improving. But this is the case with any technology; its adoption today fuels its improvements tomorrow. The technology is here and now; it is not the technology of the future. It is meeting market needs throughout AZ and throughout the world.

    I am not sure what you mean when you say the peak energy curve is mismatched. Solar’s most hailed quality is that it produces power at a time of day when power is most heavily consumed. Solar electric systems produce power during on-peak hours when grid-supplied electricity is most expensive.

    When you say there are no effective means for solar energy storage, you are referring to a problem that affects utility scale solar power plants, not grid-tied urban applications. If you are installing solar on a structure that is tied to the grid, you are already using the most affordable and efficient battery pack available. If your system is designed ideally, you will produce more power during the day than you need. This power is sent back to the grid and is measured by the utility as a kWh credit. When you need this power, say at a time when you are running your air conditioning or using electricity when the sun has set, that same kWh will be sent back to you as a 1:1 credit…in other words, no power loss or inefficiencies inherent to all earthly forms of energy storage. This is called Net Metering and solves the retail purchasing issues you mention that are inherent to Net Billing.

    Spanish and American companies alike are researching solar technologies that offer higher efficiencies as well as improved storage methods. Check out the September 2009 issue of National Geographic for an excellent rundown of those technologies being developed all over the world.

    The government is not putting taxpayer money into the subsidization of any specific technology. The federal and state tax credits, these subsidies, apply to any of the widely adopted forms of alternative energy including, solar PV, solar thermal, geothermal, wind, fuel cells, etc. They are by no means promoting one technology over the other (http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US37F&re=1&ee=1). I will not disagree that politicians today are just finally starting to properly align themselves with the alternative energy industry. They are realizing that this does meet their needs. Their constituents want this, and unless they get on board, they will be history. The politics involved is not perfect, but it is improving significantly as they realize that these technologies are on the way IN not OUT.

    My blog entry has nothing to do with the exploitation of anything. It has to do with bringing solar technology to the forefront by taking advantage of widely available resources put in place specifically to meet this goal. More specifically, it is a response to an Arizona Republic opinion regarding whether solar companies selling power should or should not be regulated as public utilities.

    I think you have misunderstood the role of the ACC in all of this. They are on the side of the people. They are the ones regulating the public utilities, influencing them to adopt fair practices that will again make these green technologies mainstream (this is why systems like Net Metering have replaced Net Billing). If they allow utilities to continue with unattractive practices, no one will want to install solar. The ACC has an e-docket you may read that reinforces this: E-01345A-08-0172. The latest activity by the ACC proposes a feed-in tariff which would promote over-sizing your solar electric system to earn upwards of $0.50-$0.80 per kWh sent to the grid, a solution that has lead to mass adoption of solar all over the world in countries that have practiced this.

  • http://www.solarpowerrocks.com SolarFred

    Solar Service Agreement, most commonly known as Power Power Purchase Agreements (PPAs) are not regulated as utilities in any other state that I know of.

    PPAs are the surface are selling power, but in reality, they are simply financing the solar system with no upfront costs. That their method of payment is an advantage to the school or other entity is consistent with purchasing the system, although the purchase is more cost effective in the long run. But then again, those capital dollars can be used by the school for other things, like teacher salaries.

    As with all financing, I do believe that PPAs should have some kind of regulation and disclosures, but they are a different animals than a utility, and they should not be treated as such. If they are, then certainly it will dissuade this type of financing. That will not only end in the loss of jobs, but the loss of clean energy to meet AZ’s goals for clean energy.

    The only entity that will benefit from PPAs being treated like a utility are.. the utilities, who want to slow down shovel ready PPAs so that they can meet the clean energy standards set by the State with their own solar farms. And do you think they’re going to reduce rates after those solar farms pay for themselves in 5 years or so? Remember that solar panels last 25 years. Their profits will be even greater after that investment is paid off. So, don’t fee sorry for the utilities. They’ll build their solar and wind farms soon enough.

  • Bob8930 (Redirected from azcentral.com)

    The ROI is there ONLY because I and other taxpayers and ratepayers subsidize the payback. Without it, the payback on a system would be about 40 years.

    The present practical limit for single crystal silicon is 22% efficiency. Alternative thin film technologies are cheaper but only half as efficient. Indeed research needs to be devoted to developing a new technology that is more efficient, not wasting money building and installing the WRONG technology. Doing the wrong thing over and over does not lead to improvement.

    Peak usage in Arizona is NOT mid-day. It is around 5 pm in the summer when solar panel efficiency has dropped. I expect you knew that.

    http://www.aps.com/_files/various/ResourceAlt/Resource_Plan_-_Presentation_sFinal.pdf

    Energy storage serves two purposes. First, it allows an intermittant source to shift a mismatched power curve to match peak usage. Second, it acts as a buffer or filter to protect the grid from surges associated with sudden drops in power associated with cloud cover. People with expertise in this problem state that if 20% of the power in a large grid is intermittant, it introduces a serious risk to the reliability of the grid. Not your problem, I guess. However, it would be reasonable to require every solar panel system to be equipped with a battery system that would handle at least short term fluctuations. I didn’t mention the possible need for multi-day storage, as that seems impractical.

    Your model of trading energy with the power company is even more of a disadvantage to the ratepayer who subsidizes it than I had imagined. You have the power company taking off-peak electricity worth 7-8 cents/W hr (retail) and then giving it back when it is worth 12-15 cents, during peak use. It’s a great deal for the solar panel owner, but it sucks for the ratepayer. You claim no energy loss, but there are significant transmission losses in both directions. Again the ratepayer loses.

    I am intimately aware of research on solar energy, having been involved myself and having friends and colleagues involved. I focus my reading on the published research. I did read the Natl Geog. article and found it disappointing.

    The government IS subsidizing out-of-date solar energy technology. It is a waste of money. To the extent that your company sells these systems, you are exploiting this misspent money.

    The ACC has played a strong role in imposing these misdirected policies on the public. Their policies are based on ignorance on the part of the commisioners. It matters not what their intentions are.

  • http://www.cambioenergyblog.com CambioEnergy

    Depending on your chosen time-of-use rate schedule, on-peak power rates in Arizona may either be from 9am-9pm or 12pm-7pm Monday-Friday excluding a few holidays. Either way, any technology using the sun’s energy produces most of its power during on-peak hours when both consumption and power prices are at their highest…and that is the original point I am trying to make.

    Solar is not intermittent power. Intermittent power means that you cannot rely on its output at any exact hour in a given day. An example of intermittent power would be wind, which may blow day or night at any random hour of the day.

    Solar is intermediate power. Intermediate power provides a viable solution to increased customer demand during waking hours or peak hours. Regardless of these definitions, the points you are making apply well to utility scale solar plants, not to urban, small scale systems of say 1MW or less (obviously most urban-based systems are significantly smaller yet).

    My original blog entry refers strictly to these urban applications and the Power Purchase Agreements (PPA’s) that make these systems a viable option for non-profits and other businesses. Small scale solar projects offset demand and are generally sized to meet the needs of one specific customer. They are not systems which would require storage, because their overproduction is immediately consumed by a neighboring customer.

    I could have gone into more detail about Net Metering but only gave the abridged version to make a point. The utility companies distinguish between on-peak and off-peak power that you are sending back to the grid. A kWh sent back during peak hours may be credited only as an on-peak kWh when you need it again. The same goes for off-peak kWh credits. Because the majority of the power produced by your system is harvested during on-peak hours, the utility never gives back a surplus of on-peak credits. In fact, if anything, the solar owner gives the utility a surplus of on-peak credits.

    When I said the system resulted in perfect efficiency I was referring to the customer’s experience. Whatever they give back they receive again as a perfect 1:1 credit. To them, it is perfectly efficient. Obviously, and this goes for any system that follows the laws of physics, there is energy loss whether through transmissions lines, batteries, or any other form of storage/transmission.

    Today’s current photovoltaic solar technology is absolutely fabulous. It is, however, imperfect, as is every form of technology on the planet. The adoption of today’s technology is the fuel for improvement by these same solar companies, public and private research and development firms, and even institutional R&D departments such as universities.

    I think a more productive discussion that would merit a separate blog entry would not be a further elaboration of the methods you feel are failing but rather a brainstorming of solutions to solve these problems.

    We are all in this thing together trying to come up with the perfect plan to meet our energy needs.