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Solar-Energy Subsidies: A Primer

Posted by Robert Rio on Dec 7, 2015 7:30:00 AM

The debate over solar-energy subsidies in Massachusetts has enormous cost implications for employers. But the debate is arcane, complex and littered with head-scratching jargon such as SRECs, net-metering and behind-the-meter installations.

It is also littered with misinformation intended to distort the financial facts of the issue.

Solar.PrimerAssociated Industries of Massachusetts has compiled a plain-English series of questions and answers to help employers understand the issue. The document is excerpted below. The full white paper is available here.

What incentives are available in Massachusetts to defray solar installation costs?

There are three types of incentives:

  • the federal investment tax credit (ITC), which is 30 percent of the cost of solar installation;
  • state solar renewable energy certificates (SRECs); and
  • state net metering credits.

The incentives do not include savings from lowering your electric bill through the use of on-site solar, or any tax savings, such as depreciation, that may be applicable to your business. The ITC is scheduled to be reduced to 10 percent for commercial installations on December 31, 2016 although there are efforts to extend it. Net-metering credits are tax free in Massachusetts.

What’s the difference between a net-metering credit and an SREC? Which types of facilities are eligible to receive them?

Net metering describes the process by which an electric customer uses the solar power produced at its facility to lower the use of electricity. If you produce more than you use, the surplus may be sold back to the utility for net-metering credit. Otherwise, your electric bill is just lowered by the amount you generate.

SRECs are different.

Massachusetts law requires that a certain portion of all power consumed within the commonwealth be generated by renewable resources. The amount is currently 10 percent and it increases 1 percentage point per year. The generating resources may be solar, wind, small hydro and few other generation methods classified as renewable under state law (the definition can vary from state to state).  A certain portion of the 10 percent renewable obligation must be met with solar energy.

Each renewable source essentially generates two components – the actual energy, which in the case of solar is typically used on-site (though it could be sent to the electric grid), and environmental attributes associated with the clean-energy production.

The state determines whether or not utilities or others are in compliance with the renewable obligation through the trading of the clean-energy attributes, known as Renewable Energy Certificates (RECs) or Solar Renewable Energy Certificates (SRECs) if they are generated by solar energy. One REC or SREC is generated every time a megawatt-hour (1,000 kilowatt hours) of energy is generated by the applicable renewable source. Utilities and others buy these RECs or SRECs to meet their obligation set by the state.

The power does not have to be sold with the RECs or SRECs. As long as it is consumed somewhere in the electric grid for New England, an REC or SREC is generated and may be sold.

Here’s an example: A business customer generates one megawatt hour of solar electricity and thus one SREC. The company uses the power on site, but has no need for the SREC since the renewable compliance obligation is on the utility and suppliers of electricity. The company may then sell the SREC to someone who needs it to meet their renewable obligation, generating revenue for the company that produces the SREC in addition to lowering the cost of power.

How much do these incentives cost consumers?

The federal Investment Tax Credit is paid from general tax revenues. The Massachusetts SREC and net metering credit programs are paid by a surcharge on non-solar energy used by ratepayers.

The total tab to Massachusetts electric ratepayers for SREC and net metering will be about $600 million in 2015. That cost is expected to nearly triple by 2025 as solar becomes more ubiquitous. Solar subsidies will thus become the largest single component of distribution charges faced by ratepayers, even more than the cost to maintain the electric grid itself.

According to studies done by the state Department of Energy Resources (DOER), generating renewable energy through solar currently costs about 39 cents per kilowatt hour (kWh). Non-solar renewables can be produced for an average of 4.5 cents per kWh. Almost half of every dollar spent for renewable power goes to subsidize solar, yet it only generates 7 percent of the clean energy. 

What do those costs mean for employers?

Massachusetts already has one of the highest prices for electricity in the continental United States (typically among the top three for residential, commercial and industrial ratepayers). Our rates are double those of North Carolina.

Companies that use large amounts of electricity to manufacture products or to provide 24/7 medical care end up paying hundreds of thousands of dollars each year to fund solar developments for someone else. These artificially inflated electricity costs have forced scores of manufacturers to leave Massachusetts – or to close – during the past two decades.

Solar subsidies also increase the cost of electricity to cities and towns, translating into higher taxes, higher education costs and higher medical costs.

My solar-energy vendor told me there is a “cap” on the amount of solar allowed in Massachusetts and that I should support an increase in that cap. Does that mean I can’t install solar panels on my property once the “cap” is reached?  

Not at all. The “cap” does not limit solar installations in any way. It does change the way some facilities (depending on size and geographic location) are reimbursed by the utility for net metering credits.

Could you explain?

There are two general types of solar installations.

Some businesses add solar generation to reduce their electricity use. All output from the solar panels is used on site. These are called “behind the meter” installations. Most companies that add solar have an electric load much higher than the solar panels can provide. They therefore do not generate surplus net metering credits.

The second type, known as “solar farms” or “virtual net-meter” installations, are primarily built by developers to send power back to the utility, essentially acting as a power plant.  

When the Massachusetts lawmakers enacted the solar legislation, they allowed facilities that generate surplus net-metering credits to be compensated for those credits at the full retail rate of electricity. So these facilities are producing electricity like a power plant while receiving reimbursements as if they were selling electricity like a utility.

The generous reimbursement prompted the Legislature to “cap” the program. Once the cap is reached, additional solar facilities that come on line would not receive the full retail rate of power, but rather a lower rate. They would, essentially, be treated like any other power generator, including wind energy producers.  

Is my business affected by the cap?

There is a good chance that it is not.

Homeowners and most small businesses are exempt from the cap and therefore continue to receive the higher retail rate for net metering.  And the cap is utility specific. While National Grid territory has reached its cap, Eversource territory has not.

Most AIM member employers who move to solar do so with so-called “behind the meter” installations, which are not typically impacted by the cap because the facility is generally not selling electricity back to the grid. If the company occasionally sends power back to the grid during periods of low onsite energy usage, it may be impacted by the cap if it applies. Generally, however, this revenue impact is minimal.  

Even after the cap has been reached, a company can still receive benefits under the Federal ITC and SREC program. In fact, in most cases, the ITC and SRECs are far more lucrative than net-metering revenues. And remember, net-metering benefits are tax free so you can still save, even if revenue is lowered.   

So if I am a business and just want to put solar on my roof to lower my bills, can I still do it?

Even though your installation is credited against the cap for accounting reasons, the presence or absence of a cap has no financial effect on your ability to lower electricity costs through the use of solar. You will continue to receive retail credit for the power you do not use as well as SRECs and the ITC as applicable. 

Read AIM's Position Paper on Solar Subsidies

Topics: Massachusetts economy, Energy

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