This is the third of five parts of our Rooftop Revolution report being published in serial.  Read Part 1 or Part 2. Download the entire report and see our other resources here.

Millions of People, Thousand of Megawatts

When solar grid parity arrives, it won’t mean that everyone can go solar. The most likely partici- pants in the residential sector will be folks who own their own home. Even then, there will be some homes whose roof is unsuitable for solar power for one reason or another (e.g. shading). The following analysis takes the year of solar grid parity for the nation’s largest cities and translates it into megawatts of solar power potential.

We used the following assumptions to calculate the residential solar rooftop potential for each metropolitan area:

• Only non-vacant, owner-occupied proper- ties were considered. Nationally, about two- thirds of homes are owner-occupied and not vacant, with major metropolitan areas varying from 50 to 70%.¹
• We estimated approximately 1,000 square feet of total roof space per home.
• We assumed that only 27% of this space (in the aggregate) would be suitable for solar, based on national studies of rooftop solar potential.²
• We assumed that 1 kW of solar could be in- stalled for every 100 s.f. of suitable roof space.

With these assumptions, we can use our previous analysis of the year of solar grid parity (based on the average residential retail electricity rate) to estimate the potential capacity of solar power that could be installed on home rooftops at grid-beating prices each year until 2027.

The above chart is quite conservative. For one, the data only reflect the 50% of Americans that live in the largest 40 metropolitan areas. Additionally, we used average grid prices and did not factor in time-of-use pricing or “economic grid parity.” Finally, residential solar is only a fraction of the total solar market. In California, the largest U.S. solar market, residential solar represents approximately 30% of the installed capacity in the California Solar Initiative program.³Thus, the grid parity potential numbers above are a fraction of the actual solar potential when considering commercial and public sector property as well as communities smaller than the 40 largest cities.

Additionally, rooftops aren’t the only place for solar, and the availability of other locations could further expand the grid parity opportunity. The following infographic illustrates the opportunity for solar over parking lots, near highways, and underneath existing transmission lines. It still doesn’t factor in solar placed on the ground near existing buildings.

Jobs and Economic Development

Solar provides an unparalleled economic opportunity for local power generation and local economic benefits. Each megawatt of solar power generates as many as eight jobs and $240,000 in economic activity, and most solar power projects can be built right next to or on top of the building that will use the electricity.

Previous studies by the National Renewable Energy Laboratory indicate that locally owned renewable energy projects multiply the job and economic benefits of renewable energy projects.

With a potential for 30,000 megawatts of residential solar in the next 6 years, communities across the country could gain over a quarter million jobs and create over $18 billion in economic activity.

Value to the Electricity System

There’s also ample evidence that distributed solar power has much greater value to the grid than simply electricity output. The delivery of power during peak periods (covered by time-of-use pricing) is just one element. The ability of solar to avoid transmission access charges, supplant long- distance power sources, reduce stress on the distribution system during peak power events and hedge against fossil fuel price fluctuations can vary from $0.03 to $0.14 per kWh. Solar also has environmental benefits (relative to existing power production) that provide additional value.⁴

The following chart illustrates how utilities are recognizing the value of solar power, illustrating the willingness of a municipal utility to pay more for local solar power because of its various grid and local economic benefits.

Democratizing the Electricity System

Perhaps the greatest benefit of the solar grid parity opportunity will be its political impact. As millions of Americans become self-reliant energy producers, it will create an enormous constituency for continued support of distributed renewable energy development and distributed solar in particular. As an illustration, the following residential rooftop solar installation might have the capacity to produce 3 kW of electricity, but the two adults likely to live in the residence represent two solar voters.

References

If Minneapolis follows in the footsteps of Boulder, Colo., it may be just the first of many cities in Minnesota to consider the municipal option.

11 other cities have expiring franchise agreements with Xcel Energy in the next three years and many of them may be interested in how they can get more affordable and reliable electricity service while also increasing renewable energy and local economic development.  The cities are mostly in the Twin Cities metropolitan area, and include: Hopkins, Mound, Mounds View, Grant, Mankato, North Mankato, Edina, Maplewood, Robbinsdale, South St. Paul, and Stillwater.

Interestingly, Edina is the first city in the state with a PACE program that provides simplified, low-cost financing for commercial energy retrofits.  The city and its residents and businesses should keep an eye on Minneapolis.

Photo credit: JasonLangheine

• At Renew Wisconsin: Master Limited Partnerships for Renewable Energy: A Point/Counterpoint
• On ThinkProgress: Master Limited Partnerships (MLPs) Will Bring More Investment To Clean Energy
• At Midwest Energy News: Commentary: MLPs a powerful tool to boost renewables
• At GreenTechMedia: MLPs: A Bargain for Renewable Energy or a Devil’s Bargain?

The counterpoints are from some very smart people in the renewable energy wonkosphere, and it’s worth a quick review of their points:

• We can’t get to the level of investment we need without the big investors, and they like MLPs (and also, companies aren’t waiting for MLPs to invest in renewable energy)
• Renewables can’t get access to low cost capital without MLPs (or can’t get as low cost capital as can fossil fuel industries allowed under current federal MLP law)
• Anyone can invest in MLPs and share in the benefits
• MLPs aren’t super easy to set up, so there won’t be a torrent of companies shifting to MLP from other governance structures
• We sacrifice economies of scale by focusing on small-scale projects

The most persuasive arguments for MLPs is that renewable energy is at a cost of capital and tax disadvantage to fossil fuel companies.  Hence, the federal bill is called the “Parity Act.”  I’m also sympathetic to the plea that we also need massive investment in renewable energy, thus we need every tax advantage we can get to attract capital.

But I remain unconvinced of the potential tradeoffs.

1. Expanding Tax Loopholes: As I stated in the original piece, the purpose of the federal legislation is extending a tax haven currently allowed for oil and gas infrastructure.  These partnerships pay no corporate income tax.  That’s already proven a significant problem.  After the creation of MLPs in the mid-1980s, Congress had to revisit the law to narrow eligible companies, because other industries (hotel chains and amusement parks) were already jumping into the tax free zone, jeopardizing federal tax revenues.  It may be financially beneficial to give the renewable energy industry a tax break oil and gas has (and I do think parity is important), but if we need – as Richard Caperton says in his counterpoint – $2 trillion in new renewable energy investment by 2050, what is the lost federal revenue if a substantial portion is tax-free?  And who will pay for that?  Individual taxpayers.
2. Enhancing Corporate and Utility Power: Despite what a few respondents claim, I see little hope for MLPs offering an investment opportunity for the average American.  That’s by design.  The MLP gets its corporate tax exemption by acting as a passthrough to the investor, who is responsible for paying taxes on their share in every state the partnership does business.  In the Boston Globe, Jonathan Fahey quotes a financial advisor discussing the tax filing implications of investing in MLPs: “for some individual investors, it becomes a tax nightmare.”  Kathleen Pender, financial reporter for the SF Chronicle, says, “Instead of getting a Form 1099 reporting their investment income each year, investors get a Schedule K-1, can easily add several hundreds dollars to tax-prep fees (or loads of anxiety if you do your own taxes).”  RBC Capital Markets’ Mark S. Easterbrook advises: “If you’re going to invest, get an accountant because things could be very complicated.”  Investing in MLPs sounds like a way for wealthy Americans to get a good yield on a tax advantaged investment, not like a way for the average American to take ownership of their energy future.

In summary, MLPs allow corporate and wealthy investors get tax advantaged access to low cost capital, whether or not they bring new capital to the market and federal taxpayers pick up the tab.  Regulated industries operating MLPs enrich shareholders by passing through phantom taxes to ratepayers.  And worst, energy industry MLPs with access to (taxpayer-subsidized) lower cost capital will be able to undercut the prices of independent or community-based energy investors, all else being equal.

There is an alternative road to parity.  Instead of expanding a bad tax subsidy to renewable energy, drive investment to renewable energy by getting rid of the MLP loophole for fossil fuel industries.  Use the increased tax revenue to cover the cost of tax incentives for renewable energy (and switch back to more equitable cash-based production payments like we had during the economic crisis).

It’s always easier to add a new federal subsidy than take away an old one, but that doesn’t make MLP Parity for renewable energy a good idea.

Photo credit: suenosdeuomi

In April 2013, the city council again voted to move forward, inspired this time by the example of Denton, TX, a municipal utility that already gets 40% of its power from renewable energy.  The presentation to the city council is from Mike Grim, the head of the Denton city utility.

Mike Grim Presentation from Boulder, Colorado on Vimeo.

If you follow the renewable energy industry and haven’t been sleeping, then you’ve probably heard about one of the few pieces of federal legislation purported to help clean energy that’s actually moving: expanding Master Limited Partnerships (MLPs) to cover wind and solar energy. (H.R.1696)

This is not a good thing.

MLPs originated in 1986, when Congress decided that to allow certain businesses (oil and gas pipelines) to avoid paying corporate income tax.  These partnerships function a lot like publicly traded corporations, with publicly traded stock, but don’t pay income taxes. Most folks who’ve touted expanding MLPs to include renewable energy projects see this move as “leveling the playing field.”  And it will, allowing big energy corporations to avoid paying taxes on their renewable energy projects just like they do for pipelines.

But that’s not the worst.  Several years after the MLP was created, the federal agency responsible for setting the prices to use these oil and gas pipelines (the Federal Energy Regulatory Commission) allowed the not-paying-corporate-income-tax companies to charge rates for access as though they DID pay the corporate income tax.  Including this phantom tax payment in rates amounted to a 75% increase in after-tax profits for pipeline companies. This policy wasn’t even set in a public forum (such as a docket with public hearings), but through a shadow “policy statement” released after private meetings with the oil and gas industry (and after a federal judge had previously struck down the absurd notion that users of pipelines should have to pay phantom taxes).

This makes two big problems in adding renewable energy companies to the list of eligible Master Limited Partnerships.

First, there are many powerful, regulated industries that would love a bite at this apple, like the existing electric and gas utilities.  The cost to taxpayers from letting these hogs get to the trough is likely much, much larger than the opportunity for renewable energy.  These big industries – with huge lobbying budgets – are not likely to miss the opportunity.

But even more important, the extension of MLPs to renewable energy is likely to reinforce centralized, corporate control of the energy system.  Right now, renewable energy – particularly solar – is transforming the energy system.  It’s turning energy consumers into producers, re-routing energy dollars back into community economies, and giving cities and towns more control over their energy future.  Half or more of new solar power in the U.S. is being put on the rooftops of homes and small businesses.  New community solar policies (like one just adopted in Minnesota!) are giving even more Americans a chance to have skin in the energy game and share in the profits of a transition to renewable energy.

The average American isn’t going to be a shareholder of a Master Limited Partnership, but they probably will pay a share of phantom taxes in their electric and gas rates if MLPs are expanded to other energy industries.  Even if Congress miraculously limits the MLP expansion to just the renewable energy industry, subsidiaries of most of the large corporations in the energy business (Shell, BP, Exxon) are building wind and solar projects.  These subsidiaries would certainly be reorganized as MLPs, giving them a tax advantaged opportunity to crowd out competitors (like community solar or other distributed generation) AND make larger profits off their renewable energy business.

There are many ways the federal government could improve its policy toward renewable energy.  A CLEAN Contract or feed-in tariff could supplant tax credits that act as a barrier to production-based payment for energy and avoid paying for panels that don’t produce power.   The feds could remove ridiculous bonus incentives for long-distance, high-voltage transmission that gives electric companies an incentive to build power lines for 20th century power plants instead of distributed solar and wind power.  They could set a federal distributed renewable energy standard that requires utilities to procure energy from places close to where people use it.

But let’s not expand a tax loophole to big renewable energy companies.  This is one playing field best left unmoved.

(most of this article is based on a book, The Fine Print by former New York Times writer David Cay Johnston)

Photo credit: Michael Fleshman

The topline:

• 1.5% solar standard for the state’s investor-owned utilities (with some exemptions) for a projected 450 MW of capacity installed by 2020
• A CLEAN contract / feed-in tariff / standard offer for solar projects 1 MW and smaller, IF investor-owned utilities file to create the tariff.
• A $5 million incentive pool for solar projects 20 kW and smaller.
• Net metering increased from 40 kW to 1 MW for investor-owned utilities.
• Community solar gardens authorized.

The Solar Standard

The solar energy standard requires the state’s investor-owned utilities (representing about two-thirds of state electricity sales) to supply 1.5% of their energy sales from solar power by 2020. This is in addition to the 25% by 2025 (30% by 2020 for Xcel Energy) required under the state’s existing renewable energy standard.

The number is a little more complex than that, since in the political horse-trading, large industrial electricity customers of certain utilities were also carved out of the standard. They were carved out when the standard also included a 1.33% assessment on utility bills to provide the incentives for the long-term contracts for smaller-scale solar. The assessment died before the bill passed, but the share of electricity sold to these large electric customers remains exempted from the standard.

So in practice, the solar standard is 0.88% solar by 2020. No wonder Otto von Bismarck compared legislating to sausage making!

Additionally, 10% of the standard is carved out for small solar projects (up to 20 kW), or about 45 MW by 2020.

The CLEAN Contract / Feed-in Tariff

One of the core pieces of the legislation is a 20-year, standard contract for solar projects under 1 MW, if their interconnecting utility files for an “alternative” value of solar tariff.

The value of solar concept has been most prominently practiced by the Austin, TX, municipal utility. For eligible projects, they do not “net meter” their energy usage but separately purchase all their power from the utility and sell all their power to the utility at this value of solar price. The price changes annually, but reflects the market value of solar to the utility, including the time and value of energy delivered, avoided transmission and distribution costs, etc.

The Minnesota law expressly includes five components of the value of solar:

• Energy
• Generation capacity
• Transmission and distribution value
• Transmission capacity
• Environmental value

The law also empowers the responsible state agency and public utility commission to include the value of local manufacturing, systems installed at high value locations on the grid, and other factors.

In two ways, the value of solar in Minnesota will work like Austin: the price will adjust annually and solar producers under the tariff will separately buy and sell all of their electricity. However, Minnesota solar producers will lock in the price on a 20-year contract when their project comes online, whereas Austin producers receive the recalculated price each year.

There are two big issues to watch with Minnesota’s value of solar / Clean Contract experiment:

1. It’s not really a buy all contract. Minnesota’s Clean Contract differs significantly from most others in that producers may not make any profit net of their electricity use. Although the policy separates electricity consumption from production, the two dollars totals are netted against one another annually, and if a solar project produces more value than the customer’s electricity consumption, it’s zeroed out. In other words, you have to be a utility customer to participate (because you need to be offsetting electricity expenses), you have to size your system to load, and ultimately this isn’t really a power purchase contract but “net metering 2.0″
2. There’s no guarantee that this will works as well as net metering. Advocates of the policy wanted customers to be able to choose between net metering and value of solar, giving the utility an incentive to develop a reasonable alternative to a policy they have grown to despise. But the legislation as passed lets utilities replace net metering with a value of solar tariff, and the only safety is a requirement that the value of solar not be less than the retail electricity price for at least 3 years. With utilities concerned about losing market share to homes and businesses generating their own power, this may prove problematic, to say the least.

The Small Incentive Pool

For the next five years, solar projects 20 kW and smaller in Xcel Energy’s territory will receive a production-based incentive to help bring them to market. The incentive will be production-based (on a per kilowatt-hour basis) and will last for 10 years. The incentive can be combined with net metering or with a value of solar 20-year contract.

The incentive pool is quite small, with just $5 million being taken from the state’s Renewable Development Fund (just a one year after such legislative allocation was expressly forbidden by law), an account populated by payments from the utility in exchange for storage of spent nuclear fuel at its two nuclear power plants in the state.

The incentive pool is also not likely large enough to finance all of the small solar eligible under the carve out. My back of the envelope calculation (more in a future post) suggests that there’s enough money for perhaps two-thirds of the eligible project capacity.

Better Net Metering

Minnesota’s 1981 net metering law was one of the first in the nation but in the 30 years since it had fallen behind. The net metering cap was raised from 40 kW to 1 MW for investor-owned utilities (no change for municipal utilities and cooperatives), but with some concessions to utilities.

• Net excess generation receives avoided cost – under the original law, any production in excess of onsite consumption – “net excess generation” – was still redeemed at the retail electricity rate. For projects over 40 kW, net excess generation will now receive avoided cost (approximately one-third the price).
• Systems must be sized to 120% of on-site electricity use. Previously, systems merely had to come in under the 40 kW size cap.

Community Solar Gardens

One of the biggest achievements of the solar law was the enabling of community solar projects, like those in Colorado. The law will allow participants in a community solar project to share the electricity output from a nearby solar array. Specifically, the law allows:

• Participation by five or more subscribers living in the same or contiguous counties
• Purchases of as little as 200 Watts of capacity
• Participants to own no more than 120% of their own energy use
• Community solar projects to receive the value of solar rate (described above)

Delightfully, there are no limits on the amount of capacity that can be developed as community solar.

Conclusion

Minnesota’s new solar energy standard will grow installed solar capacity 30-fold from 2013 to 2020, with strong provisions for community-based solar projects and smaller-scale solar. If it works as designed, it will cultivate a robust industry and drive down prices to new lows, encouraging expansion of the policy in future years.

But Minnesota’s new law is hardly the most ambitious standard, with a total requirement for the state’s investor-owned utilities that sums to less than 0.9% of electricity sales by 2020. It also fails to grow the pool of investment in clean energy, tapping existing conservation and renewable energy funds rather than using the proposed assessment to get a 3-to-1 return on public investment. Finally, it remains to be seen if the value of solar concept will result in a more fiscally sustainable strategy for utilities to accommodate more solar power or an opportunity for them to squash competition in the name of their shareholders.

In a year when not many states made any progress on clean energy, Minnesota’s solar champions should be applauded for their heartfelt efforts to bring more clean, local solar to the Upper Midwest. I hope it works as intended.

Other resources on Minnesota’s new standard:

• 8 Vivid Charts – 8 Reasons for a Solar Energy Standard in Minnesota
• Comparisons of Minnesota’s proposed solar standard
• Why utilities have no credibility to talk about the cost of solar electricity
• The making of a Midwest solar energy standard (before the legislative process changed it dramatically)

Photo credit: CERTs

The bottom line is that the FIT program and its predecessors (despite facing significant threats) have jumpstarted renewable energy development in Ontario: the province would rank #4 and #11 for solar and wind deployment, respectively, if it were a U.S. state. It has created 31,000 jobs. It has also enabled widespread participation in renewable energy generation: 1 in 7 Ontario farmers is participating, earning a return on their investment.  Finally, it has enabled the province to shut down all of its coal-fired power plants by the end of 2014.

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Huge Interest

The biggest challenge for the FIT program is the overwhelming demand. Already, signed contracts for nearly 5,000 megawatts of new renewable energy capacity will allow the province to meet most of its 2030 renewable energy target, 12 years early. Actual deployment has kept pace with many U.S. states, but poor preparation has meant that less than 10% of energy under contract (thus far) is actually producing electricity.

Success with Small

The MicroFIT program (mostly 10 kilowatt and smaller solar) has been a huge success. More than half of the 230 megawatts of solar added to the grid under the FIT program has been from the MicroFIT program, serving almost 15,000 individuals and small businesses.

Unexpected Challenges

The Ontario Power Authority has faced several additional challenges that may explain its difficulty in keeping up with demand:

• The world economy collapsed in late 2008, with a slow recovery.
• The ruling Liberal Party nearly lost its majority in the fall of 2011, jeopardizing support for the FIT program.
• The largest provincial utility, Hydro One, limited renewable energy to no more than 7% of peak demand on its distribution feeders and missed deadlines for interconnection, slowing energy deployment.
• In May 2013, Canada lost an appeal to a World Trade Organization suit challenging the program’s buy local provisions from Japan, the European Union, and the United States.

A Mixed Review on Jobs

The Energy Ministry says that 31,000 direct and indirect jobs have been created thus far by the Green Energy Act, far more than would be expected with less than 10 percent of the renewable energy deployed and despite the world economic slowdown.

Manufacturing has come to the province to serve the “buy local” provision. About half of surveyed manufacturers intending to locate in Ontario have established a presence locally.

Doubling Down on Local

Ontario energy officials haven’t abandoned the ‘buy local’ policy, but rather have reinforced it with new program rules that prioritize local ownership of FIT projects. The success of the MicroFIT program and community-based projects led to a points scoring system for new FIT projects that rewards greater local support and local ownership. A quarter of the program capacity opened in early 2013 was set aside for locally owned projects. The new rules will hopefully lead to more smaller-scale projects with support from the local community.

Conclusion: Improvements Needed

While renewable energy development has been a modest success and job creation more so, the FIT program needs to improve. The Ontario Power Authority needs to streamline the development process for projects with existing contracts and push utilities to use evidence-based procedures for determining grid capacity. It should consider whether utility-scale, multi-megawatt projects make sense, given the difficulty in getting such projects to market. It should consider requiring local ownership for the remaining program capacity, knowing that it will minimize public opposition and maximize the economic returns. With these changes, the FIT program may still live up to much of its early promise.

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