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Thursday 31 March 2011

Are Solar Power Incentives A Nasty Regressive Tax On The Poor/Misinformed?




By GORDON JOHNSON
GAINESVILLE, FL - APRIL 15:  Wayne Irwin, who ...
Image by Getty Images  via @daylife 

Lately, a lot of attention has been given to the solar industry due to the unfortunate set of events which have unfolded in Japan as a result of the earthquake. The prevailing theme among journalists, mis-informed Wall Street analysts’, and investors who have a positively biased view on the solar industry is that due to the problems with the nuclear plants in Japan following the earthquake, this form of renewable power should be abandoned in favor of power sources such as solar.

The fundamental problem with this thesis is that it is impossible to replace distributed (i.e., power this is accessible equally at all times of the day) baseload (i.e., energy produced at a constant rate) nuclear power with intermittent (i.e., energy that is only accessible during certain times of the day) peakload (i.e., power sources that provide the most output at select times of the day) solar power. Furthermore, given nuclear power costs roughly $0.015/kWh, while solar power costs closer to $0.25/kWh, if all of the world’s nuclear plants were to be replaced by solar plants, the cost to the rate-payer would go up by nearly 25x (we do not think this would bode well in countries facing high unemployment – U.S., France, Greece, Spain, Italy, Germany, etc.). Stated more simply, if you were to replace the world’s nuclear power with solar power, you would only have power during the day when the sun is shining the brightest (if a rain storm, or large cloud, happened to pass over, you would suddenly not have power – this could be a problem in less sunny regions). In addition, your cost of electricity would rise by roughly 25x. Under this backdrop, it seems many of the arguments suggesting solar energy can replace nuclear are delusional at their core.

Now, to the question posed in the heading of this entry: Are solar power incentives a nasty regressive tax on the poor/misinformed? Well, first, it may make sense to know what a regressive tax is. More specifically, in terms of individual income and wealth, a regressive tax imposes a greater burden on the poor than the rich – there is an inverse relationship between the tax rate and the taxpayer’s ability to pay as measured by assets, consumption, or income. Stated differently, a regressive tax tends to reduce the tax burden of people with a higher ability-to-pay (i.e., the rich), as it shifts the burden disproportionately to those with a lower ability-to-pay (i.e., the poor).

So, how do solar incentives work? Well, there are a number of schemes in which solar power is “incentivized”. However, the most popular form of solar incentive globally is in the form of a feed-in-tariff (FiT). Under a FiT incentive structure, renewable energy generators (homeowners, businesses, pension fund investors, private equity investors, etc.) are paid a premium by the utility buying the solar power generated by their roof-top system, on top of the cost of generating the solar power. As a point of reference, it is important to remember that while natural gas costs roughly $0.035/kWh, and coal costs approximately $0.05/kWh, with nuclear power at $0.015/kWh, solar currently costs about $0.25/kWh. Thus, if you are using solar under a FiT incentive structure, you are being paid by the utility $0.25/kWh for the solar power you are producing, plus an additional “premium” as high as $0.25/kWh, making the total cost to the utility subsidizing this incentive significantly higher than it would have otherwise paid using more traditional forms of electricity.


Thus, the cost to the utility appears to be significant, right? Well, it’s not that simple. That is, what the utility does when it pays the person who is using the renewable energy under a FiT program is simply redistribute the difference in what it is paying the renewable energy user (i.e., $0.35-$0.55/kWh) and what it pays for more traditional forms of energy (i.e., $0.045/kWh) to all of its ratepayers; in essence, the utility is not paying the exorbitant cost of incentivizing solar, but rather the collective ratepayers in any region which implements solar incentives are. This begs the question… can’t everyone equally share in the benefit of this structure? Well, unfortunately, due to the high cost of solar, the answer to this question is no. What do we mean? Well, when considering at present, the cost for a solar system is approximately $5.50/watt, and the average home installation is 5.5kW, the cost to anyone considering such an installation is $27,500 up front. Furthermore, given a solar system is a 20-year investment (meaning the returns on these systems are calculated over a 20-year period), the first 5-to-10 years of your investment in a home solar roof-top system, you will be cash flow negative. Admittedly, for those ratepayers in a FiT area who have a spare $27,500 to invest, which they don’t need access to in 5-to-10 years, an investment in solar makes a lot of sense (you are paid to use power). However, for the bulk of Americans who do not have a “spare” $27,500 to invest over a 20-year period, for which they will be cash flow negative for 5-to-10 years, solar is not an option. Despite this, however, because the utility redistributes the cost of solar to all ratepayers, whether you are using solar or not, you are paying if you live in a state that has significant solar incentives (i.e., California, New Jersey, Florida, North Carolina, etc.). As such, despite you not being able to afford putting solar on your roof, you are effectively being forced to subsidize your “rich” neighbor who does have the resources to put solar panels on their roof. Stated differently, a solar incentive is a form of a regressive tax on the “poor”. This begs the question… do many of the “poor” people in the States who have passed solar legislation understand this dynamic? Likely not.

When you add to this dynamic the fact that the majority of solar modules are produced in China, with U.S. solar module makers First Solar (FSLR) and SunPower (SPWRA) producing the majority of their panels in Malaysia, Germany, and Vietnam, the idea that solar installations in the U.S. create American jobs is another mistruth (this is an understatement). In fact, First Solar’s 290MW Agua Caliente Solar Project, which will receive nearly $1.5 billion in tax-payer funded money from the U.S.

government, and is being supplemented, for the most part, by modules produced in Malaysia (thus, effectively, creating jobs in Malaysia using U.S. taxpayer dollars), being constructed in Yuma County, Arizona, will only create 15-to-20 full-time U.S. jobs (a cost to the U.S. taxpayer of nearly $85.7 million per full-time job; this does not appear like a good return on investment for the U.S. taxpayer).
Another form of incentive, more widely used in the U.S., comes in the form of a loan guarantee, or tax credit. While these differ from FiTs, they are effectively the same thing… money taken from the taxpayer used to subsidize high-cost solar power.

In short, the way solar incentives work is by taking money from the poor to subsidize the rich homeowners, businesses, and investors who can afford the high upfront costs of installing solar power (a reverse Robin-Hood structure), which is among the most expensive forms of energy available today. While the solar industry has grown considerably, increasing its lobbying power globally, which in-turn has allowed for a massive expansion in marketing (with the key selling point being you must support solar to stop global warming), it remains among the most costly and inefficient forms of electricity available when observing: (1.) cost/kWh compared to other forms of electricity (i.e., wind, hydro, geothermal, nuclear, etc.), and (2.) usage (solar power is only available when the sun is shining, and declines in output with less intense sunrays and cloud coverage).

While it goes without saying that many of the same people who support solar in the U.S., and other countries, don’t fully understand this dynamic, as they see material spikes in their electricity bills, despite limited job creation associated with the massive solar plants being constructed in their backyards, this could become more of an issue.

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2 comments:

  1. daviddelosangeles
    Mr. Johnson,

    You are quite correct that solar power is not at all cheap in terms of capital outlay and years until it pays for itself, although the O&M is very low, probably the lowest among all forms of power generation. With that said it is important to note that from a USD/MWH (not MH) solar has certain. Power costs more in the middle of the day than in other times and more in the middle of the day in the summer as opposed to the middle of the day in the winter. This means that solar provides power when electricity is in the most demand and costs the most. So for example many public utilities which use large quantities of electricity 24/7/52 (e.g. sewage treatment plants) are investing in large solar projects. While the solar panels only produce perhaps 30 – 40 % of the total power used, it reduces costs 50 – 70 % because solar power is producing power when power is most expensive. This is both in terms of the actual number of MWHs used and the stand-by fees (which are quite substantial) which are based on peak MW use in a month. Solar allows power users to shed peak loads which not only save money directly but most power utilities provide bonuses to customers who shed peak loads so there are additional cost benefits. These utilities make use of as many of the incentives are available and improve the cost recovery curves.

    So I would suggest that there are many good reasons to continue incentives for solar power installations.

    Quite beyond that, there are considerable tax breaks and other incentives for nuclear power to consider. Indeed, without the Price-Anderson Nuclear Industries Indemnity Act the civilian nuclear power industry would not even exist. In the case of a nuclear power plant accident, all claims above the 12.6 USD would be covered by a Congressional mandate to retroactively increase nuclear utility liability or would be covered by the federal government. Likewise, without federal government participation, enriched uranium would not be available for US nuclear power plants. So when comparing costs and incentives, it is important to compare both to both.

    Without Federal government incentives and protections, nuclear power would be cost prohibitive from a purely commercial perspective.

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  2. (contd)

    The solar companies will say, “Look, we’re at grid parity in California, because the cost of the solar power is no higher than the retail price of electricity in the state!” But that misses the fact that the appropriate comparison isn’t with retail prices, it’s with the cost of alternative ways to generate that peak loak electricity capacity…natural gas, coal, hydro, nuclear…all of which have production costs of a nickel or less per kwh. Obviously, there are other costs that the utility bears that drive the retail price…transmission, service, maintenance, etc., and that is what makes up the difference between the generating cost of the power and the retail price to the customer.

    You could argue that for DISTRIBUTED solar (ie, for customers who generate solar power on their own roofs and use the power themselves), you shouldn’t have to include the transmission cost, because the power isn’t going on to the grid. But the balance of systems costs for small, rooftop systems are much higher than $1.00/watt, so the $2.40 system cost we discussed above wouldn’t apply…that is only for utility scale systems.

    Further, solar power works unpredictably. Sure, in some environments you can AVERAGE 6 hours/day of electricity generation, but other than knowing it will all occur during daylight hours, you can not pinpoint in advance which days your system will produce and which it will not. So the electricity provider must STILL maintain sufficient peak load generating capacity to meet the needs of the customer base even on cloudy days. In this sense, solar power is unlike most other peak load generating assets, which can SUBSTITUTE for other types of capacity. With solar, you still need your entire peak load capital structure…though on certain parts of certain days you can allow those gas or coal plants to sit idle (and save the fuel costs).


    Mr. Johnson,

    You mentioned that “many of the same people who support solar in the U.S., and other countries, don’t fully understand this dynamic, as they see …massive solar plants being constructed in their backyards, this could become more of an issue”. How about build a “small nuclear plant” in your backyard? Would that be an issue to you? The point is, you have neglected the biggest issue with regards to nuclear energy – the risk of potentially immense safety hazard. Just look at Japan’s ongoing nuclear disaster. It’s been 3 weeks yet the situation is still not under control. Instead, the level of radiation has been increasing on the daily basis. Experts say that it could take 50 ~ 100 years for the nuclear rods to cool down. How much does it cost to fix this mass? Do you want to be near that area at all, or you’d rather see a “massive solar plant” in your backyard? The reason Japan’s nuclear disaster has caused fundamental change of the views toward nuclear energy by the governments of almost all major industrial countries, including some of the biggest supporters of it, such as Germany and China, is because of the tremendous risk associated with the nuclear energy. Sure you may argue that today’s nuclear technology is so advanced that virtually no natural disasters will be able to destroy it. Well, what about a cruise missile? What if Bin Laden gets his hands on to such missiles and shoot a few over aimed at your nuclear plants? Now you get it? This is NOT a cost issue, but a risk to man-kind!

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