Utilities often claim that allowing customers to run their meter backward (by generating electricity on-site, e.g. from rooftop solar) can affect their bottom line because these customers don’t pay enough to cover the cost of maintaining the grid.  In at least one case, however, a utility’s cost-benefit analysis of net metering was turned on its head in an independent review.

Presenting as part of Vote Solar’s Data Not Drama webinar on net metering last month, Interstate Renewable Energy Council’s (IREC) Joe Wiedman showed the Public Service Company of New Mexico (PNM) erred in proposed standby charge of 5.3 cents per kWh for net metering customers. The utility asserted that this charge — ostensibly to backup these on-site generators — would allow the utility to recover its costs from these customers busily spinning back their meters. IREC’s review of their analysis, however, showed that net metering was actually a net benefit to the utility.

The differences were substantial. While PNM had given almost no value to net metering systems, IREC’s review found that the on-site generation helped the utility avoid energy costs, line losses, capacity upgrades, and transmission costs worth over 15 cents per kWh. Even when balance against the transmission and distribution costs, and power generation costs to the utility of supporting net metering, the policy had a net benefit of 7.8 cents per kWh, a 13-cent difference!

The following chart illustrates, with the perceived costs shown in red (positive) and perceived benefits in green (negative).

The lesson for advocates of distributed generation is clear: challenge utility valuation of net metering and of distributed renewable energy.  You can never be sure what they overlook.

Whether German feed-in tariffs or U.S. tax incentives, opponents of solar rail at its perceived high cost. But a story making rounds this week, “why power generators are terrified of solar,” presents a powerful image that may flip this conventional wisdom on its head. Building lots of solar power can actually reduce electricity prices, to the dismay of utilities.

The story comes from Germany, where a decade of consistent policy has resulted in thousands of megawatts of distributed solar installed on urban rooftops and rural barns. This year, it was noted that the surge of “solar PV was cutting peak electricity prices by up to 40 percent.” The following graphic of prices on the German electricity exchange — which Craig Morris calls “the afternoon dip” — illustrates the effect. The left view is 2008, showing steady, high prices in the market throughout the afternoon. The chart on the right shows the same time period in 2012, where an abundance of solar has sharply cut afternoon power costs.

Click for a larger version.

What’s happened is the “merit order effect.” Because utilities have purchased all this solar capacity on long-term contracts, there is effectively zero marginal cost to taking the solar electricity onto the grid. And in Germany, there’s enough solar electricity on sunny afternoons to completely offset the traditional spike in electricity demand created by air conditioning. So, instead of taking electricity from expensive gas peaking power plants or diesel generators, utilities have low-cost solar filling the gap, undermining the previous price peaks.

The fall in wholesale power costs from so much solar represents a delicious irony. For years, solar advocates have justified high prices as necessary to help the market mature and — because solar is such a small part of total power generation — that solar will cost the average ratepayer very little. The truth is that the impact of solar may be large, but in the opposite direction.

Ontario just completed a revision of their landmark feed-in tariff program and rates for renewable electricity generation and prices fell sharply: 30 percent for solar and 15 percent for wind power. This continues a trend of falling costs for renewable energy around the world.

As a bit of background, Ontario’s feed-in tariff gives wind and solar producers (and many other technologies) long-term contracts at premium prices to support deployment of new renewable energy. In a unique marriage of environmental and economic goals, the province also provides price bonuses to community-based projects and requires wind and solar projects to source much of their labor and materials within Ontario (for more on this, see our 2011 report).

Modeled after Germany’s landmark program, Ontario is starting to see the price declines as their renewable energy market matures. Here’s a quick look at how the new prices stack up against world-leader Germany, as well as against two of the prominent feed-in tariff programs in the United States, Vermont and Gainesville. The prices for all programs have been changed to U.S. dollars, adjusted to the same contract length of 20 years, and to an equivalent solar insolation (for Gainesville, Fla.). Prices for U.S. programs were also increased by 30 percent to account for the federal tax credit, which is usually taken in addition to the feed-in tariff contract price. More on the methodology can be found in this post.

For solar, Ontario pays a rate comparable to other North American jurisdictions, but all of them pay much more than Germany. Germany pays half of what North American feed-in tariff programs do for the same size solar project.

For wind power, Ontario pays less than Vermont (which caps wind projects at just 1.5 megawatts), but still more than Germany’s mature wind market. Unlike its North American counterparts, Germany’s tariff adjusts based on the quality of the wind regime. In the reference scenario (~6 meter per second wind at a height of 50 meters), Germany’s price paid is a full 2 cents per kWh less than American producers. In a high wind scenario (7 meter per second wind), Germany pays even less. Only in a low-wind regime does Germany’s tariff price compare to Ontario.

Ultimately, the test of success for Ontario’s clean energy program is its outcomes and public support. Despite public outcry about high prices paid to renewable energy producers, the prospect for over 43,000 jobs and nearly 5,000 megawatts of clean energy sustained feed-in tariff supporters in the recent government election and the program will continue.

In their interactive graphic, Bloomberg Energy Finance calls solar grid parity (when electricity from solar costs less than grid power) the “golden goal.”  It’s an excellent illustration of how the right energy policy can help a nation go gold on solar or wallow in metallurgical obscurity. In the case of the U.S., it may mean delaying grid parity by eight years.

In the screenshot below, countries in purple have reached the golden goal in 2012 based on the quality of their solar resource and the cost of grid electricity, as well as a 6 percent expected return on investment for solar developers. (Note to Bloomberg graphic designers — countries meeting the golden goal could be colored gold.)

By 2020, the universe of countries has expanded significantly, and includes the United States (the delay due largely to differences in the cost of electricity, much cheaper in the U.S.).*

*But this picture isn’t accurate, because the type of solar policy influences investors’ expected rate of return and solar policies vary significantly across countries. In Germany, their feed-in tariff policy offers long-term, fixed-price contracts for solar. This certainty and policy transparency means lower risk and investors accept a modest 6 percent return on investment.

In the U.S., however, there is more uncertainty. Incentives for renewable energy have a habit of expiring based on the vagaries of federal and state legislatures. Incentives come in the form of tax credits, leaving developers dependent on a fluctuating market for tax equity partners to “monetize” the credits. This higher risk means solar developers want higher returns (more like 10 percent than 6 percent).  (I wrote about this in a report last fall.)

The 4 percent higher expected rate of return means another eight years of waiting for the golden goal, delaying solar grid parity in the U.S. from 2020 to 2028.

This highlights a huge irony in U.S. energy policy.  There’s a strong bias toward “market-based” policy (auctions, renewable energy credit markets, etc) on the assumption that cutthroat competition to deliver solar will give ratepayers the best deal.  But the high risk to developers means an expectation of higher returns, so that the winning bids are likely higher than could be proffered in a low risk environment.

High risk means Americans may pay more for solar than their international counterparts.  It probably explains why Germans — with a decade of low-risk under their feed-in tariff — are installing solar for half the cost in America ($2.60 per Watt compared to $5.20).  It also undermines the opportunity for local ownership, a key tool for spreading the economic rewards of and political support for solar power.

Reaching the golden goal is inevitable, but a country’s time of arrival depends heavily on its choice of solar policy.

If you care about the future of the American renewable energy industry, you need to learn what the Internal Revenue Service (IRS) calls “passive activities.”  Because these important rules mean that as long as the U.S. relies on the tax code to provide renewable energy incentives, renewable energy can only grow as fast as Wall Street tax equity and it will remain difficult to have locally-owned renewable energy projects.

The “passive activities” issue has to do with an important IRS determination to prevent wealthy people from creating more tax shelters.  The basic idea is that if you earn tax credits from investments that you don’t “materially participate in” (e.g. investing in a wind farm) then you can only use those to offset taxes that you pay on the same kind of income (e.g. renting property).  Both activities are considered “passive,” because the rich person isn’t the wind farm mechanic, nor are they typically the rental property superintendent.

In renewable energy, it means that the two major federal incentives – the Production Tax Credit and the Investment Tax Credit – can only be used to offset passive income tax liability.  And since few Americans own rental property or have other passive income liability, it means few Americans can effectively invest in renewable energy projects.

The rules on passive income taxes and credits can’t be effectively changed because, as tax attorney Greg Jenner puts it, “it would be like pulling on the thread in a sweater.  The passive loss rules are the primary defense in the tax code against tax shelters and once you start to unravel them, there will be no turning back.”

Thus, using the tax code to boost renewable energy creates two major problems: artificially capping the renewable energy market and curtailing local ownership.

I outlined the first issue in December, in Federal Tax Credits Handcuff Clean Energy Development:

Since clean energy projects must rely on a limited set of tax equity partners and a limited-size tax equity market, when tax equity dries up, so do wind and solar projects.  The economic crisis of 2008 made the problem particularly evident, as the tax equity market shrank by 80 percent from 2007 to 2009.  Only the cash grant program saved the wind and solar industries from total collapse in the intervening years (2009-11), and the cash grant will likely expire at the end of 2011.  The following chart from a SEIA presentation illustrates [pdf] the problem, even though it was devised before the 1-year extension of the cash grant in 2010.

The problem of limited tax equity isn’t just short term.  Marshal Salant, managing director of Citigroup Global Markets Inc., said in a recent interview: “There’s more demand for tax equity to finance renewable energy projects than we will ever have in the way of supply.”

Local ownership of renewable energy also suffers when incentives come through the tax code.

The logical entities like cooperatives, schools, or cities are ruled out because federal wind and solar incentives are for taxable entities, not these rooted community organizations. Instead, communities seeking local ownership have to either perform complex legal acrobatics to set up private corporations or sacrifice as much as half of the value of the tax incentives by forming a partnership with a tax equity partner.  When community wind projects succeed, like the South Dakota Wind Partners, organizers admit that repeated the success is unlikely in light of the legal and financial complexities.

It’s understandable in today’s political climate that renewable energy boosters spend more time on keeping existing incentives alive, but if Americans hope to (someday) achieve a 100% clean energy future, they will need energy policy that’s no longer handcuffed to the tax code.

Building houses according to updated energy conservation codes saves homeowners money. (Photo by 401k.)

Cross-posted from Energy Self-Reliant States, a resource of the Institute for Local Self-Reliance.

In energy policy, lawmakers often prefer carrots to sticks, because this strategy minimizes the opposition. But mandatory rules, like building energy codes, can save energy and pay back several times over during the useful life of buildings.

The state of Illinois is poised to become a regional leader by adopting the 2012 International Energy Conservation Code (IECC), an example of small-seeming rules with big impact. For example, 40 percent of primary energy consumption in the U.S. is in buildings, along with about 40 percent of greenhouse gas emissions. Thus, adopting the 2012 IECC, with energy efficiency standards 28 percent stronger than the 2006 code, can make a big dent in carbon emissions.

The financial savings can add up, as well. The federal Energy Information Administration estimated in 2005 that homeowners in the Midwest spent an average of $1,800 per year on household energy use. Assuming states had already adopted the 2006 IECC for the previous expenditure figure, the implementation of the 2012 code could save families $500 per year.

Builders often fight codes, and the ones in Illinois are no different, claiming the cost of the improvements will add $5,000 to the cost of a new home. But a recent report [PDF] found that building a home to the 2012 code in Illinois will increase the home’s cost by $1,500 (or about $6 a month), and save save $33 per month in energy costs.

In other words, improved energy efficiency in building codes saves homeowners money from day one.

The U.S. Department of Energy supplies maps depicting the current status of state building codes. Their residential map is shown below (click to enlarge).

Already, 30 states have adopted the 2009 IECC or better, and interestingly, the pattern does not follow traditional red/blue state political divisions.

Of course, a code is only as good as compliance — enforced by municipal government — and the Alliance to Save Energy suggests that compliance can be spotty. Anyone know of good studies of code compliance?

It's sundown for the 20th century electric grid. (Photo by Nayu Kim.)

This post originally appeared on Energy Self-Reliant States, a resource of the Institute for Local Self-Reliance.

In a New York Times SundayReview piece, “Drawing the Line at Power Lines,” Elisabeth Rosenthal suggested that our desire for clean energy will require significant trade-offs:

There are pipelines, trains, trucks and high-voltage transmission lines. None of them are pretty, and all have environmental drawbacks. But if you want to drive your cars, heat your homes and watch TV, you will have to choose among these unpalatable options …

Perhaps the answer is simply that in an increasingly crowded powered-on world, we’re all going to have to accept that Governor Cuomo’s so-called energy highway is likely to traverse our backyard.

I disagree.

The future of American electricity policy is not about trade-offs, but rather a chance to trade in an obsolete, centralized paradigm for a local, clean energy future. Utilities would have us believe that new high-voltage transmission lines are necessary to get more wind and solar power. But the truth is that the American electricity industry refuses to embrace the fundamentally different nature of renewable energy: Its ubiquity means that Americans can produce energy near where they use it, in an economically competitive manner, and at a community scale.

The 20th-century electricity system was centrally controlled and centrally owned, a necessary evil when coal, gas, and nuclear power plants had significant economies of scale and required enormous capital investments. The supply lines for these power plants were equally large, connecting far-off mines, oil, and gas fields via rail and pipeline to these remote power plants, and big transmission lines in turn carried the electricity from these power plants to big urban centers.

An electricity system primarily powered by wind and solar is fundamentally different. Turbines and panels are always right at the fuel source, whether on a rural farm or an urban rooftop. And because their scale is substantially more amenable to community ownership, renewable energy can be built near and provide economic benefits to the communities it powers.

The fundamental shift means Americans should trade in an obsolete model of centralized energy generation for one that matches and builds support for the local energy opportunity.

Local ownership and its economic benefits should play a significant role. For example, researchers in Germany recently surveyed local support for expanding wind energy production, comparing two towns with nearby wind farms. When the local turbines were absentee-owned, 60 percent of residents were opposed to more local wind power. Opposition dropped by 45 percentage points when the wind farm was locally owned. It’s no different from the fight over the Badger-Coulee transmission line in western Wisconsin, where locals have raised hell knowing that they will be asked to pay as much as $5 billion for new transmission lines that will earn utilities an 11 percent (or greater) return with questionable local economic benefit.

Locally owned wind power is in short supply, however, because federal and state energy policy make it extremely difficult. Community ownership could be best achieved through cooperatives, schools, or cities, but federal wind incentives are for taxable entities, not these rooted community organizations. Furthermore, federal tax credits require wind power project participants to have “passive income” from investments, ruling out the vast majority of Americans. When community wind projects succeed, as did the South Dakota Wind Partners, organizers admit that repeated success is unlikely in light of the legal and financial complexities.

Community-scaled wind and solar projects also struggle against an electricity system stacked against small-scale or “distributed” generation. A recent study in Minnesota, for example, suggested that the state could meet its entire 25 percent by 2025 renewable energy standard with distributed renewable energy projects connected to existing electric grid infrastructure. Incumbent utilities have focused on transmission instead, likely because building new power lines (and not maximizing existing infrastructure) earns them a statutory 11 to 13 percent rate of return.

This myopic focus on big infrastructure may prove doubly expensive as the cost of solar power falls rapidly. Within 10 years, one-third of Americans could install solar on their own rooftops and get electricity for less than their utility charges, without any additional power lines. But under the current electricity policy, these same Americans will likely be paying a few dollars each month for new utility-conceived, high-voltage transmission lines even as they increasingly produce their own local, clean energy.

The future of American energy policy is not a trade-off between new clean energy and new transmission. Rather, it’s an opportunity to trade in an obsolete, centralized model of development for the alternative — a democratized energy system where Americans can be producers and owners of their energy future.

If the cost of electricity were the only factor in energy discussions, we’d probably have a lot more coal and a lot less renewable energy. But the truth is that renewable energy can compete on cost and distributed renewable energy has a lot more value beyond just electricity, as illustrated in this one facet in this brief examination by the Clean Coalition.

Distributed solar finds a cost sweet spot.

In their analysis, the Clean Coalition focused on two elements: the cost to produce electricity from solar facilities of various sizes and the cost to deliver that power (via the distribution or transmission system).  As it turns out, fees to access the transmission system and transmission losses can offset any economies of scale from central station power generation.

The chart below illustrates the “sweet spot” balance between economies of scale and costs for transmission.

For context, in their latest examination of the levelized cost of energy generation, investment bank Lazard shows these prices are competitive with new coal power plants and substantially cheaper than new gas peaking power plants.

Of course, there’s more to the value of distributed renewable energy than just cost to generate and transmission access, whether it’s the economic multiplier from potential local ownership or the political value of community-based generation.  But it’s good to know that even in this narrow view, distributed generation can compete with large-scale power generation.

The Germans are debating significant revisions to their landmark renewable energy policy, and instead of declaring the death of the German solar market, Americans should focus on why solar still costs so much on this side of the Atlantic.

After a significant step-down this month, revisions to the German feed-in tariff will require utilities to buy electricity from solar projects 10 kilowatts or smaller for 19.5 euro cents per kilowatt-hour (kWh) on a 20-year contract. Larger projects (over 1 megawatt) will get just 13.5 euro cents per kWh. Using insolation data for Munich, these prices translate to installed costs of approximately $2.24 and $1.55 per Watt, respectively.

For comparison, in the U.S. in the 3rd quarter of 2011 the average installed cost of solar was $5.20 per Watt with residential-scale projects costing $6.40 per Watt.

What would German installation costs mean for the U.S. solar market, where sunshine is 29 percent (in the cast of Minneapolis) to 70 percent (Los Angeles) more abundant? Americans could buy solar on long-term contracts – with no subsidies – for 18.6 cents per kWh in Minneapolis, and just 15.4 cents in Los Angeles. Factor in the federal 30 percent solar tax credit and Minneapolitans could get solar for 14.3 cents per kWh, Los Angelenos for 11.8 cents.

Already, the trajectory of solar costs and electricity prices suggests that 100 million Americans will be able to get cheaper electricity from their rooftops than from their utility in the next decade (see ILSR’s new report – “Rooftop Revolution: Changing Everything with Cost-Effective Local Solar“).

But if Americans could install solar at the same price as the Germans, 47 million Americans in the nation’s largest cities would be at solar grid parity – without subsidies – right now.  By 2015, assuming no change in the cost of solar and a modest 2 percent per year inflation in retail electricity prices, 100 million Americans in major cities could beat grid prices with rooftop solar.

Yes, Germany is cutting their solar contract prices.  But this is in a market that installed 7,000 megawatts of solar per year in the past two years – 20 times the U.S. pace on a per capita basis.  And they are doing it at half the cost (or better).  That’s the benefit of a decade of consistent renewable energy policy – the feed-in tariff – that provides a low-risk, long-term contract for solar project owners.  Compare that to America’s hodge-podge of 50 individual state policies, stacked on top of federal incentives that can only be used by businesses with big tax liability (or their Wall Street partners).

The irony is that Americans point to Germany and say, “they pay too much for electricity,” while a majority of Germans continue to say, “we’re willing to pay more for clean power,” because they can (and do) own it.  In fact, over half of Germany’s renewable energy capacity is locally owned, multiplying the economic benefits of their renewable energy policy and reinforcing political support for clean energy (while support for clean energy has declined in the U.S.).

Quite a few folks have decried the price cuts to the German solar feed-in tariff as “the end is nigh,” but especially in comparison to American solar policy, it’s more appropriate to declare, “mission accomplished.”

A new report released today by the Institute for Energy and Environmental Research shows that Minnesota can meet 100 percent of its electricity needs with in-state wind and solar power, and (with ample energy efficiency investments) at a comparable cost to its existing electricity supply.

The notion that solar and wind energy cannot be the mainstay of an electricity generation system because they are intermittent is incorrect … it is technically and economically feasible to meet the entire 2007 electricity demand of Xcel Energy [in Minnesota] using only renewable energy generation combined with storage technology and energy efficiency improvements … a 100 percent renewable energy-based electricity system for Minnesota increases rates by a mere 1-2 cents per kilowatt hour when sufficient reasonable and economical investments are made in energy efficiency

The renewable energy mix would include approximately 13,000 megawatts of wind power and 4,600 megawatts of distributed solar PV. The expenditures for the new renewable energy, storage (via underground compressed air), and energy efficiency would pump more than $90 billion into the state’s economy and create 50,000 jobs.

With the combination of new renewable energy and significant energy efficiency, electricity rates rise slightly but Minnesota ratepayers are held relatively harmless. The following chart from the report illustrates, with some relatively conservative estimates, the cost of wind and solar:

While the Minnesota-specific findings are groundbreaking, the paradigm shift suggested for the electricity system is equally profound:

The conventional notion of a “peak load” needs to be replaced in designing an electricity system with a high proportion of solar and wind energy … The crunch time may be during periods when the wind and solar supply are low relative to demand … “relational system peak.” … Instead of the peak load that drives marginal investments in generation as at present, dealing with the relational system peak will require comprehensive consideration of investments throughout the system – generation, demand, and storage (though not necessarily by utilities in all cases).

The following chart from the report illustrates how wind, solar, other renewables, and storage adjust to meet customer demand during a typical week in July, with both supply and demand being flexible.

This fundamental shift is an issue we’ve covered before, the challenge of reconciling a centralized electricity system with decentralized renewable energy resources.

Overall, Renewable Minnesota is a stellar report, incredibly thorough in its analysis and profound in its conclusions. It’s a must read for energy policy makers everywhere.