State PV Incentive Programs | States Advancing Solar

Solar Programs and Policy Support

Financial Incentives

State Clean Energy Fund PV Incentive Programs

Over 20 states have established clean energy funds that will collect more than $6 billion in aggregate over the next decade, most often through a small surcharge on retail electricity rates known as a system benefits charge. The general goal of these funds is to support development of renewable energy technologies and markets. The widespread popularity of PV, along with its high up-front cost and resulting need for support, have made is a prime target of state clean energy funds. Almost all of the state funds currently provide some form of support for customer-sited PV.

Many funds have implemented what are commonly known as “buy-down” programs where funds are distributed as grants to subsidize or buy down the initial cost of a system.

As real time programmatic experience accrues, lessons are being learned from these rebate programs, and many states are revising their programs to increase effectiveness.

Recommendations for Implementing Effective State Incentive Programs

Setting the Correct Incentive Level

Incentives currently offered by state range widely from $2-$5/W as necessary to stimulate significant demand for grid-connected PV systems.

Because larger commercial are typically more economical due to economies of scale and the availability of federal tax incentives (a 30% investment tax credit and accelerated depreciation) some states have created tiered incentive structures that progressively reduce the $/W incentive as systems grow larger.

Create consistent, stable, long-term state program support

Sustained, long-term program will enable more significant PV cost reductions. Experience from Japan suggests that deeper cost reductions with solar technology are possible with sustained policy efforts. States should commit and release whatever funds are made available for solar incentives in a way that ensures long-term continuity – for periods of 5 to 10 years or more. This will allow local solar markets to develop and stabilize, without boom and bust cycles.

The California Solar Initiative provides an example of a state program with a good balance between providing meaningful support, providing an incentive for industry cost reductions over time, and budgetary certainty. California has committed to a 10-year $3 billion solar program, with rebate levels reduced each year by approximately 10%, with subsidies zeroing out after 10 years.

Establish specific installed capacity goals for PV

For similar reasons, state policy makers should consider publicly committing to a solar installed MW capacity goal as the basis for future policy, strategy and program actions. Doing so will create clear market expectations, strengthen investor confidence, and provide predictability for future budgeting and continuity for program design and deployment. Given the distributed nature of PV technology, achieving long-term PV generation goals will require the collective confidence of multiple investors and customers in the state’s commitment to long-term market building.

To that end, through 2007, three CESA states have established specific, ambitious PV goals and resource commitments – California: 3000 MW in ten years; New Jersey: 2300 MW by 2020; and Maryland: 1500 MW by 2022 – that are driving the emergence of a local solar industry and market.

Ensure incentive design fosters PV cost reductions and mainstream adoption

The prevalent funding strategies in the U.S. and abroad to mitigate PV costs and grow markets include long- and short-term subsidies and incentives, special feed-in tariffs, targeted tax treatments, solar targets in renewable portfolio standards, and other mechanisms to make PV systems more affordable.

In the U.S., capacity-based incentives offered by states are by far the most common approach to providing financial support for PV installations. These incentives are literally pegged to the number of watts of system design capacity (its nameplate capacity rating) and offer an upfront, set dollars-per-watt grant, subsidy, or incentive (with the terminology for the award varying from state to state).

Recently, a growing number of states are looking to provide installation incentives that are performance-based, in response to concerns that the capacity-based payments may be subsidizing systems with potentially poor performance. Capacity-driven incentives are criticized for not encouraging effective system design, optimal component selection, and regular ongoing system maintenance. However, there is no comprehensive information regarding the extent and specific causes of poor PV system performance. In fact, it is not clear that poor PV performance is a widespread problem in the U.S., especially in light of the inherent incentive by owners to ensure that their systems perform well. Instead of using performance-based incentive designs, states may want to focus on giving homeowners and building operators the necessary information on performance and maintenance as a more effective approach to promote system performance.

However, two primary types of performance-based incentives (PBI) are emerging in the U.S., with a number of variations related to timing of and basis for incentive payments. The most “pure performance” approach strictly ties incentives paid out over time to demonstrated production by the PV system. In many ways, this approach mimics the utility feed-in tariffs of Germany.

The other major performance-based approach pays an up-front incentive that is based on an estimate of long-term production, taking into account an analysis of specific installed system components in a particular location, and such factors as orientation, declination, seasonal shading potential, and weather. This estimate or modeled output is then used to determine what the up-front payment should be, with adjustments made based on actual measured performance.

Both approaches address the desire to have payments tied to production rather than nameplate capacity. However, while the measured performance approach more effectively accounts for output variability driven by actual weather conditions, system degradation, or poor maintenance, it does not address the significant first-cost barrier of PV systems, unless it can be tied to long-term financing. It also may be administratively burdensome (and costly) to have variable ongoing payments tied to production. In particular, performance-based incentives may be a poor match for new residential construction, as the approach does not address builders’ concerns with the impact of PV on the upfront cost of new homes.

For these reasons, the estimated performance incentive approach may be more appropriate than a strict PBI approach for PV systems installed on newly constructed buildings or for smaller systems. While it does not take into account the potential for future change in output, it does go a long way toward helping ensure that systems are properly installed and will generate the income the customer has been promised. Most importantly, it provides the same front-end payment and cost certainty that the capacity-based approach offers to a buyer.

Ensure Program Rules Do Not Pose Unreasonable Barriers and Costs on Installers and Customers

In choosing an incentive design and program elements, states must take care not to implement program features that are so complex or costly to use (for themselves, installers and their customers) that they make PV systems even harder to afford.

Specifically, it is important that states consider and evaluate how the design of their solar support program affects local installation and non-hardware costs. An example from the Small Renewables Initiative (SRI) program in Massachusetts is informative of the unintended cost consequences of rigorous solar program requirements.

A 2006 survey of PV installers working in Massachusetts, completed by the Solar Energy Business Association of New England (SEBANE), asked them to allocate their time and cost by activity to further understand how the total local cost of systems is incurred. Installers reported that, in addition to the time and manpower it takes to physically install a system, their non-hardware costs were being driven up by requirements of the SRI incentive program. According to the installers, the SRI application imposed considerable paperwork requirements. Marketing and sales required a significant amount of time to travel between job sites (given the distances between active customers) to qualify customers both technically (e.g. roof and sun availability) and financially. Other major costs were permitting and the need to participate in several individual inspections by multiple parties (i.e., in some cases, separate trips by the installers to meet an electrical inspector, building inspector, utility representative, and program representative). As a result, the actual system installation itself averaged only 50 percent of the non-hardware costs.

The lesson here: If their ultimate objective is to mainstream PV technology by making it more affordable, states should weigh both the benefits and the cost implications of program requirements designed to encourage performance and quality. Both the cost of sales and cooperating with local code enforcement already add significant expense to installations. Solar program requirements should avoid placing additional unnecessary burdens on solar technology installers and contractors that further increase transaction costs, which will likely be passed on to the customer.

States also should simplify program eligibility requirements and paperwork to make programs easy to understand and use. For example, states should try to move to electronic applications when possible. States also should provide for quick funding decisions and notifications to reduce transaction costs and prevent prospective solar buyers from losing interest in the solar purchase.

Encouraging High-Value Installations

Many states increasingly are targeting incentive support to encourage high-value or niche applications for which solar technology is particularly well-suited. To do so, states are using targeted solicitations, discretion in award of incentives, or explicitly setting different incentive levels of different applications.

For example, several states have sought to support larger amounts of solar capacity at lower costs by focusing on the non-residential sector where installations are more economical than residential systems. And many states have provided elevated incentive levels to public schools for PV installations to promote high demonstration values and solar education. Finally, recognizing that PV systems may be installed more economically if incorporated into the design of a new building rather than retrofitted onto an existing building, several states are targeting new home construction and, in particular, energy efficient green buildings.

CONCLUSION

There are a number of factors that should be considered as a state begins to develop a solar incentive program. There is no “one size fits all” approach to incentive design and each state’s case is unique. A clean energy program’s selection of an incentive structure will depend upon the program’s goals, resources and constraints. Depending upon the size of the program, it may be desirable for a program to implement multiple strategies simultaneously.