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Incentives:

The Solar Stimuli?

by Don Loweburg

PV incentive programs, be they in Europe, Japan, or the United States, have played a huge role in the development of a global PV market. The World Watch Institute reports that global PV production increased 41% in 2006 to 2,521 megawatts. Compared to global PV production in 2000 (about 400 MW), this is a 600% increase.

In the United States, state and federal tax credits have leveraged state incentives. The 30% federal tax credit implemented in January 2006 under the 2005 Energy Policy Act has especially heated up commercial PV projects. During 2007, the California Solar Initiative program reported a doubling of the number of commercial reservations when compared to 2006. Unfortunately, this increase hasn't been the case across all sectors: A $2,000 cap on residential tax credits has resulted in higher final costs for these system owners and may be responsible for the relative slowdown of California residential PV projects.

The Incentive Impetus

Incentive programs vary widely, some simply providing a direct rebate to the customer that is based on the system's output rating (capacity based), while others reward actual energy production with payment provided over time rather than a single payment upon completion of the project (production based).

But whether capacity- or production-based, incentives are shaping the market for PV systems. Currently, that market consists of two primary sectors, commercial and residential. What effect has incentive structure had in determining the relative size of these two market sectors in the United States? Are there other factors outside the incentive program design that are responsible for market allocation?

The incentive programs in three states—California, Oregon, and New Jersey—provide a good sampling of successful U.S. programs. Together, these three programs account for more than 90% of PV sales in the United States and can provide a deeper look into market sector uptake.

California has had incentives for PV systems since 1998. In 2007, the program was restructured and renamed the California Solar Initiative (CSI), with the intention of providing a ten-year funding platform for PV systems. The CSI uses a capacity-based rebate for systems smaller than 100 KW, while mandating performance-based incentives for larger commercial systems. Additionally, the incentive levels decline over time as program participation increases. In early 2007, rebate levels started at $2.50 per AC watt for both residential and commercial projects. At this time of writing, California residential rebates are at $2.20 per AC watt and commercial rebates are at $1.90 per AC watt.

Prior to the CSI, the incentive program had resulted in approximate parity between commercial and residential segments of the PV market, with about 75 MW installed at commercial sites and about 100 MW installed at residential sites. A significant shift occurred in the first ten months of the CSI. Residential installations have stalled and commercial installations have escalated. According to SunCentric, an RE consultancy, predicted PV installations for residential customers in California will be about 22 MW in 2007 compared to almost 56 MW installed during the previous year. Commercial projects for 2007 are expected to exceed 130 MW, about six times the expected residential level for 2007.

Oregon's rebate program began in May 2003. Oregon's rebate for commercial systems is between $1.25 and $1.50 per rated DC watt and the state allows a generous 50% state tax credit. Residential systems get a rebate of $2 to $2.25 per rated DC watt and a state tax credit of $3 per DC rated watt, capped at $6,000. Jan Schaeffer, communication and marketing director for the Energy Trust of Oregon (ETO), reports that the 2007 expenditure of $3 million will increase to $9 million in 2008 with additional funding for commercial systems approved in April 2007.

Currently, about 1.3 MW of residential and about 0.7 MW of commercial systems have been installed under Oregon's program. However, Schaeffer expects commercial systems to significantly increase this year based on the funding approval of three large projects that will total up to 5 MW. In Oregon, large systems are individually negotiated by the ETO board. These projects result through the ETO's Open Solicitation program, requiring board approval of projects involving Energy Trust incentives of this scale. In 2008, commercial-installed MW are expected to exceed residential MW in Oregon by about three to one.

New Jersey. On the opposite coast, New Jersey's incentive program, Customer On-Site Renewable Energy (CORE), began in March 2001. This program initially had a generous rebate of $5 per installed watt. But the high rebate coupled with federal tax credits resulted in a very high program uptake, quickly depleting the program's funds. According to the program's Web site, as of October 2007, 2,351 PV projects have been independent power providers installed. During 2007, the residential sector installed about 2.5 MW, while the commercial sector accounted for about 7.3 MW. The New Jersey program is not approving projects until more funding can be secured. According to the CORE Web site, a backlog of 8.3 MW exists for residential systems and there is a 26.7 MW backlog for commercial systems.

Accelerating Growth

Within these three incentive programs, the subscription for commercial systems is running between three and six times greater than that for residential systems. However, it is difficult to attribute this significant difference to any specific structural elements in these programs. For instance, Oregon offers a modest rebate of $1.50 per watt compared to New Jersey's generous $5 per watt. This difference may explain the oversubscription and current struggles that the New Jersey program faces, but does not account for the imbalance between residential and commercial systems. Examining incentive type, whether capacity- or production-based, also fails to explain the imbalance. California offers both, while the other two programs offer only capacity-based rebates. So what's the dynamic driving the expansion of commercial systems?

Federal business tax credits coupled with an investment model known as a Power Purchase Agreement (PPA) can explain the disproportionately rapid growth of the commercial PV market. The federal investment tax credit (ITC) allows for 30% of a PV system's cost to be deducted from any federal taxes due, with no commercial systems cap. For residential systems, the ITC is capped at $2,000. Additionally, business investors can take advantage of the Modified Accelerated Cost Recovery System (MACRS), which allows the investment to be depreciated over a five-year period.

Under one type of PPA, an investor or group agrees to sell the power produced by their PV system to a host client. The host does not own the system but does agree to provide a site for the system and to purchase the electricity produced for a fixed number of years at either a fixed rate or at some rate indexed a fixed amount below the utility price for electricity. Investors receive the incentives offered by the local program, a five-year accelerated depreciation for their investment, and a 30% tax credit. Plus, they retain the value of any renewable energy credits (REC). In addition, investors receive cash flow coming from the sale of project's power to the host customer. The host saves on electricity costs and can claim "green" bragging rights, both with no financial investment.

Jump-Starting Residential Growth

Investors do deserve to make profits and these, in turn, help drive the PV industry forward. However, when one sector dominates, it may be to the detriment of another. The strength of the U.S. economy is not based solely on corporate investment, but also relies strongly on consumer spending. Balance in markets, as balance in life, needs to be sought. Removing the $2,000 cap on the federal residential tax credit could be a powerful stimulus for the residential PV market in the United States.

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Don Loweburg ([email protected]) and his wife Cynthia run Offline Independent Energy in central California from their off-grid office and home. Don and his crew of two handle installations, while Cynthia manages the business. Offline projects include both grid-tied and off-grid systems. Don also enjoys teaching college-level algebra at a local junior college two evenings a week.

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