Suppose two factories produce and sell identical widgets at $1 each.
Now, suppose a law is passed to provide one of those factories with $9 of additional revenue per widget.
Clearly, this is law will distort markets. The $10 widget manufacturer will attract more investors and it will lobby hard to preserve that law. Meanwhile, the $1 manufacturer will struggle. If it survives, it will be through cost control and niche markets.
After a few years of this, the $1 manufacturer may well have the better product, given their focus and discipline, while the $10 manufacturer will likely have the better political access.
This scenario pretty well describes clean energy markets today, with solar PV playing the role of the $10 widget maker. As a result, the solar PV industry is exposed to massive regulatory risk, while capital flows that would otherwise bring a host of other less-risky and more cost-effective technologies forward are distorted.
Such are the inherent failures of path-based regulation. As long as we confuse support for a path (e.g., solar power) with support for a goal (e.g., CO2 reduction), the environment, the economy, and our political discourse will suffer.
The environment loses because capital is finite: the more we spend per unit of CO2-free electricity, the less CO2 we will reduce. The economy loses because failure to deploy the lowest cost clean generation technologies raises energy prices unnecessarily, leaving less money in all of our pockets, for no social benefit. Political discourse loses because these path-based approaches put clean energy advocates in direct opposition to cheap energy advocates, creating needless conflict.
So why do we favor path-based rules? Hubris, in part. No matter how bad our track record, we’re sure that this time we’ve got it right.
But hubris only starts this process; baser motivations keep it going. Once path-based rules are passed, they create their own constituency. There are a lot of fortunes (and egos) that depend on the preservation of our path-based model. A goal-based model would be good for the environment and the economy, but the transition would be emotionally painful, inasmuch as it forces us to acknowledge that what’s good for the solar industry isn’t necessarily what’s good for America.
The numbers
Since the benefits from any carbon-free power source are only realized when MWh are generated, it’s appropriate to compare revenue streams on a $/MWh basis. That requires a bit of math, because not all the incentives we provide to clean energy are MWh-denominated.
Any clean generation technology has access to one or more of the following revenue streams:
Brown power displacement: Before any green attributes, there is revenue associated with the displacement of traditional power sources. This may come in the form of displaced retail purchases or a wholesale transaction with a utility.Net-metering: Where it exists, net metering can provide qualifying technologies with the ability to realize full retail rate displacement for all MWh generated, regardless of local load.Tax credits: Some but not all clean technologies are eligible for investment tax credits, ranging from 10-30 percent of total capital investment. Renewable energy credits: In the 29 states with renewable portfolio standards, eligible technologies can sell the renewable energy attributes of the power they generate.
Let’s now look at how these apply to locally-sited solar PV on a $/MWh basis. Brace yourself for some math!
U.S. average retail rates today are $98.90/MWh. In 43 states with net metering laws, this retail rate can be applied to 100 percent a PV array’s output. Solar also gets a 30 percent investment tax credit, and if we assume $6500/kW for the installed cost of the system, that works out to $1,950 per installed kW of capacity. Given a 15 year operating lifetime and a 20 percent annual capacity factor, each kW of installed solar PV capacity produces 26,280 kWh over its lifetime. Thus, the $1,950 tax credit is worth an additional $74.20/MWh (ignoring the time-value of money). Finally, while REC markets vary by state, renewable attributes can add an additional
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