Government Policies and Solar Power Systems Explained

Introduction: Electricity Regulation and the Public Utility Model

Government regulations and policies affect renewable power generation a great deal, as is revealed through a brief review of the history of governmental policy regarding power generation. Federal, state, and local governments support solar power creation, progress, and improvement through a broad assortment of strategic and regulatory instruments. As the cost of solar power creation has fallen during administrative incentivization, the regulatory expenses have increased. Some modification is desirable in the permitting procedure for this innovative technology. The prospect of government fiscal incentivization is reliant on both the financial system and the political state of affairs.

Any explanation of solar power in the current market must begin with an exploration of the traditional generation of electricity. Schmidt lists four reasons why the power plant monopoly was established: 1) economies of scale, 2) fixed capital, 3) peak demand capacity requirements, and 4) size and siting limitations (1). Lay people frequently forget that electricity is not storable, so because of its essential nature, it is regulated as a public good that is required to instantly meet peak demand. Because of the illiquid nature of the investment, regulations helped assure supply and demand. Since power plants are more efficient at a larger scale, monopolies are inevitable.

Schmidt also points out that the current American system is globally relatively uncommon, consisting as it does of "private ownership that services a profit motive with public control through regulation to mitigate market power and ensure public convenience and necessity by providing desired levels of public goods" (2). Rather than regulation by a government agency — like the department of motor vehicles — the courts have addressed prices and market agencies while state agencies deal with health, safety, and the environment, leading to an uneasy balance between private capital and public benefits (Schmidt).

Due to rising costs, limited expansion of demand, and slowing technological advances in the 1970s, those state agencies had to expand their roles to influence capacity expansion, financing, and policy development, particularly as the public benefit side of the equation gained emphasis (Schmidt). As deregulation favoring competition came into vogue in the 1980s, paradoxically interconnection over larger geographic areas allowed fewer power plants to be built (Schmidt). Since the competitive markets were created in the 1990s, those markets began to dictate prices as energy efficiency came into vogue and multiple electrical sources became available to the consumer (Schmidt).

Federal and State Policies Encouraging Solar Deployment

Key to understanding the role of solar power is the 1978 Public Utility Regulatory Policies Act (PURPA), which increased the role of Qualifying Facilities (QFs) — entities that "produce up to 80 MW of electric capacity from renewable resources" — by requiring public utilities to buy power from QFs (Schmidt). This "market-driven policy that ensures a minimum amount of [non-hydroelectric] renewable energy is included in the portfolio of electricity resources of the licensed electricity suppliers serving a state or country" is known as a Renewable Portfolio Standard (RPS) (Singh and Sood; Palmer and Burtraw). An RPS has been proposed in Congress many times but is unlikely to pass, perhaps because RPSs have a tendency to support renewable energy generation to the detriment of natural gas utilization (Palmer and Burtraw). As this is a politically volatile topic, Section 1251, Title XII of the Energy Policy Act of 2005 (EPAct 2005) actually eliminated this requirement and substituted a vague requirement for a plan to "minimize dependence" on a single fuel source and to sell electricity generated using "diverse" sources (Energy Policy Act of 2005).

No new Renewable Portfolio Standard has been passed at the federal level (DSIRE). Nonetheless, "twenty-nine states and the District of Columbia, the Northern Mariana Islands, and Puerto Rico have established an RPS," and many of those explicitly favor solar power (DSIRE). In addition, six states' RPSs create a renewable energy market because utilities can trade renewable energy credits to comply with the RPS (Palmer and Burtraw). As a result, the utility can: a) generate its own renewable energy, b) buy renewable energy and the accompanying credits, or c) simply buy renewable energy credits (Palmer and Burtraw). Two states offer credit multipliers for renewable energy generation (Palmer and Burtraw). Similar systems have been implemented abroad (Palmer and Burtraw). As a result, "approximately 60% of all new resources added to the grid by 2019 will come from wind and solar," according to the North American Electric Reliability Corporation (NERC), as quoted on RenewableEnergyWorld.com (Leone).

Net metering allows small generators — including solar — to receive credit from the public utility for producing electricity, even though they may be consumers at other times (Schmidt). This "purchase" may be at retail or wholesale cost (Singh and Sood). It is an inexpensive, easily managed technique for persuading customers to use solar power (Singh and Sood). Often, solar power is at its most abundant during peak demand periods, improving the system load profile and thus benefiting utilities (Singh and Sood). While DSIRE states that no uniform federal policy exists on net metering, Section 1251, Title XII of EPAct 2005 amends Section 111(d) of PURPA to read:

(11) NET METERING. — Each electric utility shall make available upon request net metering service to any electric consumer that the electric utility serves. For purposes of this paragraph, the term "net metering service" means service to an electric consumer under which electric energy generated by that electric consumer from an eligible on-site generating facility and delivered to the local distribution facilities may be used to offset electric energy provided by the electric utility to the electric consumer during the applicable billing period.

Perhaps DSIRE means that there is no uniform policy. They point out that the 45 explicit state policies vary by type of applicable customer, individual system capacity limit, aggregate system capacity limit, eligible customer types, eligible system types, treatment of net excess generation, and ownership of renewable energy credits (RECs) associated with customer generation (DSIRE).

Another key element of federal policies regarding solar power generation is interconnection standards. Interconnection refers to the connection between a small power generation system — such as a household solar panel system — and the grid (DSIRE). Singh and Sood refer to these as "Electricity Feed-in Laws" or "Advanced Renewable Tariffs (ARTs)" and note that they are a rapidly expanding policy instrument for inspiring the speedy development of renewable energy, including solar panel installations. In this context, regulation tends to work in favor of the individual, because it specifies the processes through which a customer must go to obtain an interconnection that allows net metering (DSIRE). This places individuals on an "equal footing" with utilities (Singh and Sood). Without such guidance, customers often end up navigating a complex, arduous, and costly series of negotiations in order to obtain an interconnection.

In response to EPAct 2005, the Federal Energy Regulatory Commission (FERC) developed policies and procedures for the interconnection of large and small customer-sited systems — including solar — to the grid (FERC), as well as interstate transmission line regulations (Leone). Despite this, there is no uniformly adopted state policy. About 24 states have general customer standards regardless of net metering. Approximately 15 states have standards only for net metering systems. Some states' standards apply only to customers of investor-owned utilities (DSIRE). Other variations include individual system capacity limits, interconnection fees, standard agreement requirements, insurance requirements, external disconnect switch requirements, and area network grid requirements (DSIRE). IEEE 1547: Standard for Interconnecting Distributed Resources with Electric Power Systems, adopted in 2003, addresses technical issues, and compliance tends to be required by states with comprehensive interconnection standards (DSIRE).

Financial Incentives for Solar Power Investment

One way that governments influence technology development is through incentivizing research and development, public works projects, workforce training, public awareness initiatives, and business development activities (Singh and Sood). There are five general types of incentivization: 1) subsidies and rebates for capital investment; 2) tax relief on capital investments; 3) production tax credits to offset costs; 4) guaranteed loans as financial assistance; and 5) use of economies-of-scale purchasing power (Singh and Sood). Another method to initiate a shift toward renewable energy generation would be a tax or cap-and-trade system on carbon emissions (Palmer and Burtraw). However, this is a politically volatile topic and is unlikely to be accepted.

One type of Renewable Energy Production Credit (REPC) is the Renewable Electricity Production Tax Credit (PTC) (DSIRE). The PTC is a tax credit equal to 2.2 cents per kilowatt-hour for wind, geothermal, and closed-loop biomass power generation, and 1.1 cents per kilowatt-hour for other eligible power generation technologies — including marine and hydrokinetic resources such as wave, tidal, current, and ocean thermal energy (DSIRE). It applies to electricity sold by the taxpayer to an unrelated person during the taxable year and is usually applicable only to the first ten years of operation (DSIRE).

However, taxpayers may opt to take the Business Energy Investment Tax Credit (ITC) instead (DSIRE), which was originally designed for investment in geothermal and solar generators equal to 10% of the capital cost of the generating facility with no expiration date (Palmer and Burtraw). It now applies to a wide range of generation technologies, including but not limited to solar thermal electric, photovoltaics, wind, and geothermal electric (DSIRE). For solar systems, the credit is "equal to 30% of expenditures, with no maximum credit. Eligible solar energy property includes equipment that uses solar energy to generate electricity…" (DSIRE). For small wind turbines, the credit is likewise "equal to 30% of expenditures, with no maximum credit" (DSIRE). Significantly, this also applies to investments supported by "subsidized energy financing" (DSIRE).

Alternatively, taxpayers could apply for Renewable Energy Grants (REGs) under the Section 1603 program. These apply to a wide range of generation technologies, including but not limited to solar thermal electric, photovoltaics, wind, and geothermal electric (DSIRE). The grant is equal to "30% of property that is part of a qualified facility, qualified fuel cell property, solar property, or qualified small wind property; and 10% of all other property" (DSIRE). However, "only tax-paying entities are eligible" (DSIRE). Government agencies, non-profits, and cooperatives are not eligible (DSIRE).

These incentives are not limited to the federal level. Roughly twenty states offer tax credits to help compensate for the cost of purchasing and installing solar energy equipment, ranging from 10% to 50% of expenses, with credit limits "ranging from $500 to $35,000 for residential systems and from $25,000 to $60 million for commercial systems" (DSIRE). This tax credit is not automatic, however. Some states require applications and pre-approval, and several states have minimum standards for system warranties, equipment quality, installer credentials, and installation types (DSIRE).

Conclusion

Government regulations and policies affect renewable power generation a great deal. Federal, state, and local governments encourage solar power generation developments and installations through a wide variety of mechanisms. As the price of solar power generation has come down through government incentivization, the regulatory costs have gone up. Some fine-tuning is needed in the permitting process for this new technology. The future of government financial incentivization is dependent on both the economy and the political situation.

Works Cited

DSIRE. Solar Set-Asides in Renewables Portfolio Standards. 2011. North Carolina State University, under NREL Subcontract No. XEU-0-99515-01. 26 November 2011 <

Energy Policy Act of 2005. No. 119 STAT. 594. Pub. L. 109-58. 5 August 2005.

FERC. "Generator Interconnection." 6 August 2006. Federal Energy Regulatory Commission. 26 November 2011 <http://www.ferc.gov/industries/electric/indus-act/gi/small-gen/agreement.doc>.

Kelly, Erin. Future of Federal Solar Programs in Doubt. 28 June 2011. 26 November 2011 <

Leone, Steve. Solar, Wind Projects Could Benefit From New Grid Regulations. 22 July 2011. 26 November 2011 <http://www.renewableenergyworld.com/rea/news/article/2011/07/solar-wind-projects-could-benefit-from-new-grid-regulations>.

Lipton, Eric and Clifford Krauss. "A Gold Rush of Subsidies in Clean Energy Search." The New York Times 12 November 2011: A1.

Musser, George. Are Local Solar Regulations Really as Bad as People Make Them Out to Be? 7 February 2011. 26 November 2011 <http://blogs.scientificamerican.com/solar-at-home/2011/02/07/are-local-solar-regulations-really-as-bad-as-people-make-them-out-to-be/>.

Palmer, Karen and Dallas Burtraw. Renewable Electricity Policies. Discussion Paper. Washington, DC: Resources for the Future, 2005.

Schmidt, Hugh F. "What Regulation May be Appropriate to Support Sustainable Energy Inputs for Electric Generation?" Proceedings of the 42nd Hawaii International Conference on System Sciences. Honolulu, Hawaii: University of Hawai'i at Manoa, 2009. 1–8.

Singh, Randhir and Y. R. Sood. "Policies for Promotion of Renewable Energy Sources for Restructured Power Sector." Third International Conference on Electric Utility Deregulation and Restructuring and Power Technologies (DRPT). Nanjing: IEEE, 2008. 1–5.

Wang, Ucilia. Solar Industry Fears Losing Federal Support Amid Profit Decline. 22 September 2011. 26 November 2011 <http://www.forbes.com/sites/uciliawang/2011/09/22/solar-industry-fears-losing-federal-support-amid-profit-declines/>.

Zeller, Tom. "Solar Firms Frustrated by Permits." The New York Times 20 January 2011: B1.