OnSolar - Simple Solar Solutions

Even as recessionary pressures continue to linger, 2010 is projected to be a solid growth year for the Massachusetts solar industry, thanks in large part to the new incentives enacted. The Massachusetts Clean Energy Center (new home to the MA Renewable Energy Trust), together with the MA Dept of Energy Resources (DOER), have put together a collection of robust incentives built upon prior years’ success along with lessons learned from other states’ solar programs. Projected 2010 growth is around 30%–an estimate grounded in the implementation details of the following incentive programs:

• Solar Renewable Energy Credits (SREC) program
• Commonwealth Solar Stimulus rebate
• Commonwealth Solar II rebate

Understanding these incentives is critical for investors, business owners, and homeowners, in order to evaluate not only the relatively low risk to investing in solar, but also how 2010 is likely the ideal time to invest.

Let’s explore the first of these major incentives. In a subsequent posting, we’ll talk about the remaining ones.

SOLAR RENEWABLE ENERGY CREDITS (SREC) PROGRAM

The most significant change in 2010 is the DOER’s new SREC production-based incentive program. Massachusetts’ Renewable Portfolio Standard (RPS) mandates that retail electricity providers (excluding municipal light districts) source 15% of their electricity from qualified renewables by the end of 2020. The Green Communities Act of 2008 further clarified & expanded the RPS, enabling DOER to develop rules and programs to realistically enforce this regulation.

Part of the regulations dictate a Solar Carve-Out, requiring a percentage of the renewable generation to come from grid-connected solar facilities. In January 2010, DOER issued emergency rules related to this Solar Carve-Out, thereby creating the SREC program.

Solar power installations produce two marketable products: (1) physical electricity, and (2) Solar Renewable Energy Credits (SRECs), which represent the renewable (or “green”) attributes of the generated electricity. Prior to 2010, the latter product had little marketable value. With the new SREC program, however, MA DOER has created a market-driven system that guarantees market stability while retaining enough system flexibility to react responsibly to market conditions. The system is comprised of a state Solar Credit Clearinghouse Auction, where SREC prices have a minimum fixed value of $300/MWh. The Solar Credit Clearinghouse is only employed if a SREC owner cannot sell their SRECs through either a spot market or long-term contracts. Additionally, SRECs will be re-minted and auctioned again if they can’t be sold initially in order to provide shelf-life and guarantee the minimum fixed price. This ensures that, at the very least, SREC owners will receive $300 (minus a 5% administrative fee) for each SREC. Similar to this imposed “floor”, the Solar Credit Clearinghouse also imposes an Alternative Compliance Payment (ACP) of $600/MWh, acting as a “ceiling” price that electricity suppliers must pay if they fail to fulfill their RPS obligations. Solar facilities participate in this program via an “opt-in” agreement, which guarantees participation for a set number of years. In 2010, the “opt-in” arrangement is for 10 years.

What does this all mean?

The easiest way to emphasize the incredible value of this new SREC program is by using an example. Let’s assume a 100 kW DC system for a medium-sized business has an annual production of 124,000 kWh AC. An SREC is generated for every MWh of production, so for our example system, that is 124 SRECs (124,000 kWh = 124 MWh). In 2010, the minimum guaranteed auction price of $300 (minus the 5% fee) ensures that these SRECs are worth at least $35,340:

124 SRECs * ($300 x 95%) = $35,340

That’s annually. Run that out over 10 years, accounting for system degradation, and you’re looking at a conservative value of $262,000 (net present value at 5% discount). Aggressive estimates, using the Solar Credit Clearinghouse’s Alternative Compliance Payment of $600/MWh, indicate the SREC value could be as much as $524,000. Not bad.

Why now?

So why is 2010 the year to take advantage of this? As I stated earlier, MA DOER made the system flexible enough to respond to market conditions. MA DOER reserved two key levers in order to maintain flexibility:

• The 10-year “opt-in” terms can be adjusted downward by as much as 2 years annually (though at least 5-year terms are guaranteed for the first seven years).
• The Alternative Compliance Payment of $600/MWh can be adjusted downward by as much as 10% annually.

The Solar Carve-Out program is targeted to support 400 MW of solar facilities in Massachusetts. MA DOER will, quite obviously, make annual adjustments to provide stability in the market, avoid over-incentivizing, and ultimately reach this 400 MW goal. Using the above system levers, this means the SREC value for solar facilities who opt-in after 2010 will incur additional risk in the marketable value of their SRECs.

The MA DOER’s goal is to increase demand for solar facilities annually by 30%–a strong indicator to investors that this market, through regulation alone, remains strong. With no foreseeable future incentives in MA, the low-risk 10-year guarantee provided in 2010 makes now, more than ever before, the right time to go solar!

And that’s not all…

Next week we’ll explore the other two new incentives, which further exemplify why now is not just a good time to go solar, but the right time.

Choosing to use solar power is not all about spreadsheets, Return on Investment (ROI), energy cost hedging, or incrementally improving our environment.  It’s about Leadership.  Leaders who choose to invest in a sustainable future demonstrate to the world that they are far-sighted and disciplined enough to reach long-term goals that benefit their organizations, customers, suppliers and communities.

In areas where strong incentives and high electricity prices combine to make distributed solar electricity an economically viable alternative to utility-supplied electricity, leaders are faced with a choice: investing in sustainable distributed energy generation, or business as usual.

Our customers often start their solar investment evaluation by “running the numbers” in a spreadsheet to determine if purchasing a solar power system is likely to produce a ROI high enough to justify a capital investment.  Or, in the popular Power Purchase Agreement (PPA) model where companies install solar power systems purchased by investors, to determine how much less expensive a long-term solar power purchase contract is compared to purchasing electricity from the local utility for the same time period.  These evaluations are important and necessary, but should not become leaders’ primary focus as they determine their strategic direction.  Financial evaluations compare known solar power costs to assumed future utility electricity prices for the duration of a solar power system’s warranty period–often 15 to 20 years. Conservative models assume utility electricity prices will rise by about 2.5% per year (the 30-year running national average). This assumed price inflation rate is certainly wrong, and dramatically affects the outcome of the analysis.  The problem is that nobody can accurately guess utility electricity prices 15 or 20 years in the future–If possible, such a person would be able to make an enormous fortune trading options contracts.

A better place to start an evaluation of investing in distributed solar power is to examine the associated benefits, then determine if they are worth the likely cost.  Here are some of the benefits of distributed solar power generation.

Global Environment Protection
Future technologies aimed toward mitigating effects of burning fossil fuels are usually based on grand projects requiring government-sized budgets and strong stomachs for risk.  Distributed solar power generation provides an immediate, low-risk opportunity to significantly reduce green house gas emissions. By combining efficiency improvements with distributed generation to reduce utility consumption 20%, leaders can immediately reduce their organization’s electricity-related carbon footprint by 20%–the same goal ambitions governments are hoping to attain by the year 2020.

Resilience
Diminishing carbon-based fuel supplies are increasing price volatility of the fuel utilities use to generate electricity–these costs are often described as fuel surcharges on  electricity bills.  Solar power generation requires no fuel, so electricity costs become fixed and known for the life of the system. When combined with emerging storage technologies, solar electricity will be able to be stored and used to power critical systems during utility grid outages.

Improved Authentic Image
Not an ad-campaign false image, but authentic branding that describes what your company is all about.  Solving complex problems (such as green house gas related climate change), and achieving long-term goals (energy independence) demonstrates to suppliers, customers, employees and communities a strong commitment to integrity and sustainability.  These are the types of companies we enjoy doing business with.

Is there a chance that during the next 20 years utility electricity prices may decline? Or, that climate change will somehow become a non-issue? Or, that utility grids will become impervious to disruption? Yes. If so, the relative merits of distributed solar power generation would be less.  However, in the much more likely scenario where utility electricity prices increase faster than general inflation, business leaders are able to choose solar power and its associated benefits for less money than they are going to spend for utility-generated electricity.

We will not know which choice is absolutely least expensive for many years.  But, solar power benefits certainly seem worth the cost to organizations seeking to establish themselves as leaders.

We bet you and many others will care about solar power soon.

For much of our nation’s history, we’ve used energy without regard to consequences of its source fuel. In Thomas Friedman’s hot, flat and crowded world, that’s changing fast. We now watch the price of gasoline like we watch the stock market, and pensioners can quote the spot price of Brent Sweet Light Crude oil. In this internet-connected market, consequences span the globe and perceptions travel at light speed to everyone with a computer or cell phone?

Americans are demanding transparency and accountability from our government and financial institutions because we don’t like the present day consequences of irresponsible decisions made without regard to long-term risks. We now face similar decisions regarding our use of traditional fossil fuels for generating electricity and other energy consumption.

These four topics highlight why you might want to explore skipping the fossil fuel supply chain in favor of alternative distributed electricity generation such as solar power.

1. Economics – The Federal Investment Tax Credit passed along with the Emergency Economic Stabilization Act of 2008 to help level the playing field between heavily subsidized utility electricity generation and emerging distributed clean energy generation. Wind and Solar power become cheaper every year, and are already at grid parity (same cost as utility provided electricity) in certain markets. Meanwhile, electricity prices increase in response to higher fuel costs, infrastructure maintenance and new construction costs (we’ll talk about potential carbon costs in the next section). It’s a near economic certainty that in the next five to ten years, you will pay less to generate electricity on your own roof with solar panels than you’ll pay to buy electricity from the utility. Current subsidies give us an opportunity to buy into clean energy now by reducing the effective price of clean energy to near utility rates. As utility prices rise, those who have locked-in energy prices will begin enjoying a competitive advantage over peers subject to ever-increasing electricity costs.
2. Environment – The time frames for climate change are so long that we have trouble determining the credibility of scientific reports, and wrapping our brains around how small temperature changes might affect us–the scientific community seems convinced, so I will defer to their conclusions. The consequences are so profound that we must take climate change seriously. None of us want to leave a planet in a deficient state for our children–a place where opportunities we’ve enjoyed are no longer available. Burning fossil fuel without regard to environmental damage is analogous to the collateralized debt obligation mess we’re dealing with now, but on a much larger scale–future risks ignored in favor of booking profits today. Governments are floating various schemes to reduce carbon emissions to combat climate change (cap-and-trade, carbon tax, etc.). These measures will attempt to use increased prices to dissuade electricity production from carbon-based fuels.
3. Independence – Over the past decade we’ve begun to see the consequences of importing most of our transportation energy (oil). Gasoline prices are volatile, foreign and domestic policies are influenced by our desire for inexpensive gasoline, strategic alliances are made for the wrong reasons. Eventually we find ourselves at odds with core principals that make the Unites States the world’s democratic and financial role model. Clean electricity combined with new automobile technology offer us a path toward breaking our reliance on foreign oil while halting climate change.
4. Image – Solving long-term, big problems plays to our innovation and entrepreneurial culture. Creating a clean energy economy gives us an opportunity to simultaneously address: economic renewal, environmental improvement and energy independence. Who wouldn’t want to be part of this? Now is the time to create a sustainable brand image by looking for ways to generate and use clean energy. Your employees will be proud of it, and your customers will see you as an innovative leader able to solve long-term problems.

Solar power is one of many clean energy technologies, but it is uniquely applicable to most areas of the United States, and offers clean, silent, reliable electricity production.