Tag Archives: subsidies

Is Iowa solar power ruling a camel’s nose into electric utility’s monopoly tent?

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Michael Giberson

Eagle Point Solar, a for-profit solar power installer and operator, proposed to build a solar PV array on a Dubuque, Iowa municipal building under a long-term contract with the city. Under the contract, Eagle Point would own the solar array and sell power to the city in a “behind the meter” arrangement.

The local electric utility, Interstate Power and Light Company (IPL), challenged the arrangement as infringing on its exclusive service territory. In April of 2012, the Iowa Utilities Board agreed with IPL that the retail electric sales contract would require Eagle Point to be an electric utility and it would thereby be prohibited from providing service in IPL’s assigned exclusive electric service area.

Eagle Point appealed and in March 2013 the Iowa District Court for Polk County overturned the Iowa Utilities Board ruling. Eagle Point was declared not to be a public utility and therefore not in conflict with IPL’s assigned exclusive electric service area. Kari Lydersen at Midwest Energy News summarized key parts of the ruling:

The ruling emphasized that since there is no state statute defining what it means to sell to the public, the utility board should have relied on a decision in a 1968 Iowa case involving the state commerce commission and a natural gas company. Based on a series of tests outlined in that case and actually drawn from a previous Arizona case involving a natural gas company, the court decided that Eagle Point would not meet the definition of either a “public utility” or an “electric utility.”

Among other things, Schemmel noted, Eagle Point would not be able or required to meet all requests for service and it would not be competing with Alliant or creating a monopoly of its own.

Schemmel also pointed out that the solar panels would not meet all of the building’s electricity needs, hence the building would still be hooked up to the grid and buying electricity from Alliant. The building’s demand for electricity from the grid would be reduced, but this would be equivalent to the demand reduction created by energy efficiency measures like weatherization, Schemmel found.

The court also considered a state law declaring it “the policy of this state to encourage the development of alternative energy production facilities” as balancing against the public interests in the law granting monopoly territories to electric utilities.

A significant factor in this case was the ability of for-profit companies like Eagle Point, but not non-profit entities like city governments, to access numerous federal and state subsidies for solar power installations. If the deal was just about power supplies the city could have simply bought the solar array from Eagle Point. But this angle is actually less interesting that the broader possibilities of the precedent to support distributed generation.

The Iowa Utilities Board could appeal the decision to the state’s Supreme Court. But at least until that happens, or if the Supreme Court affirms the district court rules, behind-the-meter distributed power systems appear to be legal in Iowa (at least if they are “alternative energy” based generators, and if they don’t result in entirely removing a customer from electric utility service).

Small renewable providers and cogenerators, start your engines.

Eagle Point Solar: Dubuque City Operations Center

Eagle Point Solar: Dubuque City Operations Center

Free solar power tomorrow!

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Michael Giberson

Well, not free-free, but subsidy-free. Maybe.

When I read a headline promising “Solar Power to Hit Cost Parity Next Year,” it reminds me of the sign above the bar promising “Free Beer Tomorrow.” Like tomorrow, “next year” is always approaching and never here.

RP Siegel begins his Triple Pundit article, “Solar Power to Hit Cost Parity Next Year,” in full solar triumph mode:

They said it couldn’t be done. They tried to tell us that renewable energy could only survive if it were propped up with government subsidies. Never mind that our whole system of economic development, beginning with the patent office, is predicated on the idea that fledgling, underfunded industries need special protection for a limited time until they are strong enough to go it alone. Never mind that the fossil fuel industry, which can hardly be considered fledgling or underfunded, is still receiving billions in taxpayer subsidies.

But like the little engine that could, or the middle aged rock star that, after twenty years of struggling in sleazy dives has suddenly become an overnight sensation, solar power, having now surpassed the 100 GW threshold, has finally arrived and is good to go, in many places, without subsidies.

Great, so can we now pull the plug on solar power subsidies? And, by all means, yank the fossil fuel subsidies too.

(I’m passing over the wildly off-the-mark claim about “our whole system of economic development.” Not credible enough to take seriously. As it turns out, neither is the “grid parity” claim credible yet. But let’s at least explore the triumphant claims of success.)

Curiously, the article follows the “has finally arrived and is good to go … without subsidies” declaration with accounts of subsidized success. Apparently one-third of the 100 GW of world solar power capacity has been installed in Germany because of its generous feed-in tariff policies. Installations in China are growing fast. India and then Spain are mentioned. Spain built a lot of solar with subsidies, but recently stopped the subsidies. I’ll come back to India, but let’s look closer at the claim for Spain. Let the fisking begin!

Spain, the article declares, has achieved “grid parity,” backing the claim with only a link to a post at Forbes.com last December. The Forbes.com blog by Peter Kelly-Detwiler, “Solar Grid Parity Comes to Spain,” builds off a report from Bloomberg titled “First Large Solar Plants Without Subsidy Sought in Spain.” The Bloomberg article reports that many large-scale solar projects have applied to connect to the power grid, and the head of solar energy analysis at Bloomberg New Energy Finance is quoted as saying, “Spain is probably set to have Europe’s first utility- scale solar parks without subsidies.” So following the chain of links we have gone from gleeful declarations of “grid parity” to mere grid-connection paperwork that “probably” will yield “solar parks without subsidies” according to a solar energy analyst.

But read a little more and you get the views of the solar power lobbyist in Spain who reports that while many companies are anxious to develop solar power projects…

The biggest hurdle they face is to get the government of Prime Minister Mariano Rajoy to restart the planning process for new solar generation, said Eduardo Collado, director of operations at lobby group Union Espanola Fotovoltaica. Rajoy ordered the end of subsidies for new projects 10 months ago.

“None will go ahead until that changes, even though there are a few plants definitely needed at points in the system where the network operator wants them,” Collado said in an interview.

So, none of the subsidy-free projects will go forward until the policy that ended subsidies is changed?

Still, just a bit later in the article, a solar power developer said it would be able to build without subsidies. Maybe, at long last, this report justifies the triumphant claim that Spain has reached “grid parity”?

Not exactly. In June 2012 the developer said it expected to be able to build without subsidies in the last half of 2013, because ”we think the cost of photovoltaic will have dropped enough by then and, given the irradiation in Spain, will be totally competitive.” So once again we have hopes of grid parity “next year,” which through the magic of sloppy reporting become triumphant claims that “Spain has … achieved grid parity.”

So what about India? As the Triple Pundit post reports, Deutsche Bank anticipates solar power transitioning “from subsidized to sustainable markets in 2014″ based on the emergence of “large unsubsidized markets in places like India, where sunshine is plentiful and the alternatives are expensive.” Okay, so once again we have analysts claiming that solar power could live subsidy free soon, just not yet, and no doubt one day such predictions will come true.

But in parts of India, as with many other places around the world, where centralized grid power is expensive or unreliable or unavailable altogether, solar power is already an economical option. Solar power is a product with a few successful market niches, and these market niches will likely continue to grow as (and if) costs continue to fall.

Without extensive policy interventions, a sustainable solar power industry would tend its market niches and prepare to exploit other niches as it became more competitive.

And, by the way, please do yank fossil fuel subsidies and address externalities with appropriate policies, and let fossil fuels shrink to their market-justified size as well.

Get policy right and let the market sort ‘em out.

Fossil energy subsidies and renewable energy competitiveness

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Michael Giberson

Some, not all, of you believe that fossil fuel energy gain massive and undeserved subsidies from the federal government, that such subsidies way outweigh subsidies for renewable energy, and that subsidies for fossil fuels undermine the market success of renewable energy.

You may want to read Severin Borenstein’s post, “Are Fossil Fuel Subsidies Really the Problem for Renewables?“

In brief, he claims that government-based fossil fuel subsidies don’t amount to much per unit of energy delivered so don’t undermine renewables, are pretty stupid anyway, and the more significant fossil fuel support is elsewhere.

Negative power prices due to wind power’s subsidy

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Michael Giberson

On the NYTimes.com Green blog, Matthew Wald reports on “An argument over wind.” The issue is the scheduled-to-expire Production Tax Credit for wind power. As previously mentioned here, former PTC-supporter Exelon Corp. has come out against the PTC extension. It parted ways from the American Wind Energy Association, of which it had long been a member, over the issue.

Wald reports on an Exelon-funded study done by The NorthBridge Group, “Negative Electricity Prices and the Production Tax Credit.” According to Wald:

The study sponsored by Exelon, prepared by the NorthBridge Group, which does extensive consulting for utilities around the country, found pockets where the number of negative hours reached 12 percent or more. While various types of electricity generation have received subsidies over the decades, said Frank Huntowski, one of the authors, “I don’t think we’ve seen something as dramatic as this.’’ …

Negative pricing occurs mostly on spring and fall nights when the wind is blowing strongly but offices, stores and factories are mostly closed and temperatures are so mild that there is virtually no demand for home heating or air-conditioning. The phenomenon existed before the surge in construction of wind machines, but the new industry is making it worse, some industry participants say, especially for companies with baseload plants that were built to run at a steady rate around the clock.

That is a special problem for Exelon, which runs many nuclear plants in the Midwest; nuclear plants cannot change their output quickly.

Long-time readers may recall that we’ve discussed negative power prices many times before here on Knowledge Problem. This link will execute a search of the KP archives: negative+prices.

Related:

Losing the race to sound conclusions on the Production Tax Credit

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Michael Giberson

When I worked on public policy issues in Washington, DC, I used to read the National Journal. It tended a bit toward Washington-establishment thinking, but at least it gave evidence of thinking. Now much farther from the daily fray, I only occasionally come across the National Journal, and usually just the so-called Energy Experts Blog. I’m less impressed with the National Journal than I used to be.

Recently they’ve posted a bundle of energy “experts” on the production tax credit. I mentioned the other day that one of the “experts” thought the PTC paid $2,200 per megawatt (actually it pays $22 per megawatt-hour). I just noticed another “expert” reporting that the PTC is set to expire at the end of 2013 (oops, off by 365 days). I guess we’re getting raw, unvarnished expertise on the Energy Experts Blog, nothing subjected to the indignities of editorial review.

But worse than these little slip ups is the general lack of depth to many of the arguments. For “Ms. 2013,” who works for the Pew Clean Energy Program, whether or not we continue the Production Tax Credit is apparently about being at the top of the world in building “clean energy.”

Really? This is your policy criteria? Whether we can wear the “#1 Clean Energy Nation” T-shirts and wave the big “We’re #1″ green energy foam fingers? I thought these kinds of public policy decisions should be informed by considerations of costs and benefits, not a bunch of cheesy cheerleading routines.

Quoted, so you can see what I’m talking about:

In 2011, for the first time in several years, the United States led the world by investing more than $48 billion in clean energy. The clean energy sector represents one of the fastest-growing industries globally, with investment increasing more than 600 percent between 2004 and 2011 (excluding research and development).

We’re in danger of losing our place at the top, however. To maintain our lead amid fierce international competition and to continue to attract private capital, there must be policy certainty. While other nations have national policies to encourage the adoption of clean energy, we rely on a patchwork of state policies and cyclical federal tax incentives, one of the most important of which is to end in a year.

The production tax credit (PTC) is an effective tool to keep electricity prices low and encourage the development of proven clean energy projects. While not large–about 2.2 cents per kilowatt hour–it gives American businesses the certainty they need to continue to invest, build, and deploy. But it’s set to expire at the end of 2013. Uncertainty about whether Congress will act to extend the PTC has already resulted in a sharp drop in investments in wind energy production, threatening the livelihoods of the more than 78,000 people nationwide who are in wind-supported jobs.

When Congress has allowed the PTC to expire in the past, wind installations declined by 73 to 93 percent.

“Wind-supported jobs”? Funny phrase, given the context. Apparently they are 73 to 93 percent tax-break supported jobs. The wind-supported jobs are the ones that would be left in the business after the tax break goes away.

Any economic historians in the audience who can spot check this energy development claim?

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Michael Giberson

Please let me know ASAP if you can find any economic historians, energy policy specialists, economists or persons with at least a high school diploma who actually believes the following claim:

For over a century, every major energy source – petroleum, coal, nuclear, natural gas and renewables – has been developed due in large part to favorable federal policy that includes incentives. Without federal assistance of these fuel sources, it is unlikely that our nation would have grown to the economic superpower that it is today.

While the National Journal‘s collection of pro and con Production Tax Credit opinions includes a lot of bullshit, this pair of claims rises to the top. Fully 100 percent USDA prime bullshit, in my opinion.

But prove me wrong, please: find me an interested party with a plausible argument and a grasp on one or two facts that justifies the above claims.

MORE: By the way, the loose thinking and sloppy work isn’t only on the pro-PTC side. Guys arguing that wind power turbines are killing way too many birds slip in the claim that the PTC pays $2,200 per MWh. Um, no, only about $22 per MWh. And, of course, they are focused like a laser beam on the seen dead birds near wind turbines and ignore the unseen dead birds killed by other power production methods.

But thanks for joining us here on the “Let’s Pretend We’re Actually Serious People Doing Serious Thinking” show.

The fraying of support for wind power’s PTC subsidy

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Michael Giberson

The coalition in support of  wind power’s Production Tax Credit has always had a bit of a “Baptists and Bootleggers” flavor: environmentalists making a clean and green argument in favor of wind power and the multinational wind power development corporations funding the political muscle needed to get things done. The coalition has proven durable even as wind power took a few environmental hits, but now the business side of the coalition is beginning to fray. The Production Tax Credit will expire at the end of 2012 unless Congress acts to extend it.

One example: The Chicago Tribune reports that Exelon Corp., a large electric power company that owns a significant amount of wind power and a member of the American Wind Energy Association, is opposing efforts to renew the tax credit (reg. required).

“The (production tax credit) has been in place since 1992, I believe,” Exelon Chief Executive Christopher Crane said in a conference call with investors and analysts Wednesday. “And I think that’s enough time to jump-start an industry, 20 years.”

The economic logic behind Exelon’s position is clear: ”with nearly half of its profits coming from its nuclear fleet and low-cost wind power cutting into its margins, Exelon is in Washington leading a fight to kill a tax credit the wind industry says is crucial to its survival.” Note that “low cost wind power” is referring to the low marginal cost of production, not the total cost per MWh of energy produced. Most of Exelon’s generating assets are in markets with energy prices driven toward the marginal cost of production, and additional wind power in these markets tends to push average prices down.

It isn’t just the nuclear fleet that sees its profitability pushed down, either. Wind on wind competition is also becoming an issue. If additional wind power comes online near existing wind power, it naturally produces more output at the same time that existing wind power plants produce more output. The profit-suppressing effect of new wind is thereby intensified for existing wind assets.

Wind power project owners contemplating PTC extension have to weigh the benefits from anticipated new projects against the price suppressing consequences for their existing wind power and other generation assets. It is a cost-benefit weighing that is increasingly turning against continued support for the PTC among owners of wind power assets. Of course, on the other hand, manufacturers of wind power turbines and towers, and those developers who build but don’t own wind power projects benefit only from the construction of new projects. Wind power coalition dynamics should see these players taking a bigger and bigger role over time.

The Chicago Tribune article contains more good stuff. They found someone willing to claim that wind power needs the subsidy because it is “on the cusp of seeing real price declines,” and “In three to five years wind energy will be cost competitive … without the subsidy.” The claimant doesn’t explain why we shouldn’t just wait three to five years and build wind power when it is actually competitive.

(Research efforts do seem to be making progress in improving wind power productivity. That progress justifies maybe a few million dollars for continued research, not a few billion dollars to build more not-quite-cost-competitive wind power projects now.)

Other Production Tax Credit news and commentary:

 

No, the federal solar power subsidy does not pay for itself

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Michael Giberson

Last Friday the US Partnership for Renewable Finance, a coalition of financiers who invest in renewable energy, issued a report in which they claimed the federal investment tax credit for solar power is not a taxpayer burden because the tax credit “pays for itself” (to use their phrase). As I explain below, the report fails to support its claims.

In essence the US PREF report sums up federal tax collections that can be somehow linked to subsidized solar PV projects and concludes that the sum of the future tax collections is greater than the cost of the current tax break. For example, they claim a $10,500 residential solar credit will eventually lead to $22,882 in federal tax revenues, and a $300,000 commercial solar credit would yield $677,627 in federal tax revenues over the life of the project. Most of the tax revenues are federal income taxes paid by the companies, investors, and employees on income that is associated with the subsidized solar project.

The report led to a couple of rewrites of the press release in the renewable energy trade press. RenewablesBiz: “federal tax credit that has helped energize the recent boom in solar construction pays for itself and even generates excess revenue…”; RenewableEnergyWorld): “finds that the solar investment tax credit … can deliver a 10% internal rate of return … on the government’s initial investment.” Clean Technica wasn’t content with the press release’s own puffery, so it puffed up the report more: “Contrary to erroneous, misleading assertions to the contrary, the federal government’s Solar Investment Tax Credit (ITC) is proving to be an excellent investment for US taxpayers and the federal budget.”

Let’s be clear: the report does not demonstrate that the solar subsidy “pays for itself.” First, the report does not discount future revenues as is traditional in this kind of analysis, so the effects of time value of money and inflation are completely ignored. In effect they suggest it doesn’t matter if the subsidy ‘investment’ is paid back tomorrow, next year, or thirty years from now. Do you know any lenders that loan out money on these terms? If the federal government and current taxpayers had absolutely no other currently useful tasks requiring investments (technically, if current decisions had no opportunity costs), maybe one could ignore the time value of money. An investment is excellent only if the net present value of the future revenues is better with the investment than it would be with any other investment. The report doesn’t tell us if that claim is true of the solar subsidy.

Second, the report mostly neglects the effects of depreciation on the calculated taxes. They did analyze the tax collections with and without depreciation, and it turned out that assuming depreciation has a significant effect on their results. In their residential case assuming a $10,500 tax credit, the eventual federal tax revenue is $12,469 with depreciation instead of the $22,882 in taxes they highlight. In their commercial case, the eventual federal tax revenue collected is $380,127 with depreciation instead of $677,627. But they claim they can ignore depreciation and focus on the larger results.

Their justification for ignoring depreciation is that they’re assessing the effect of the subsidy on eventual federal tax collections, and depreciation would be the same whether a company invested in subsidized solar PV projects or some other unsubsidized capital projects. In their words, they are ignoring depreciation “since the depreciation of capital improvements applies without regard to how the capital improvements have been financed” and “depreciation is not specific to the solar industry.” (See pp. 2-3.)

But income tax laws, too, apply the same for income from subsidized solar projects or income from elsewhere–well, of course, there are thousands of variations in how income gets taxed under the federal tax code, but generally speaking income taxes are “not specific to the solar industry.” If we should ignore depreciation, why don’t we also just ignore income taxes?

This point leads us to the most fundamental of problems with the US PREF analysis. To analyze the benefits of the solar investment tax credit, we’d want to compare the world with the tax credit to the world without the tax credit. For example, the US PREF report simply estimates the corporate income from sales of electricity from the solar projects and then counts a fraction of this as federal tax revenue. But a reasonably safe assumption about a “world without the tax credit” is that electricity sales would have been about the same, so income and income tax revenues would have been about the same. The net effect of the subsidy on future tax revenue is near zero. (In effect, US PREF’s analysis proceeds under the amazing assumption that without the subsidized projects, consumers would have just used less electric power.)

The same criticism applies to investor and employee incomes. In the absence of the subsidized projects, it is safe to assume that investors would have found other investments to profit from and employees would have found other jobs. US PREF might claim that subsidized solar projects are more profitable to investors and lead to higher pay for employees than otherwise, so income tax collections would be a little higher than otherwise. But in this case they should only claim the increment in tax revenue, not the whole of it, as a “return on investment.”

All of this preoccupation with net federal tax collections is mostly, if not entirely, beside the point. Even if the report was any good–and it isn’t–public policy analysis is much more that gross impact on the federal budget over the lives of subsidized projects. The usual first step for sound policy analysis is a benefit-cost analysis, and a reasonable second step is careful considerations of alternative approaches to achieving desired policy goals. There is still more to good policy analysis, but these are useful starts. The US PREF analysis stands woefully short of a complete policy analysis and therefore is mostly useless as an argument for the solar investment tax credit.

If you must subsidize energy, subsidize wisely

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Michael Giberson

Earth Track has dedicated itself to uncovering the government policies that it finds harmful to the environment, with a particular focus on the effects of energy subsidies. From various quotes in the press from Earth Track founder Doug Koplow, I gather I may not always agree with his views of public policy and the world. But a casual review of the extensive work Earth Track has done on subsidies suggests that its work is, as it aims to be, pretty thorough and reasonably unbiased.

Koplow, noted for his criticism of energy subsidies, reports being asked which kinds of energy subsidies he does favor. His response – “So which forms of energy should we subsidize?” – notes that while he is not opposed to energy subsidies in principle, in practice there are many reasons to be cautious.

The realism exhibited with respect to the ways policymaking actually works is refreshing.

NYT Energy For Tomorrow Closing Plenary video

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Lynne Kiesling

Last week the New York Times hosted a conference called “Energy For Tomorrow”, and they have made video from all of the sessions available; there are several sessions discussing energy efficiency, natural gas, renewables, etc. I watched the closing plenary on Friday, for which the topic was subsidies in any or all energy industries (sorry, WordPress and the embed code aren’t playing well together). Among the speakers it features Rice economist Amy Myers Jaffe  (to whom we have linked here before), as well as friend-of-Knowledge Problem Branko Terzic from Deloitte Consulting.

The discussion was good and very informative, raising many of the aspects of the pros and cons of subsidies depending on their form and how they are implemented. Naturally, much of the discussion addressed solar and the unintended (but easily anticipated) costs illustrated by Solyndra and by Spain, whether subsidies generate more overall net benefits than a carbon tax would, and whether subsidies should focus on driving down costs and getting to grid parity or on R&D. I’ll let you form your own conclusions on those topics.

I found that Amy Myers Jaffe’s comments were the closest to what I would have said if I were on the panel. She critiques the use of subsidies very effectively, and encourages an energy policy focus on “targeting the externality” and pricing it in the market. Branko’s comments highlight the political economy of subsidies and whether subsidies are hidden or in plain sight.

Recommended for easing into your Monday.