Introduction

Killing me softly with soft cost

The main problem with residential solar is that there is a tremendous amount of what is called “soft cost” which are everything other than the direct cost associated with the project. So aside from the actual hardware and take home pay of the laborer, there is overhead, design, sales, supply chain mark-up, installer profit, a partridge and a pear tree, and in mainstream construction, this soft cost margin is around 30%. Solar residential soft costs are far above this figure. It may not be the installer’s fault. In Mississippi, I might design, procure, and install a solar project within seven days start-to-finish. The permit process can take months, with more time spent fighting grid operator obstruction than doing real work. This can create a market where a specialty installer must be used to navigate a time-consuming development cycle, and must charge a huge specialty margin in order to make enough money to simply get by. In other words, the profit made on a one week project might have to last the installation team for two weeks or more. It is no wonder these specialty contractors go out of business whenever there is a policy shift in the local solar market.

 

This soft cost drops dramatically at the utility-scale. But that does not mean that the direct costs of utility-scale projects are substantially less than residential. The soft cost of a rooftop solar project can be brought down substantially through a well-planned design process when there is not substantial obstruction from the local permit authority.

 

Subsidies increase soft cost, yet have a benefit to the project owners by lowering their out-of-pocket expense. Not always – the import tariffs have substantially eliminated much of the tax credit benefit while making solar more difficult to afford for lower income households. Supposedly, the subsidies will vanish with the tax credits and permit offices will realize the bulk majority of residential projects are smaller than the minimum amount of residential electric service mandated by national electric code.

 

But to accomplish solar without reliance on subsidies of any kind, we will have to be smarter about our solar design to reduce those soft costs, which is what mainstream construction

does on a regular basis. That discipline has not yet made it into the solar industry. More likely, building construction experts know little about solar and need to know where to find someone

who knows about solar design, and solar installers are focused on low-hanging fruit retrofit markets rather than incorporating their practices into a larger general construction practice. This is where a smaller solar designer might find an opportunity, working with local architects and engineers to incorporate solar into existing design and construction firms.

Introduction

Solar Timeline Part II – Tax Credits + Buyback

In 1978, the Public Utility Regulatory Policy Act (PURPA) was passed to clean the electric grid with some low-hanging fruit. On the one hand,m acid rain wabs burning leaves off of trees and choking out fish in the streams.  On the other, the energy crisis of 1973 which had quadrupled the price of crude oil was fresh on the public’s mind. Manufacturers who needed more power for their manufacturing processes than what the utility could provide them from the grid were generating their own power onsite. But to achieve a stable power supply,  the manufacturers were generating more power than they could consume. These were traditional fossil fuel generators, but even gas generators produce fewer emmissions in regions primarily powered by coal. These “qualifying facilities” wanted the ability to sell their surplus power back to the electric grid, but the electric utilities claimed it was not their role to purchase backfed power from their own customers.

PURPA was a compromise between manufacturers and grid operators, requiring the utility to allow generator interconnections and purchase the backfed power so long as the facilities were small (defined as less than 80 megawatts) and generated by power sources cleaner than what the utility would otherwise provide. The compromise was that the forced purchase rate would be set at avoided cost – essentially the raw material cost the utility pays to buy the coal before shoveling it into the powerplant, less an administrative fee. So PURPA established a bare minimum purchase price that the power companies should find acceptable to buy back clean power from their customers. But keep in mind that the definition of a small and the definition of clean were both far behind that of a residential solar array today.  Still, this was not a policy intended for individuals to offset their entire electric bill, but rather more of a convenient arrangement between power companies and large manufacturers to clean the grid without impacting the cost of electricity.

The debate over fair buyback rates between grid operators and their customers still continues to this day, with PURPA being the starting point over what is fair compensation for backfed clean power. Even at avoided cost buyback, PURPA is under attack. There are states like Hawaii which have brought so much solar online that PURPA does not really apply anymore. Homeowners in Hawaii are allowed to interconnect to the grid, but must program their solar arrays to throttle back their output rather than push surplus production onto the grid. This is because enough backfed power appear as a power outage to to “dumb” infrastructure – as the electricity is flowing the wrong direction! Also, in some regions the avoided cost electricity rate is high enough to stimulate utility-scale solar development, which upsets traditional power generation balance sheets due to the first-in-line status given to backfed renewables. A powerplant that was designed for 24/7 operation may find itself without a buyer for its mid-day electricity. These fossil fuel owners may claim they need to increase the cost of electricity to make up for the shortfall. Whether higher night time rates translates into effective increased consumer cost is yet another factor worth consideration, as daytime electricity is traditionally considered to be “peak”. Combining these scenarios, consumer solar advocates may find themselves on the opposite side of utility-scale solar developers, both competing for the limited capacity of backfed power that the grid can handle without upgrade. Even in a world of 100% renewable energy, there will still be debate between “consumer owned” and “Big Energy” stakeholders.

It may come as a surprise to learn that George W. Bush deserves special recognition for contributions to the solar industry. His administration is responsible for reinstating Carter’s solar tax credit in 2005 and uncapping the tax credit as part of TARP in 2008. Additionally, his Energy Policy Act of 2005 required all states to develop develop a net-metering policy, which defines how customer-owned solar consumers are compensated for their outflow at rates above and beyond PURPA. Typically, net-metered solar is constrained to less than five megawatts at the commercial scale or less than 25 kilowatts at the residential level but it varies by each state. Additionally, commerce clause restrictions on Federal power make the Federal net-metering mandate act more like a request rather than a mandate; some states have chosen not to develop net-metering policies without punishment. Perhaps more confusing is the compensation rate – in other countires, a net-metering policy is more akin to PURPA rather than compensation above and beyond avoided-cost.

The spirit of USA-style net-metering is that you are allowed to offset your energy use with what you push back onto the grid, provided that you do not produce more than you consume at the end of a billing cycle, which may be a month, a year, or even unlimited. Traditionally, net-metering policy is set by each state’s public utility commission. Before the era of “smart meters”, the analog meter would simply “spin backwards” when outflowing electricity to the grid – essentially an unlimited net-metering benefit. Digital meters can track the inflow and outflow independently of each other, meaning the instant a solar array begins pushing electricity onto the grid, the value of that electricity can be worth as little as 15% of average retail pricing. Net-metering may increase that value up to as much as a 1-to-1 match for inflow verses outflow. So because net-metering policy is left to the states, the economic value of solar can be completely different in Kansas City, Missouri verses Kansas City, Kansas.This brings a localization to solar design where one must be an expert in regional policy.  

Obama extended and expanded W’s solar programs. The solar tax credit was extended in 2015 (as part of a bi-partisan energy bill which punted on cap-and-trade and expanded fossil fuel development domestically and abroad). The tax credit is 30% of total system cost through 2019,  26% until 2021, 22% in 2021 (a great year to go off-grid), and then the residential credit phases out while the commercial tax credit demains at 10%. It may seem odd that corporations get an added tax benefit above residential consumers, but technically, the commercial tax credit is for energy projects – other forms of energy projects (not necessarily renewable) may also qualify for the 10% Energy Investment Tax Credit. The oil refinery expansion project I was working on while researching the solar industry back in 2006 was a product of the ITC.

One item many do not realize is that if you have already installed a solar array which qualified for the tax credit, you may expand the solar array (such as adding solar-charged batteries or more panels) and have the expansion qualify for the tax credit.