the unseen costs of solar-generated electricity · the unseen costs of solar-generated electricity...

THE UNSEEN COSTS OF SOLAR-GENERATED ELECTRICITY

Megan E. Hansen, BS, Strata Policy

Randy T Simmons, PhD, Utah State University

Ryan M. Yonk, PhD, Utah State University

The Institute of Political Economy (IPE) at Utah State University seeks to promote a better understanding of the foundations of a free society by conducting research and disseminating findings through publications, classes, seminars, conferences, and lectures. By mentoring students and engaging them in research and writing projects, IPE creates diverse opportunities for students in graduate programs, internships, policy groups, and business.

PRIMARY INVESTIGATORS:

Megan E. Hansen, BS Strata Policy

Randy T Simmons, PhD Utah State University

Ryan M. Yonk, PhD Utah State University

STUDENT RESEARCH ASSOCIATES:

Matthew Crabtree Jordan Floyd Melissa Funk

Michael Jensen Josh Smith

TABLE OF CONTENTS Table of Contents ................................................................................................................................................................ 2Executive Summary ............................................................................................................................................................. 1Introduction ......................................................................................................................................................................... 1

Solar Energy and the Grid ............................................................................................................................................. 3Grid Parity and the Levelized Cost of Electricity ........................................................................................................... 4

Federal Solar Policies ......................................................................................................................................................... 5The Investment Tax Credit ............................................................................................................................................ 7Accelerated Depreciation - MACRS ............................................................................................................................. 8The American Recovery and Reinvestment Act of 2009 .............................................................................................. 9Section 1705 Loan Guarantee Program ........................................................................................................................ 9Section 1603 Treasury Grant Program ........................................................................................................................ 10Federal Policies and the Unseen Costs of Solar Energy ............................................................................................. 11

State Policies .................................................................................................................................................................... 12Renewable Portfolio Standard .................................................................................................................................... 13Tax Incentives ............................................................................................................................................................. 14Feed-in Tariffs and Net Metering ............................................................................................................................... 15Feed-in Tariffs ............................................................................................................................................................. 15Net Metering ............................................................................................................................................................... 16

Cost Estimates for Utility-Scale Solar Energy .................................................................................................................. 17The Cost of Solar Today .............................................................................................................................................. 18Cost Factors ................................................................................................................................................................. 19Capital Costs and Operations and Maintenance ........................................................................................................ 19Capacity Factor ............................................................................................................................................................ 21Baseload Cycling and the Intermittency of Solar Power ............................................................................................ 22Transmission Costs ..................................................................................................................................................... 24Social and Environmental Costs ................................................................................................................................. 24The Future of Solar Energy .......................................................................................................................................... 25

Key Findings ...................................................................................................................................................................... 27Conclusion ......................................................................................................................................................................... 28Appendix A: ....................................................................................................................................................................... 29

The Unseen Costs of Solar-Generated Electricity 1

THE UNSEEN COSTS OF SOLAR-GENERATED ELECTRICITY

"In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them." -- Frederic Bastiat, 1848

EXECUTIVE SUMMARY

This report explores both explicit and implicit factors that influence the cost of producing electricity from solar. The explicit, or seen costs of solar-generated electricity, include cost components such as power plant development and construction, operation & maintenance, and transmission infrastructure costs. Often overlooked, however, are the implicit costs of solar power, caused by government subsidies, mandates, and regulations that distort the electricity market. This report does not estimate an actual value for the cost of producing electricity from solar, rather, it identifies and analyzes those factors that policymakers should consider.

To identify the factors that should be included in a more accurate estimate of the cost of solar energy, we review major federal policies enacted to incentivize solar energy production and analyze their associated costs for taxpayers and electricity consumers alike. We then review and analyze the unseen costs of state policies, such as mandates, tax incentives, net metering, and feed-in tariffs. Finally, we review all of the most commonly-cited cost estimates to identify as many factors as possible that should be included in an accurate estimate of the cost of solar energy. In particular, this report focuses on how federal and state policies increase the cost of solar energy, unfairly transferring wealth by distorting the energy market, creating unfair competition, and misdirecting taxpayer dollars.

The hidden costs we analyze in this report are a result of government manipulation of the energy market. Government policies that support and hasten solar energy development harm individuals not once, but twice—first as consumers of electricity and again as taxpayers. If policymakers were to allow the energy market to function with minimal intervention, consumers and taxpayers would benefit.

INTRODUCTION

In recent years, solar energy capacity has grown rapidly in the United States. Much of this growth is due to generous state and federal subsidies intended to boost production of electricity from renewable energy sources. It’s fair to say that those who conceived and enacted such subsidies had good intentions—to transition US energy markets away from carbon-based forms of energy. It’s also fair to say that policies that support solar energy have significantly boosted the solar industry. In 2014, for example, 7,000 megawatts of new solar energy capacity were installed, expanding the


total solar energy capacity in the United States by 34 percent.1 But despite this rapid growth, in that same year solar power accounted for only 0.4 percent of electricity generation.2

Not only does solar power contribute a minimal supply of electricity, but it also receives a disproportionate amount of federal aid. In 2013, solar energy produced less than one percent of total US electricity generation while receiving 27 percent of direct federal subsidies for energy. As Figure 1 shows, generation of electricity from solar was insignificant when compared to generation from coal, nuclear, and natural gas.3

Figure 1: Federal Electricity Subsidies and Electricity Generation by Source4

In its most basic form, solar energy production involves harnessing sunlight and converting it into electrical current. The two primary forms of harnessing solar energy are photovoltaic (PV) and thermal concentrating systems. PV is the

most common type of solar energy technology, comprising 87 percent of solar energy production in the US.5 Traditional PV relies on silicon-based cells that produce an electrical current when struck by light.6 Other forms of PV include concentrated photovoltaics (CPV) and thin-film solar cells. CPV increase cell efficiency by concentrating sunlight onto

1 Solar Energy Industries Association (SEIA). n.d. "Solar Industry Breaks 20 GW Barrier; Grows 34% Over 2013." Retrieved July 7, 2015 from: http://www.seia.org/research-resources/solar-industry-data 2 U.S. Energy Information Administration (EIA). 2015, March 31. “What is U.S. electricity generation by energy source?” Retrieved from: http://www.eia.gov/tools/faqs/faq.cfm?id=427&t=3 3Energy Information Administration. 2015, March 23. "Direct Federal Interventions and Subsidies in Energy in Fiscal Year 2013." Department of Energy.Retrieved from: http://www.eia.gov/analysis/requests/subsidy/ 4 Energy Information Administration (EIA). 2015, March. "Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2013." Pg. xix and xxi. Retrieved from: http://www.eia.gov/analysis/requests/subsidy/pdf/subsidy.pdf. The data for this chart were taken from Table ES4 and Table ES5. The numbers may not sum to 100 percent because of independent rounding. 5 The percentage was calculated by dividing solar PV production by the added total of solar PV and solar thermal. Energy Information Administration. 2015, July 27. "Electric Power Monthly." Department of Energy (DOE). Retrieved from: http://www.eia.gov/electricity/monthly/epm_table_grapher.cfm?t=epmt_1_01_a 6 National Renewable Energy Laboratory (NREL). 2014. "Solar Photovoltaic Technology Basics." Department of Energy (DOE). Retrieved from: http://www.nrel.gov/learning/re_photovoltaics.html

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PV cells with the help of optical devices.7 Thin-film solar cells are made of flexible, lightweight semiconductor materials that can be placed on a variety of surfaces.8

Although PV is the most common form of solar energy technology, solar thermal systems (also known as concentrated solar energy) are often used to both generate electricity and heat homes. Solar thermal systems use mirrors and lenses to focus sunlight, which heats a liquid to high temperatures. The heated liquid can then be used to heat water for homes or businesses, or to generate electricity via steam turbines.9

The price of installing solar technologies has decreased by about 73 percent since the implementation of the solar Investment Tax Credit in 2006, but solar energy remains economically uncompetitive when compared to conventional

technologies.10 One reason for this is that energy generated from solar energy technology cannot easily be stored or transported, and must be consumed close to where it is generated.

Lithium-ion battery packs are the most promising large-scale renewable energy storage system currently in development, but they are expensive and more affordable solutions are still many years distant. In 2015, Tesla released

its Powerwall battery, claiming cost estimates for electricity storage are about $0.15 per kilowatt-hour.11 When the cost of storage is added to the average electricity rate of $0.13 per kilowatt-hour in May 2015, the total cost of producing and storing solar energy is $0.28 per kilowatt-hour. In this scenario, the cost of storage more than doubles the cost of the electricity itself.12

SOLAR ENERGY AND THE GRID

To understand solar energy, its costs, and why solar energy producers struggle to compete with conventional energy producers without government support, one must understand how electricity is distributed. The US electric grid is a sprawling network of transmission lines, transformers, and power plants. This network connects producers of electricity

(both utility and residential) with virtually all homes and commercial buildings in the country.13 The grid also allows an independent electricity producer to power a home or small business with solar energy when sunlight is available and to switch to electricity from conventional sources when solar energy production is not feasible.14

The grid is designed to match electricity supply with consumer demand. That is, energy producers must send just enough electricity to the grid to supply the demands made by customers. If too much energy is supplied to the grid, electronics can be damaged and profits and efficiency are lost. If too little is supplied to the grid, interruptions in service will occur. In markets that rely exclusively on conventional energy sources, instances of over-generation and shortages

7 National Renewable Energy Laboratory (NREL). 2009, December 30. “Concentrating Photovoltaic Technology.” Department of Energy (DOE). Retrieved from: http://www.nrel.gov/csp/concentrating_pv.html 8 Zipp, K. 2013, May 1. "How Does Thin-Film Solar Work?" Retrieved from: http://www.solarpowerworldonline.com/2013/05/how-does-thin-film-solar-work/ 9 Union of Concerned Scientists. n.d. "How Solar Energy Works." Retrieved July 7, 2015 from: http://www.ucsusa.org/clean_energy/our-energy-choices/renewable-energy/how-solar-energy-works.html#.VNLwm8mKXWh 10 Solar Energy Industries Association (SEIA). n.d. "Solar Industry Facts and Figures." Retrieved from: http://www.seia.org/research-resources/solar-industry-data 11 Helman, C. 2015, May 1. “Why Tesla’s Powerwall is Just Another Toy for Rich Green People.” Forbes. Retrieved from: http://www.forbes.com/sites/christopherhelman/2015/05/01/why-teslas-powerwall-is-just-another-toy-for-rich-green-people/ 12 Energy Information Administration. 2015, July 27. "Electric Power Monthly." Department of Energy (DOE). Retrieved from: http://www.eia.gov/electricity/monthly/epm_table_grapher.cfm?t=epmt_5_6_a 13Energy Information Administration (EIA). 2014, September 16. "What is the electric power grid and what are some challenges it faces?" U.S. Department of Energy (DOE). Retrieved from: http://www.eia.gov/energy_in_brief/article/power_grid.cfm 14 U.S. Department of Energy (DOE). 2015, January 28. "Grid-Connected Renewable Energy Systems." Retrieved from: http://energy.gov/energysaver/articles/grid-connected-renewable-energy-systems


are few and infrequent because these energy sources are reliable and predictable. Solar power is neither reliable nor wholly predictable. Though solar power ostensibly reduces demand for conventional, non-renewable energy, it can also trigger instability in the grid, a hidden cost of solar.

GRID PARITY AND THE LEVELIZED COST OF ELECTRICITY

Grid parity occurs when electricity from an alternative energy source (such as solar) is sold on the energy market for

the same price as electricity produced by conventional sources.15 Grid parity is commonly used as an indication of an energy source’s viability and cost effectiveness. Solar energy has yet to reach grid parity, and its ability to do so is currently inhibited by factors we have already discussed—high energy production costs and inefficient battery storage technology.

Another factor to consider in estimating the cost of solar energy is the levelized cost of electricity (LCOE). This measurement accounts for the average cost of producing electricity over a plant's lifetime. According to the Transparent Cost Database, which uses the historical average for electricity rates from 2009 to 2014, the LCOE of producing

electricity from solar PV is $290 per megawatt-hour, over three times higher than any other energy source.16 The Energy Information Administration’s LCOE for solar PV, for comparison, is $125.3 per megawatt-hour. The EIA’s LCOE, however, is a projection for energy produced from new generation resources in 2020, and does not reflect the actual cost of producing electricity today.17

15Institute for Energy Research (IER). 2014, November 26. "Why ‘Grid Parity’ is a Meaningless Concept." Retrieved from: http://instituteforenergyresearch.org/grid-parity-meaningless-concept/#_ftn1 16 Open Energy Information. 2014. "Transparent Cost Database: LCOE." Retrieved from: http://en.openei.org/apps/TCDB/ 17 Energy Information Administration. 2015, June 3. “Levelized Cost and Levelized Avoided Cost of New Generation Resources in the Annual Energy Outlook 2015.” Department of Energy. Retrieved from: http://www.eia.gov/forecasts/aeo/electricity_generation.cfm


Figure 2: Median Levelized Cost of Electricity (LCOE) ($/Megawatt-hour)18

Figure 2 demonstrates the disparity in LCOE between solar energy and conventional energy sources like natural gas, coal, and nuclear energy. Even this measurement, however, fails to account for other costs of solar energy, such as its unreliability and the financial burden imposed upon taxpayers in the form of government subsidies. Solar energy may appear to be a way of producing low-cost energy from nothing more than sunshine, but once the many hidden costs are revealed it becomes clear that solar energy is far from cheap.

FEDERAL SOLAR POLICIES One of the key drivers of solar industry growth has been federal government intervention in the energy market.

Modern energy policy favors renewable sources of electricity like wind and solar over conventional sourcessuchascoal and natural gas. Appendix A provides an overview of U.S. tax incentives across the energy sector. Our analysis

18 Ibid. The EIA notes in the AEO report that the LCOE for fossil fuels (dispatchable sources) cannot be directly compared with the LCOE for non-dispatchable sources like wind and solar.


here focuses on the most influential policies that affect solar power producers today. Tax credits and subsidies are used to incentivize a shift from fossil fuels to renewable energy. For example, solar energy producers receive over 50

times more subsidy support per megawatt-hour than producers of conventional coal energy.19 Policymakers at the federal level have enacted policies that support solar energy in an effort to address constituents’ concerns about the potential negative environmental consequences of burning fossil fuels. These policies, however, are costly, and have proven to be a bad investment of taxpayer dollars.

In 2012, the Government Accountability Office (GAO) published a report on the number of renewable energy initiatives enacted by federal agencies. To determine if there was unnecessary overlap between agency initiatives, GAO collected data from many of the 24 federal agencies that accounted for about 98 percent of federal expenditures in 2009. GAO found that during fiscal year 2010, federal agencies had a combined total of almost 700 renewable energy-related

initiatives—nearly half of them contained a provision supporting solar energy development.20 Figure 3 shows the types of renewable energy sources supported by these initiatives and the number of initiatives supporting each source.21

Figure 3: Federal Renewable Energy Initiatives by Energy Source22

19 Bell, L. 2014, February 9. "Loss of Production Tax Credits Brings Big Wind Chill to Cooling Subsidy-Dependent Market." Retrieved from:http://www.forbes.com/sites/larrybell/2014/02/09/loss-of-production-tax-credits-brings-big-wind-chill-to-cooling-subsidy-dependent-market/ 20 Note that a single initiative may contain provisions for more than one energy source and therefore may be counted more than once; United States Government Accountability Office (GAO). 2012, February 1. "Federal Agencies Implement Hundreds of Initiatives." Pg. 17-18. Retrieved from http://www.gao.gov/assets/590/588876.pdf 21 Ibid. 22 Ibid.


The almost 700 renewable energy initiatives identified in the GAO’s report demonstrate why measuring the actual cost of producing electricity from different sources is so difficult.Federal subsidies and tax credits enable solar energy to appear much more economically feasible than itactually is. For example, the GW Solar Institute at George Washington University estimates that removing the depreciation advantages offeredthrough the tax code and doing away with the Investment Tax Credit (ITC) would raise the price of a standard 20 MW solar photovoltaic plant by 58 percent.23

The following three federal policies have been especially important in accelerating the growth of solar energy production and consumption: (1) the Investment Tax Credit, (2) the Modified Accelerated Cost Recovery System (MACRS), and (3) the American Recovery and Reinvestment Act of 2009. These federal policies mask theactual cost that individuals—as consumers and taxpayers—ultimately payfor electricity generated from solar energy. Each policy will be examined in this section.

THE INVESTMENT TAX CREDIT

The Investment Tax Credit(ITC) reduces federal income taxes for owners and long-term lessees of qualifying renewable energy equipment by offering a 30 percent tax credit for expenditures related to eligible energy projects, such as solar

panels, that are put in service before December 31, 2016.24 The same deduction applies for both residential and

commercial solar project developers.25 The value of the ITC is calculated based on the total cost of the solar energy project, including equipment and labor but excluding structural components, such as the stands or platforms the

equipment is placed on.26 Other renewable energy projects, such as small wind turbines, fuel cells, and geothermal systems, also benefit from the ITC.27

Since the tax credit was enacted in 2006, solar installations have increased at an average of 76 percent per year.28 The tax credit increases solar installments, but it also makes solar dependent on government assistance. The Solar Energy Industries Association expects a 57 percent reduction of installed solar capacity if Congress does not extend the

Investment Tax Credit before it expires at the end of 2016.29 That the solar industry cannot attract the attention of private interests to invest in its future is indicative of the low level of confidence placed in solar as a reliable source of electricity by the private market.

As the December 31, 2016 deadline draws nearer, solar energy developers are increasingly concerned about completing their projects in time to qualify for the tax credit. The significant amount of time and planning inherent in the project development process mean that a developer who begins construction on an energy development project at this time will likely fail to qualify for the ITC; as a result, some developers have cancelled their projects entirely.30

23 Mueller, J., & Ronen, A. 2014, September 1. "Tax Reform, a Looming Threat to a Booming Solar Industry." George Washington Solar Institute. Pg. 2. Retrieved from: http://solar.gwu.edu/file/753/download 24Database of State Incentives for Renewables and Efficiency (DSIRE). 2014, October 31. "Business Energy Investment Tax Credit (ITC)." Retrieved from: http://programs.dsireusa.org/system/program/detail/658 25 George Washington Solar Institute. n.d. "What federal tax policies are currently in place for solar?" Retrieved from: http://solar.gwu.edu/q-a/what-federal-tax-policies-are-currently-place-solar 26 Office of the Comptroller of the Currency. 2014, January 1. "Public Welfare Investments in Solar Energy Facilities Using Renewable Energy Investment Tax Credit." Pg. 1. Retrieved from: http://www.occ.gov/topics/community-affairs/publications/fact-sheets/fact-sheet-solar-energy-invest-tax-credits-grants.pdf 27United States Government Accountability Office (GAO). 2014, September 1. "Information on Federal and Other Factors Influencing U.S. Energy Production and Consumption from 2000 through 2013." Pg. 76. Retrieved from: http://www.gao.gov/assets/670/666270.pdf 28 Solar Energy Industries Association. (2014). Solar investment tax credit (ITC). Retrieved from http://www.seia.org/policy/finance-tax/solar-investment-tax-credit 29 Solar Energy Industries Association. (n.d.) Solar industry data. Retrieved from http://www.seia.org/research-resources/solar-industry-data 30Roth, S. 2014, August 24. "Solar Slowdown: Stalled Projects Dot Desert Landscape." Retrieved from:


For example, at least two utility-scale thermal solar projects have recently been cancelled because of concerns about meeting the ITC deadline. BrightSource Energy, Inc., cancelled one project in 2014 because of uncertainty about qualifying for the ITC. Derek Dorn, a current partner at Davis & Harman LLP and former Staff Director of the Senate Finance Subcommittee on Energy, Natural Resources & Infrastructure, argues that without continued access to the robust federal incentives that enable solar energy projects to be economically feasible, more cancellations are inevitable. To avoid these cancellations, solar industry advocates have begun pushing to extend the ITC to allow projects that begin construction by the end of 2016 to claim the credit once placed in service.31

One thing appears clear: solar energy project cancellations strongly suggest that the solar industry is propped up by government programs rather than by its own merits. If solar energy were truly more efficient and affordable than conventional energy sources, developers would complete all current solar energy projects and begin new ones—regardless of the status of the ITC. Instead, as the ITC expiration looms, solar energy profits become much more difficult to come by and solar energy developers leave the market.

The ITC not only props up a dependent solar energy industry but, according to GAO estimates, it cost taxpayers $4

billion dollars of lost revenue between 2000 and 2013.32 If Congress wishes to make up for the lost revenue, it must raise taxes, cut existing programs, or increase government borrowing, which increases the public debt. If Congress wishes to make up for the lost revenue, it must raise taxes, cut existing programs, or increase government borrowing, which increases the public debt.

ACCELERATED DEPRECIATION - MACRS

Like the ITC, the Modified Accelerated Cost Recovery System (MACRS) is a major contributor to the rapid annual

expansion of solar energy installations.33 Created by Congress in 1986, MACRS grants owners of renewable energy systems a 5-year recovery period for depreciation costs related to renewable energy equipment, including solar energy

generation assets.34The MACRS program also allows businesses to recover some portion of capital costs over the life of a solar energy facility. According to the Solar Energy Industries Association, the program reduces the tax liability of energy companies and increases the rate of return on solar investment, making solar energy investments more profitable more quickly.

TheUS Partnership for Renewable Energy Finance (US PREF) reports that MACRS is propping up solar energy producers in an artificial and unsustainable way. The US PREF report states that a solar energy project earning a 7percentrate of return with MACRS would drop to earning about a 5.3 percent return on investment if the policy were to end. Thereportconcludes that removing MACRS depreciation from the tax code would severely impede the growth of renewable energy industries. Further, US PREF argues that without MACRS fewer renewable energy projects would bedeveloped.35 Here again, the profits and expansion of the solar energy industry rely on a federal government subsidy

http://www.desertsun.com/story/tech/science/energy/2014/08/24/stalled-solar-projects-desert-landscape/14522553/ 31 Natter, A. 2014, October 22. "Solar Industry Launches Lobbying Effort as Tax Deadline Prompts Canceled Projects." Bloomberg. Retrieved from http://www.bna.com/solar-industry-launches-b17179907013/ 32United States Government Accountability Office (GAO). 2014, September 1. "Information on Federal and Other Factors Influencing U.S. Energy Production and Consumption from 2000 through 2013." Pg. 76, 82. Retrieved from: http://www.gao.gov/assets/670/666270.pdf 33 Solar Energy Industries Association (SEIA). n.d. "Depreciation of Solar Energy Property in MACRS." Retrieved July 7, 2015 from: http://www.seia.org/policy/finance-tax/depreciation-solar-energy-property-macrs 34 George Washington Solar Institute. n.d. "What federal tax policies are currently in place for solar?" Retrieved July 7, 2015 from: http://solar.gwu.edu/q-a/what-federal-tax-policies-are-currently-place-solar 35 U.S. Partnership for Renewable Energy Finance (US PREF). 2013, December. "MACRS Depreciation and Renewable Energy Finance." Pg. 4—5 . Retrieved from: http://www.uspref.org/images/docs/MACRSwhitepaper.pdf


program, which results in losses that will likely be funded by taxpayers. The GAO estimates that the federal governmentlostabout $1.7 billion in revenue from 2000 to 2013 due to the accelerated depreciation program.36

THE AMERICAN RECOVERY AND REINVESTMENT ACT OF 2009

The American Recovery and Reinvestment Act of 2009 (ARRA) included a package of initiatives designed to encourage the development of renewable energy technologies. In addition to adding an expansion to the Investment Tax Credit, the ARRA also created the Section 1705 loan guarantee program and the 1603 Treasury grant program.37

SECTION 1705 LOAN GUARANTEE PROGRAM

Section 1705 was a temporary expansion of the Energy Policy Act of 2005. It authorized loan guarantees to qualifying

renewable energy projects that began construction before September 30, 2011. 38 Section 1705, offered by the Department of Energy (DOE), removed the risk of loaning money to renewable energy projects by offering repayment to lenders in the event that the borrower defaults.

The DOE’s loan guarantee program, of which Section 1705 is a part, has drawn criticism for several high-profile failures, such as Solyndra, a solar panel manufacturer. In late 2014, however, the DOE reported that the loan guarantee programs brought in more money from interest payments on loans than lost through defaults, covering all of its losses from the

renewable energy portion of the initiative since 2009.39 Unfortunately, the DOE ignored the borrowing cost owed to the U.S. Treasury for lending the money. When the cost of borrowing is accounted for, the DOE program put “taxpayer losses in the hundreds of millions of dollars.”40

In testimony before the House Committee on Oversight and Government Reform, Veronique de Rugy, a senior research fellow at the Mercatus Center at George Mason University, provided evidence that the loan guarantee program offered

by the Department of Energy (DOE) has failed to meet its “defined public policy purpose.”41 In her testimony, de Rugy emphasized five fundamental problems of loan guarantee programs:42

First, federally guaranteed loans have a historically higher default rate than loans that lack a government guarantee. In the event that the loan is repaid, the lender benefits from the interest payments it received from a risk-free loan and

36 United States Government Accountability Office (GAO). 2014, September 1. "Information on Federal and Other Factors Influencing U.S. Energy Production and Consumption from 2000 through 2013." Pg. 82. (GAO Publication No. GAO-14-836). Retrieved from: http://www.gao.gov/assets/670/666270.pdf 37 Center for Climate and Energy Solutions (C2ES). 2013, January 5. "U.S. Department of Energy's Recovery Act Investments." Pg. 5. Retrieved from: http://www.c2es.org/docUploads/arra-brief-feb-2013.pdf; Solar Energy Industries Association (SEIA). n.d. “”1603 Treasury Program.” Retrieved from: http://www.seia.org/policy/finance-tax/1603-treasury-program 38 De Rugy, V. 2012, July 18. “A Guarantee for Failure: Government Lending Under Sed. 1705.” Mercatus Center at George Mason University. Retrieved from https://science.house.gov/sites/republicans.science.house.gov/files/documents/HHRG-114-SY20-WState-VDeRugy2-20150324.pdf 39 Groom, N. 2014, November 13. "Exclusive: Controversial U.S. Energy Loan Program has Wiped Out Losses." Retrieved from: http://www.reuters.com/article/2014/11/13/us-doe-loans-idUSKCN0IX0A120141113 40 Marron, Donald. 2014, November 17. “Spin Alert” DOE Loans Are Losing Money, Not Making Profits.” Retrieved from: http://dmarron.com/2014/11/17/spin-alert-doe-loans-are-losing-money-not-making-profits/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+DonaldMarron+%28Donald+Marron%27s+Blog%29 41 De Rugy, V. 2012, June 19. "Assessing the Department of Energy Loan Guarantee Program." Retrieved from: http://mercatus.org/publication/assessing-department-energy-loan-guarantee-program 42 De Rugy, V. 2012, June 19. "Assessing the Department of Energy Loan Guarantee Program." Retrieved from: http://mercatus.org/publication/assessing-department-energy-loan-guarantee-program


the borrower reaps the financial benefits of its development project. If the borrower defaults on the loan, neither the borrower nor the lender lose out but instead the costs are socialized to taxpayers, who then become the real losers.

Second, loan guarantee programs have the unintended consequence of misaligning incentives, which encourages moral hazard. Moral hazard is a behavior observed when people engage in riskier behavior than they ordinarily would because

they know they are insured against losses. 43 Loan guarantees encourage excessively risky investment because developers do not bear the financial burden if investments in renewable energy fail—as in the case of the $528 million loan default by Solyndra.44

Third, government-backed loans may result in mal-investment, which is the misappropriation of capital and labor. In the absence of federally guaranteed loan repayment, lenders typically finance projects that have a significant probability of repayment. When the government guarantees the loan, however, and by so doing reduces a lender’s liability in the event of a borrower-default, the lender is incentivized to loan money to the government-backed borrower rather than to those who lack the political clout to gain government support.

Additionally, the market distortion created by federally guaranteed loans result in private investment gravitating towards government approved projects, regardless of any project’s actual merit or viability. This is a misallocation of resources and results in producers shifting away from meeting consumer needs and reorienting to the wishes of government officials.

Fourth, government money spent on loan guarantees can lead to reduced domestic investment, a process termed “crowding out.” The money the government needs to borrow in order to guarantee the loan competes directly with private sector financing needs. This competition between government and private borrowing increases interest rates and also the difficulty for private investors to fund projects. This hurts the economy.

Lastly, guaranteed loans—such as the Section 1705 loans—are an indication of cronyistic policy. Guaranteed loans

serve “lawmakers, bankers, and the companies that receive the subsidized loans.”45 Politicians can use guaranteed loans to reward favored groups, and bankers have an incentive to loan to the government-sponsored group because these loans are guaranteed. De Rugy states that of the 26 projects funded by 1705 loans, the top ten recipients were solar generation companies. These ten companies claimed 76 percent of the almost $16 billion funded under Section 1705. Additionally, most of the money went to large companies, not small start-ups and some of these companies double-dipped by obtaining money from other grants under the ARRA, one of which went to help a company buy solar panels from itself—a $192.9 million loan.46

SECTION 1603 TREASURY GRANT PROGRAM

The Recovery Act also established the 1603 Treasurygrant program, which was designed to increase liquidity in the

renewable energy market and in turn quickly spur renewable energy development.47 The idea was to allow energy developers to opt for a direct cash payment from the Treasury in lieu of a tax credit. The program applied only to

43 Thoma, M. 2013, November 22. "Explainer: What is "moral hazard"?" Retrieved from: http://www.cbsnews.com/news/explainer-moral-hazard/ 44 Editorial Board. 2011, November 24. "The Solyndra Mess." New York Times. Retrieved from: http://www.nytimes.com/2011/11/25/opinion/the-solyndra-mess.html 45 De Rugy, V. 2012, June 19. "Assessing the Department of Energy Loan Guarantee Program." Retrieved from: http://mercatus.org/publication/assessing-department-energy-loan-guarantee-program 46 De Rugy, V. 2012, June 19. "Assessing the Department of Energy Loan Guarantee Program." Retrieved from: http://mercatus.org/publication/assessing-department-energy-loan-guarantee-program 47 Solar Energy Industries Association (SEIA). n.d. "1603 Treasury Program." Retrieved from: http://www.seia.org/policy/finance-tax/1603-treasury-program


taxpayers eligible for either the Production Tax Credit (PTC), a tax benefit for producing energy from certain sources, or the ITC, but even so, the 1603 program provided almost $20 billion inpayments for fiscal years 2009 to 2013. Of that

amount, $13 billion went to wind projects while $4 billion went to solar energy projects.48 Again,US taxpayers at large were handed the bill for stimulating renewable energy development.

The ARRA adds to the unseen costs of solar by creating both seen and unseen costs. The seen costs of theAct are the billions of dollars being transferred from average taxpayers to government favorites in the renewable energy industry. Aside from these monetary costs, the ARRA also has unseen costs. By picking favorites, the federal government discourages innovation and creates barriers to market entry. TheAct alsotransfers the risk involved in solar energy projects from US energy developers,who should be responsible for it, to US taxpayers. If a solar energy project fails, the American public pays the price. If it succeeds, the benefits are concentrated in the hands of a few government favorites. Ultimately, government programs like the ARRA are a financial liability that fall on taxpayers to fund.

FEDERAL POLICIES AND THE UNSEEN COSTS OF SOLAR ENERGY

As we have observed, federal policies related to solar energy projects obscure theactual cost of solar energy by making solar seem more economically viable than it really is. The monetary costs of federal policies are easy to stack up and compare, but the opportunity costs (the value of opportunities foregone because of misspent taxpayer money) are not as easily quantified. When added up, the major federal programs supportingrenewable energies—ITC, MACRS, the Section 1703 and Section1705 Loan Guarantee Program, and the 1603 Treasury Program—had a monetary cost of over $13.85 billion from 2000 to 2013.49

We have demonstrated that federal programs provide substantial support for the renewable energy industry and that without that aid, solar energy would be prohibitively expensive for many consumers and unprofitable for producers, even those currently in the market. Much of the solar energy industry exists merely because of special government programs, not because the technology is an efficient use of resources.

Figure 4 shows the revenue losses and federal payments to renewable energy developers associated with the Production Tax Credit, ITC, and the 1603 Treasury Program for fiscal years 2000 through 2013.These three programs increase the national debt, which will eventually have to be paid off by future taxpayers. The chief non-monetary cost of federal support of solar energy is the opportunity cost of taxation, which is represented in Figure4.If future taxpayers were not faced with the financial burden of funding renewable energy programs or making up the lost revenue associated with tax credits for renewable energy development, they could spend their money more productively, spurring economic growth and prosperity.

48United States Government Accountability Office (GAO). 2014, September 1. "Information on Federal and Other Factors Influencing U.S. Energy Production and Consumption from 2000 through 2013." Pg. 76. (GAO Publication No. GAO-14-836). Retrieved from: http://www.gao.gov/assets/670/666270.pdf 49This number was obtained by adding the total cost of the ITC ($4 billion), the 1603 Treasury Program ($4 billion), the MACRS ($1.7 billion), the Section 1705 LGP ($2.43 billion) and the Section 1703 LGP ($1.72 billion). The figures represent the total cost of the programs, not just the money funding solar energy; United States Government Accountability Office (GAO). 2014, September 1. "Information on Federal and Other Factors Influencing U.S. Energy Production and Consumption from 2000 through 2013." Pg. 76, 82, 85. (GAO Publication No. GAO-14-836). Retrieved from: http://www.gao.gov/assets/670/666270.pdf; Department of Energy. 2012. “The Budget for Fiscal Year 2012.” Pg. 420. Retrieved from: https://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/doe.pdf


Figure 4: Federal Outlays for the PTC, ITC, and Section 1603 Programs50

Federal policies represent only one of theunseen costs of solar energy. States also implement initiatives intended to encourage the development of solar energy. State-level programs, such as renewable portfolio standards, tax incentives, and other protectionist policies (e.g., tariffs)create unseen costs for taxpayers and electricity consumers alike. As such, they should be considered in any estimate of the actual cost of generating electricity from solar power.

STATE POLICIES

Voters in many states favor policies that encourage renewable energy production because they believe these policies will lead to environmental benefits. Policymakers have responded to these constituents by enacting state-level policies designed to spur the growth of renewable energy production, including solar energy. These policies include Renewable Portfolio Standards, tax credits, feed-in tariffs, and net metering programs. Although these policies are designed to increase renewable energy production, they have produced unintended consequences, such as heavy monetary burdens

50 United States Government Accountability Office (GAO). 2014, September 1. "Information on Federal and Other Factors Influencing U.S. Energy Production and Consumption from 2000 through 2013." Pg. 77. (GAO Publication No. GAO-14-836). Retrieved from: http://www.gao.gov/assets/670/666270.pdf


placed on taxpayers, the transfer of wealth from conventional energy users to solar and wind energy residents, and risks to the electric grid’s stability.

RENEWABLE PORTFOLIO STANDARD

Renewable Portfolio Standards (RPS) mandate that a specific percentage of a state’s electricity is provided by renewable energy producers by a given date. Twenty-nine states, District of Columbia, and three territories have

adopted RPS. Eight states and one territory have renewable portfolio goals, which are not mandatory or enforceable.51 Of the thirty-seven states with either a renewable energy standard or goal, 22 plus DC include specific requirements for solar energy, known as “solar carve-outs.” Figure 5 shows states with renewable standards, goals, and those that have solar provisions.52

Figure 5: RPS States with Solar or Distributed Generation (DG) Provisions53

51 Database of State Incentives for Renewables and Efficiency (DSIRE). 2015, June. "Renewable Portfolio Standard Policies." U.S. Department of Energy (DOE). Retrieved from: http://ncsolarcen-prod.s3.amazonaws.com/wp-content/uploads/2014/11/Renewable-Portfolio-Standards.pdf 52Database of State Incentives for Renewables and Efficiency (DSIRE). 2015, March. “Renewable Portfolio Standards (RPS) with Solar or Distributed Generation Provisions.” U.S. Department of Energy (DOE). Retrieved from: http://ncsolarcen-prod.s3.amazonaws.com/wp-content/uploads/2015/01/RPS-carveout-map1.pdf 53 Ibid; Database of State Incentives for Renewables and Efficiency (DSIRE). 2015, June. “Renewable Portfolio Standards (RPS) Policies.” U.S. Department of Energy (DOE). Retrieved from: http://ncsolarcen-prod.s3.amazonaws.com/wp-content/uploads/2014/11/Renewable-Portfolio-Standards.pdf


Although Renewable Portfolio Standards have succeeded in increasing solar energy use, they have also caused job losses and increased energy prices. A recent study by Strata Policy found that North Carolina’s RPS resulted in 23,769

foregone jobs and $3,870 of foregone household income in 2013 alone.54 Likewise, the effect of an RPS on Ohio was a loss of 29,366 jobs for the state and a loss of $3,842 per household. At the time of publishing, no states studied had a net increase in job production or a net savings in income per household as a result of an RPS.55

These mandates also lead to higher electricity rates because they require the use of more expensive renewables

instead of conventional sources of electricity.56 In 2010 the Institute for Energy Research found that states with RPS had electricity rates 38 percent higher than states without.57 In 2012, a study by the Manhattan Institute found “a pattern of mostly higher costs in states with RPS mandates,” in which 8 out of 10 states with the highest electricity rates had RPS in place.58

Government policies mask the actual cost of producing electricity from solar power by making it artificially cheap for producers and consumers. While the unseen costs of these policies may not show up directly in electricity rates, the costs will eventually have to be paid for by American taxpayers who fund subsidies and tax incentives for the favored industry.

TAX INCENTIVES

State legislators across the United States have passed tax exemptions and tax credits for homeowners who install solar energy. Just like federal solar policies, these state-level incentives are meant to encourage the use of electricity generated by solar energy. When combined with federal tax credits, these policies mask the actual cost of transforming solar energy into electricity.

In 2008 Louisiana legislators created a solar energy tax credit that covers up to 50 percent of the first $25,000 in

installation costs for residents who install solar systems.59 When combined with federal incentives, homeowners in the state who want to install solar are left with costs as low as $5,000, which means that tax credits are responsible for paying up to four-fifths of installation costs. Additionally, a loophole in the law previously allowed state residents to take advantage of these low costs by creating multiple arrays on their homes and accepting a tax credit for each

system.60 The net effect is that Louisiana's solar tax credit has resulted in lost revenue of $151 million since 2008, with per capita costs of about $30 per resident to pay for rebates to those who claim the solar tax credit.61 So far, the program has cost 122 times more than the highest estimates available when the credit was introduced in 2007.62 And

54 Simmons, R., Yonk, R., Brough, T., Sim, K., & Fishbeck, J. 2015, February. “Renewable Portfolio Standards: North Carolina.” Institute of Political Economy, Utah State University. Pg. 11. Retrieved from: http://www.strata.org/wp-content/uploads/2015/03/FINAL-RPS-North-Carolina.pdf 55 Simmons, R., Yonk, R., Brough, T., Sim, K., & Fishbeck, J. 2015, April. “Renewable Portfolio Standards: Ohio”. Institute of Political Economy, Utah State University. Pg. 3. Retrieved from: http://www.strata.org/wp-content/uploads/2015/06/RPS-Ohio-Report.pdf 56 Institute for Energy Research. “The Status of Renewable Electricity Mandates in the States.” Pg.1, 72. Retrieved March 8, 2015 from: http://instituteforenergyresearch.org/wp-content/uploads/2011/01/IER-RPS-Study-Final.pdf 57 Ibid. 58 Bryce, R. 2012, February. “The High Cost of Renewable-Electricity Mandates.” Center for Energy Policy and the Environment at the Manhattan Institute. Pg. 3. Retrieved from: http://www.manhattan-institute.org/pdf/eper_10.pdf 59 Database of State Incentives for Renewables and Efficiency (DSIRE). 2015, June. "Tax Credit for Solar Energy Systems on Residential Property (Personal)." U.S. Department of Energy (DOE). Retrieved from: http://programs.dsireusa.org/system/program/detail/2636 60 Adelson, J. 2014, December 11. “Giving Away Louisiana: Solar energy tax credit.” Retrieved from: http://blogs.theadvocate.com/specialreports/2014/12/06/giving-away-louisiana-solar-energy-tax-credit/ 61 Ibid; DASolar Energy. 2015. “Louisianna- Energy tax credit, solar rebates, and incentives.” Retrieved from: http://www.dasolar.com/energytaxcredit-rebates-grants/louisiana 62Adelson, J. 2014, December 11. “Giving Away Louisiana: Solar energy tax credit.” Retrieved from: http://blogs.theadvocate.com/specialreports/2014/12/06/giving-away-louisiana-solar-energy-tax-credit/


because the tax credit has cost so much more than expected, it has dramatically increased the unseen costs of solar energy in the state by increasing the burden on state taxpayers.

In terms of direct monetary benefits, Louisiana's solar tax credit policy benefits a select few while its costs are paid by all taxpayers. Twenty-six parishes did not have any participants in the solar tax credit and received no benefits, yet they were still obligated to support the policy through their tax dollars. Only eight parishes received average or above-average energy savings as a result of the solar tax credit, while the other 56 parishes received below-average or no direct benefits from the tax credit.63

Policies like Louisiana’s solar tax credit demonstrate how wealth is transferred from low- and middle-income earners to wealthier ones. Even after the tax credit is taken into account, solar panel installation is still relatively expensive,

averaging $5,000 in Louisiana.64 This means most beneficiaries of the tax credit are likely wealthier. Therefore, while high income-earners benefit from the solar energy tax credits, all taxpayers bear the costs. As a result, lower income households end up providing solar subsidies for their higher income neighbors. Because of the higher-than-expected costs of the solar tax credit policy, the Louisiana State Legislature decided in 2013 to discontinue the solar energy tax credit after 2017.65

FEED-IN TARIFFS AND NET METERING

States have also enacted policies like feed-in tariffs (FIT) and net metering to benefit residential solar energy generators who produce more electricity than they consume. Although both policies incentivize residential solar energy production, the two differ in how they credit solar customers for the energy they generate.

FEED-IN TARIFFS

FIT programs set a fixed price for the electricity that homeowners give back to the grid. Residential solar energy producers sign contracts with utility providers to receive this fixed price for energy they produce for the next 15 to 20

years.66 Funding required to subsidize FIT participants comes from increases in the utility bills of residents who use conventional sources of energy.

In 2009 city leaders in Gainesville, Florida, created the first FIT program in the United States. The program was meant to incentivize residential and commercial solar development to reduce the city's reliance on fossil fuels. The Gainesville FIT created 20-year contracts, through which Gainesville Regional Utilities (GRU) would pay solar energy producers a set rate for all electricity produced from qualifying solar systems. For the first year, contracts were set at 32 cents per kilowatt-hour, and were set to gradually decrease over time.67

Although the Gainesville FIT succeeded in increasing the city's solar capacity by 15 megawatts, the program also resulted in higher electricity rates for conventional energy users. The average Gainesville home subsidized the FIT

63 Ibid. 64 Adelson, J. 2014, December. “Giving Away Louisiana: Solar energy tax credit.” Retrieved from: http://blogs.theadvocate.com/specialreports/2014/12/06/giving-away-louisiana-solar-energy-tax-credit/ 65 Cohen, B. R. 2013, July 5. “Louisiana Law Will Phase Out Solar Tax Credit.” Retrieved from: http://news.heartland.org/newspaper-article/2013/07/05/louisiana-law-will-phase-out-solar-tax-credit 66 Maehlum, M. 2014, March 15. "What’s the Difference Between Net Metering and Feed-in Tariffs?" Retrieved from: http://energyinformative.org/net-metering-feed-in-tariffs-difference 67 Clark, Anthony. 2014, April 26. "As feed-in tariff takes a backseat, solar energy adjusts." The Gainesville Sun. Retrieved from: http://www.gainesville.com/article/20140426/ARTICLES/140429694?p=1&tc=pg


program through increased electricity bills of $3 per month.68 As of December 2013, the program had paid $11.4 million to residential solar producers.69 In December 2014 city commissioners decided to suspend the FIT program in an effort

to lower the city's electricity rates, which are the highest in the state.70 Even though the program is being suspended, the utility is contractually obligated to carry out the 20-year contracts with solar producers. These payouts are estimated to cost Gainesville ratepayers $74 to $84 million over the next 20 years.71

NET METERING

Net-metering programs differ from FIT programs in that net-metering customers receive the current retail price of the

energy they produce, as opposed to a fixed price. 72 Utility companies are responsible for paying net-metering participants. As with FIT, net metering raises the cost of electricity for conventional energy customers in two ways. First, utilities often pass on the costs of net-metering programs by charging higher rates to customers using conventional energy sources. Second, net metering causes stress on the electric grid, which results in higher maintenance costs that are also passed on to non-solar customers.

Because unsubsidized solar panel installation costs between $10,000 and $35,000 on average, lower income households are typically unable to afford solar panels.73 Several states also require a credit score above 700 to qualify for solar credit loans to cover installation costs, barring even more low-income households from installing solar

panels.74 In other words, lower income ratepayers often subsidize their wealthier neighbors by funding net-metering programs.

In order to fund net-metering and FIT programs, utility companies have to charge non-solar customers higher electricity rates. Because these non-solar customers are less affluent than solar customers, this results in the transfer of wealth from low-income households to high-income ones. These barriers and the design of FIT and net-metering programs creates an unfair system where low-income energy consumers and customers who use conventionally produced energy are forced to reward their richer neighbors for installing solar energy.75

NET-METERING REFORM

It should be noted that some utility companies are trying to reform their net-metering policies. In 2015 Arizona-based Salt River Project (SRP) was one of many utility companies in the United States to reform their net-metering program after hearing public complaints that non-solar customers were covering the operating and maintenance costs caused

68 Ibid. 69 Curry, C. 2013, December 19. “City Commission will not add to feed-in tariff in 2014.” Retrieved from: http://www.gainesville.com/article/20131219/ARTICLES/131219531?p=1&tc=pg 70 Clark, A. 2014, April 26. "As feed-in tariff takes a backseat, solar energy adjusts." Retrieved from: http://www.gainesville.com/article/20140426/ARTICLES/140429694?p=1&tc=pg 71 Curry, C. 2013, December 19. “City Commission will not add to feed-in tariff in 2014.” Retrieved from: http://www.gainesville.com/article/20131219/ARTICLES/131219531?p=1&tc=pg 72 Maehlum, M. 2014, March 15. "What’s the Difference Between Net Metering and Feed-in Tariffs?" Retrieved from:http://energyinformative.org/net-metering-feed-in-tariffs-difference. If net-metering customers were paid wholesale rather than retail electricity prices, they would share the cost of using the electrical grid. This would likely eliminate much of the controversy surrounding net-metering programs. 73 Brown, A. 2015, March 12. “Opinion: How solar advocates are overvaluing DG solar.” Retrieved from: http://www.utilitydive.com/news/opinion-how-solar-advocates-are-overvaluing-dg-solar/374297/ 74Energy Sage. n.d. “Comparing solar loans vs solar leases.” Retrieved March 17, 2015 from: https://www.energysage.com/solar/financing/comparing-solar-loans-vs-solar-leases 75 Brown, A. 2015, March 12. "Opinion: How solar advocates are overvaluing DG solar." Utility Dive. Retrieved from: http://www.utilitydive.com/news/opinion-how-solar-advocates-are-overvaluing-dg-solar/374297/


by net metering. SRP estimates that non-solar customers in Arizona pay an additional $9 to $10 million annually to cover the cost of solar customers.76

To alleviate these costs, SRP net-metering customers must pay a monthly $50 surcharge and non-solar customers’ bills increase by approximately $5. Although this reform was met with opposition from net-metering customers, SRP believes this policy will reduce how much non-solar customers pay to support solar customers. It is predicted that this

will also help utility companies recover some of their costs.77 Instead of passing the costs of net metering on to non-solar customers, SRP is requiring solar producers to bear some of the costs of Arizona's net-metering policy.

NET METERING AND FIT CAUSE GRID STRESS

Not only do net metering and FIT programs create unfair economic consequences for consumers, they place stress on the US power grid. The grid was not designed to handle inputs from residential energy producers, and so the grid is stressed in terms of maintenance and meeting electrical demand. FIT and net-metering programs can also cause problems for the grid because the rate of energy flow from residential homes is often unpredictable.

Solar energy is intermittent, so interruptions to sunlight can unexpectedly limit solar energy production. As mentioned earlier, the intermittent nature of solar energy makes it difficult for grid managers to balance energy supplied with

energy demanded. When the two do not match up, over-generation or blackouts can result.78 In fact, the threat of over-generation was one of the reasons the City of Gainesville suspended their FIT program—solar residents were providing more energy than was being demanded by the rest of the city.79

As residential solar energy production expands, utility companies will have to invest in grid infrastructure that can cope with intermittent residential solar energy, but these costs will likely be passed on to retail consumers. These grid improvements represent another hidden cost of solar energy that may go overlooked by a more cursory examination.

COST ESTIMATES FOR UTILITY-SCALE SOLAR ENERGY

This report has shown that the cost of producing electricity from solar energy is difficult to calculate. Some studies of solar energy focus on capital costs, others on solar’s place in the energy market. Still others look to account for the entire cost of solar energy projects. In this section we analyze (1) the current state of utility-scale, commercial-scale, and residential-scale solar energy production; (2) the key cost components of solar energy and their relationship to overall cost; and (3) the future of the cost of solar.

Due to the dominance of photovoltaic (PV) solar energy technology in the US solar energy market, the reports examined in this section deal predominantly with solar PV cost estimates. Some examination of solar thermal technologies is included, with respect to future development of storage capacity and batteries. The cost of solar in this section will also primarily focus on utility-scale solar, with some discussion of commercial-scale production (used by businesses) and residential-scale production (smaller solar energy projects for home use).

76 Randazzo, R. 2015, February 27. “SRP board OKs rate hike, new fees for solar customers.” Retrieved from: http://www.azcentral.com/story/money/business/2015/02/26/srp-board-oks-rate-hike-new-fees-solar-customers/24086473/ 77 Ibid. 78 Trabish, H. K. 2014, October 22. “The 'epic fail' on solar's doorstep—and how the grid can help.” Retrieved from: http://www.utilitydive.com/news/the-epic-fail-on-solars-doorstepand-how-the-grid-can-help/324411/ 79 Curry, C. 2013, December 19. “City Commission will not add to feed-in tariff in 2014.” Pg.2. Retrieved from: http://www.gainesville.com/article/20131219/ARTICLES/131219531?p=1&tc=pg


THE COST OF SOLAR TODAY

Solar energy, despite assistance programs initiated by federal and state entities, has not reached grid parity—the point at which solar energy is sold for the same amount as electricity produced by conventional sources. The Transparent Cost Database by the National Renewable Energy Laboratory is a database of studies on the cost of electricity generation from all types of energy. For the years 2009 to 2014, 78 studies on the levelized cost of electricity (LCOE) for solar PV were included, more than any other technology examined in the database.

Although the EIA’s LCOE is more commonly cited, the Transparent Cost Database is a more accurate representation of today’s energy market because it uses the historical average of actual recorded electricity rates from 2009 to 2014. The EIA’s numbers are forward-looking projections of the energy market in 2020, and therefore rely on assumptions about what the future of the US energy market will look like. For these reasons, we utilize the Transparent Cost Database to compare costs across energy types in this section.

Solar PV's median LCOE, at approximately $290 per megawatt-hour, was higher than any other technology’s median LCOE. Solar also has the greatest disparity between its maximum and minimum cost estimates, a difference of $500

per megawatt-hour.80 This gap highlights the lack of consensus on the cost of solar energy. Even at its lowest estimated price, solar is not a viable energy option for much of the nation.

Table 1:Cost of Electricity by Source81

Solar Wind Nuclear Coal Natural Gas

Median Levelized Cost of Electricity (per megawatt-hour)

$290 $70 $80 $60 $50

On a regional scale, solar energy is sometimes competitive in geographic areas with higher-than-average solar potential, although it still must rely on grid power for times when the sun is not providing sufficient energy. In areas like the American Southwest, solar energy products can produce much more energy for the same cost as projects in less-sunny areas, such as the Northeast.

Studies from Lazard and the EIA calculate regional estimates for solar’s LCOE. Lazard’s Levelized Cost of Electricity 8.0 estimates show the highest prices are in the Northeast, ranging from $100 to $221 per megawatt-hour. The lowest are

in the Southwest, ranging from $79 to $168 per megawatt-hour.82 The EIA’s Annual Energy Outlook 2015 predicts regional costs ranging from $97.8 per megawatt-hour to $193.3 per megawatt-hour.83

Currently, subsidies have a significant impact on the cost of solar energy, both regionally and nationally. According to EIA estimates, subsidies reduce the cost of solar PV energy by $8.5 to $17.5 per megawatt-hour.84

80 Open Energy Information. 2015. “Transparent Cost Database.” Retrieved from: http://en.openei.org/apps/TCDB/ 81 Open Energy Information. 2015. “Transparent Cost Database.” Retrieved from: http://en.openei.org/apps/TCDB/ 82 Lazard. 2014, September. "Lazard's Levelized Cost of Energy Analysis - Version 8.0." Retrieved from: http://www.lazard.com/media/1777/levelized_cost_of_energy_-_version_80.pdf 83 Energy Information Administration (EIA). 2015, April. "Levelized Cost and Levelized Avoided Cost of New Generation Resources in the Annual Energy Outlook 2015." U.S. Department of Energy (DOE). Retrieved from: http://www.eia.gov/forecasts/aeo/electricity_generation.cfm 84 The effect of subsidies was calculated by subtracting the solar PV minimum “Range for Total LCOE with Subsidies” from the minimum


COST FACTORS

In this section we further analyze the total cost of producing electricity from different sources of energy and identify key cost factors that should be considered in an accurate estimate of the cost of solar energy. Those factors include: capital costs, operations and maintenance costs, capacity factor estimates, baseload cycling, transmission costs, and social and environmental costs. For each factor we compare commonly cited cost estimates for solar, wind, nuclear, coal, and natural gas.

CAPITAL COSTS AND OPERATIONS AND MAINTENANCE

Capital costs are the largest financial component of all solar projects.85 Capital costs consist mostly of module costs, which include solar panels and other physical equipment. The remainder of capital costs are made up of the expenses of land permits and development costs.

The median capital cost of electricity generated from solar PV, as reported in the Transparent Cost Database, is $4.67 per watt, which is higher than the median capital cost of most other technologies. Capital cost estimates for solar PV energy, according to the database, also vary widely, reflecting a lack of consensus about the cost of solar and the high variability of the cost of solar based on region. The estimates range from a minimum of $1.50 per watt to a maximum

of $8.35 per watt at the maximum.86

Table 2: Median Capital Costs87

Solar Wind Nuclear Coal Natural Gas

$/W $4.67 $1.98 $5.39 $3.00 $1.09

Operations and maintenance (O&M) make up a small portion of the cost of solar energy. Fixed O&M costs are the costs of a project incurred regardless of use. The Transparent Cost Database estimates the median fixed O&M estimate of

solar energy at $0.03 per watt, which is lower than many other technologies.88 Solar energy also has the advantage of having very low variable O&M costs. Variable O&M costs are determined primarily by fuel costs, and because solar PV

energy does not require any fuel other than sunlight to operate, its variable O&M costs are practically zero.89

“Range for Total System LCOE.” The same process was used for calculating the maximum value. Energy Information Administration (EIA). 2015. “Levelized Cost and Levelized Avoided Cost of New Generation Resources in the Annual Energy Outlook 2015.” P. 7. U.S. Department of Energy. Retrieved from: http://www.eia.gov/forecasts/aeo/pdf/electricity_generation.pdf 85 For utility-scale solar, Lazard calculates that 90 percent of upfront solar costs are capital costs with the remaining 10 percent being operations and maintenance costs. For residential solar, Lazard calculates that 93 percent of costs are from capital costs, and the remaining 7 percent is operations and maintenance costs. To find these numbers, we added high- and low-case estimates for capital and O&M costs and then calculated the percentage of total LCOE; Lazard. 2014, September. "Lazard's Levelized Cost of Energy Analysis - Version 8.0." Retrieved from: http://www.lazard.com/media/1777/levelized_cost_of_energy_-_version_80.pdf 86 Open Energy Information. 2015. “Transparent Cost Database.” Retrieved from: http://en.openei.org/apps/TCDB/ 87 Open EI’s True Cost Database values capital costs in terms of $1,000 per kilowatt, which is equal to $1 per watt. 88 Open Energy Information. 2015. “Transparent Cost Database.” Retrieved from: http://en.openei.org/apps/TCDB/ 89 Open Energy Information. 2015. “Transparent Cost Database.” Retrieved from: http://en.openei.org/apps/TCDB/


According to the U.S. Department of Energy, the average utility-scale solar system costs just above $3 per watt.90 These cost estimates include both the capital and operations and maintenance costs of the energy sources. Utility-scale solar costs are consistently lower than comparable residential and commercial costs. The DOE specifies the source of these lower costs as the result of module manufacturers eliminating third party engineers and construction firms, which decreases supply-chain costs.

Commercial systems are typically comparable to utility-scale solar. In 2012 NREL estimated the cost of commercial

systems at $4.97 per watt for projects under 250 kilowatts, and at $4.05 per watt for projects over 250 kilowatts.91 Due to their small scale, residential solar panels are the most costly of the three categories, with the NREL estimating

residential solar PV system prices at $5.22 per watt for 2012.92 The price of residential solar panels decreased 97.2 percent per watt from 1975 to 2012, revealing significant reductions in the overall cost to consumers.93 Despite this reduction, solar has not reached grid parity in most regions of America.

Solar capital costs have decreased significantly in recent years and, of the various forms of renewable energy, solar energy shows the most potential for continued capital cost decreases. According to the Department of Energy, the cost

of solar modules decreased from $60 per watt to $2 per watt between 1976 and 2010.94 Figure 6 demonstrates this decline in module prices.

Figure 6: Decline in Factory-Gate PV Module Price With Increasing Cumulative Module Shipments95

90 Bolinger, M.,& Weaver, S. 2014, September. “Utility-Scale Solar 2013: An Empirical Analysis of Project Cost, Performance, and Pricing Trends in the United States.” Pg.12. U.S. Department of Energy (DOE). Retrieved from: http://emp.lbl.gov/sites/all/files/lbnl-6912e.pdf 91 Friedman, B., Ardani, K., Feldman, D., Citron, R., & Margolis, R. 2013, October. "Benchmarking Non-Hardware Balance-of-System (Soft) Costs for U.S. Photovoltaic Systems, Using a Bottom-Up Approach and Installer Survey -- Second Edition." Pg. V. Retrieved from: http://www.nrel.gov/docs/fy14osti/60412.pdf 92 Ibid. 93 Marketwire. 2012, September. "U.S. Solar energy Installations in 2012 Alone to Surpass Combined Totals From 2000-2010." Retrieved from: http://www.marketwired.com/press-release/us-solar-power-installations-in-2012-alone-to-surpass-combined-totals-from-2000-2010-nasdaq-spwr-1700431.htm 94 Sunshot. 2012, February. "Sunshot Vision Study." U.S. Department of Energy (DOE). Pg. 74. Retrieved from: http://energy.gov/sites/prod/files/2014/01/f7/47927_chapter4.pdf 95 Ibid.


Decreases in the capital cost of solar energy are largely attributable to high levels of polysilicon production, a key material used for crystalline silicon PV panels. In response to a shortage of polysilicon in 2007 (coupled with strong government incentives for solar energy manufacturers), multiple companies moved to fill the demand, and the high

production levels drove down the cost of solar projects.96 Although falling capital costs decrease the cost of solar energy projects and make this form of energy more attractive for the time being, capital costs are unlikely to fall much further without significant technological improvements.

CAPACITY FACTOR

The capacity factor of a power plant is its annual utilization rate, which is a measurement of how much electricity the plant generates in a year as a percentage of how much electricity it would generate if it could run at full power for the

entire year.97 In theAEO, the EIA notes that the “LCOE values [for wind and solar] are not directly comparable to [the

LCOE estimates] for other technologies (even where the average annual capacity factor may be similar).”98 The technologies cannot be directly compared because the capacity factor of dispatchable technologies can be operator controlled while the capacity factor of wind and solar is outside the realm of human control (i.e., the wind doesn’t blow, blows too strongly or too weakly; sunlight is blocked by clouds or unavailable because it is night).

Currently, capacity factors for PV solar average around 20 percent and peak at 30 percent, which is lower than capacity

factors for any other type of energy found in the Transparent Cost Database.99 Capacity factor is one of the few solar energy variables upon which there is little disagreement.

Table 3:Median Capacity Factor

Solar Wind Coal Nuclear Natural Gas

Capacity Factor (percent)

20.3 36.75 93 90 87

Capacity factors depend heavily on location. In the sunny Southwest, for instance, solar energy projects with low capacity factors can still produce a significant amount of energy at a rate that achieves grid parity. On the other hand, low sunlight is a permanent disadvantage for the Northeast. A solar facility in the Northeast produces energy at a

significantly higher cost than a Southwest facility with the same capacity factor.100 Figure 7 shows this variation in solar resources across the United States.

96 Renewable Energy World. 2008, February 26. “Polysilicon Shortage to End in 2008.” Retrieved from: http://www.renewableenergyworld.com/rea/news/article/2008/02/polysilicon-shortage-to-end-in-2008-51663 97The capacity factor used in calculating cost estimates has a strong effect on how affordable a given energy technology appears to be. For example, say the levelized fixed costs of a power plant are calculated to be $30 per MWh at a 90 percent capacity factor. If the plant utilization rate turns out to be only half of what was projected–resulting in a capacity factor of 45 percent–the levelized fixed cost doubles to $60 per MWh. Counterintuitively, levelized variable costs do not vary with capacity factor but levelized fixed costs vary inversely with change in capacity factor. 98 U.S. Energy Information Administration (EIA). 2015, June 3. “Annual Energy Outlook 2015: Levelized cost and levelized avoided cost of new generation resources in the Annual Energy Outlook 2015.” Retrieved from: http://www.eia.gov/forecasts/aeo/electricity_generation.cfm 99 Open Energy Information. 2015. “Transparent Cost Database.” Retrieved from: http://en.openei.org/apps/TCDB/ 100 Lazard. 2014, September. "Lazard's Levelized Cost of Energy Analysis - Version 8.0." Pg. 8. Retrieved from: http://www.seia.org/sites/default/files/resources/Levelized%20Cost%20of%20Energy%20-%20Version%208.0.pdf


Figure 7: Photovoltaic Solar Resource of the United States101

BASELOAD CYCLING AND THE INTERMITTENCY OF SOLAR POWER

Energy technologies like wind and solar cannot produce electricity on-demand because of the intermittence of their respective power sources—the sun does not always shine brightly and the wind may blow too strongly or not strongly enough. These less-reliable energy forms, known as “non-dispatchable” energy technologies, cannot constantly supply the grid with a necessary minimum level of electricity, known as “baseload power.” Energy technologies that can reliably and predictably produce electricity, such as natural gas, are known as “dispatchable technologies.” If the grid is not fed with a steady, predictable supply of electricity, costly forms of instability can occur. To avoid shortages, traditional energy plants (dispatchable technologies) must provide electricity to cover shortages left by solar and wind energy (non-dispatchable technologies).

Solar power produces the highest levels of energy during the middle of the day, but peak demand generally occurs in the evening. In places like California this has created a problem for the electric grid known as the “duck curve.” During the middle of the day when the sun is the strongest, solar power reduces the demand for other sources of energy. As the sun starts to go down, conventional generators must ramp up rapidly to make up for the reduction in solar power

101 NREL. 2015, February. “Solar Maps.” Photovoltaics: 1998-2009. Retrieved from: http://www.nrel.gov/gis/solar.html


and to meet peak demand, usually around 9pm.102 Figure 8 illustrates the duck curve problem, and the basic problem that solar supply does not match up with electricity demanded throughout the day. As more solar power goes online, managing the electric grid will become more difficult.

Figure 8: Solar Supply Does Not Match Electricity Demand

Hawaii has already seen the difficulties that arise from attempting to incorporate large quantities of solar energy. Grid operators struggle to balance the supply of electricity—made unpredictable because of the high amount of residential solar power flowing into the grid—and must take precautions to prevent blackouts or brownouts. A study by the National Renewable Energy Laboratory found that integrating enough solar to achieve 20 percent renewable energy penetration would require a myriad of mitigation strategies and continued study to ensure that the grid is capable of

handling these large amounts of renewable energy.103

Additionally, because solar energy technology is inefficient at converting energy from the sun into electricity, solar energy plants sometimes cannot provide baseload power even when sunlight is available, and must again turn to traditional sources of electricity like natural gas generators. When solar energy fails to meet demand, either because sunlight is not available or because of efficiency issues, natural gas generators must ramp up quickly to avoid shortages. In contrast, when solar energy plants provide more electricity than is needed, traditional generators must decrease production quickly to avoid over-generation. In order to accommodate the intermittency of solar energy, natural gas generators must continually cycle between use and non-use, a process known as baseload cycling. The need for baseload cycling will grow as more solar energy is incorporated into the electricity supply and grid unpredictability

increases.104

102 Institute for Energy Research. 2014, October 27. “Solar Energy’s Duck Curve.” Retrieved from: http://instituteforenergyresearch.org/solar-energys-duck-curve/ 103National Renewable Energy Laboratory (NREL). 2013, June. “Hawaii Solar Integration Study: Executive Summary.” Retrieved from: http://www.nrel.gov/docs/fy13osti/57215.pdf 104Institute for Energy Research (IER).2014,September2."ElectricityGeneration.”Retrievedfrom:


It is easy to understand why baseload cycling with dispatchable and non-dispatchable energy sources together is less efficient and more costly than relying solely on dispatchable technology. First and most obviously, more fuel is used when two plants are doing the job of one. Second, baseload cycling can also impose extra wear on plants during cycling, thus increasing operation costs. The EIA's levelized cost of electricity is inaccurate because it does not take into account factors like baseload cycling. It ignores the difference between energy producers that rely on non-dispatchable energy, such as solar or wind, and those that can operate at all times, such as coal or natural gas. Because of this difference, direct comparisons between dispatchable and non-dispatchable technologies do not reflect the actual costs and shortcomings of the technologies.

Baseload cycling also reduces the environmental benefits of renewable energy. Because solar energy is unreliable, coal and nuclear plants must be kept cycling to make up for when solar energy is unable to meet demand. These plants emit greenhouse gases, partially offsetting the environmental benefits of solar energy. Researchers at Carnegie Mellon

University created a model that estimates the average amount of this offset due to baseload cycling is 20 percent.105

TRANSMISSION COSTS

Transmission costs are a significant component of energy costs and are highly dependent on the location of the energy source. Unlike other energy sources, such as coal, natural gas, or wind power, solar is capable of producing electricity anywhere the sun shines, which includes large metropolitan areas, suburban businesses and homes, and the isolated expanse of the Southwestern deserts.

For both residential and commercial solar projects, transmission costs are zero because the energy is produced and used on-site. For utility-scale solar, costs are based largely upon the location of the solar plant. Ideal areas for utility-scale solar energy generation are often far from the population centers that utilize the electricity. As such, transmission costs vary widely.

SOCIAL AND ENVIRONMENTAL COSTS

One of the key justifications for government intervention in the energy market is to address social and environmental costs. An accurate estimate of the cost of producing electricity should include health and environmental costs imposed on society that are not borne by producers or consumers, often known as externalities. Social and environmental costs include potential health problems that power plants create for the nearby population, negative effects of energy production on the environment, and effects on global climate change.

Analysts have attempted to price carbon emissions based on their social and environmental effects; however, these numbers are so arbitrary that they do not provide clear policy direction. According to a CATO report, estimates for the correct tax on carbon emissions vary widely—from $5 to $100 per ton—while estimates for the damages caused by

carbon dioxide range from $5 to $35 per ton.106 Of the literature examined in this report, the Hamilton Project is the only one to attempt to quantify the social costs of energy. The Hamilton Project calculates the social cost of a new

solar PV project at $10 per megawatt-hour, compared to $53 per megawatt-hour for coal.107

http://instituteforenergyresearch.org/electricity-generation 105Katzenstein, W., & Apt, J. 2009. “Air Emissions Due to Wind and Solar energy.” Environmental Science & Technology Pg. 253-258. Retrieved from: http://pubs.acs.org/doi/pdf/10.1021/es801437t 106 Litterman, B. 2013. “What Is the Right Price for Carbon Emissions?” CATO; Regulation: Energy & Environment. Pg. 38. Retrieved from: http://object.cato.org/sites/cato.org/files/serials/files/regulation/2013/6/regulation-v36n2-1-1.pdf 107 Greenstone, M., & Looney, A. 2011, May. "A Strategy for America's Energy Future: Illuminating Energy's Full Costs." Pg.18. Retrieved from: http://www.hamiltonproject.org/files/downloads_and_links/05_energy_greenstone_looney.pdf


Because of the high degree of uncertainty involved in the calculation of social and environmental costs, attempts to accurately quantify this factor generally fail. Economist Robert Pindyck, a professor at the Massachusetts Institute of Technology, notes that economists have attempted to quantify the social cost of carbon by developing integrated assessment models. Pindyck notes, "these models have crucial flaws that make them close to useless as tools for policy

analysis."108 Because so little is known regarding the magnitude of the link between carbon emissions and the potential for human-caused catastrophic climate change, attempts to quantify social and environmental costs rely on too many assumptions to provide accurate, or even useful, estimates. For this reason, we do not recommend making policy decisions that impose billions of dollars of costs on American taxpayers in the hopes of securing some uncertain, future environmental benefit.

THE FUTURE OF SOLAR ENERGY

Solar energy has incredible potential for improvement in efficiency and lower component costs. Unfortunately, major developments, are required before solar energy can compete with traditional energy producers. Many of these developments have been tested in laboratories, but may not be implemented until manufacturing ability is improved

and cheaper materials are available.109

The Department of Energy’s SunShot Initiative funds research projects in an effort to reduce the cost of solar energy. The program recognizes that solar energy is far from being competitive on the energy market, and its goal is to decrease

the cost of solar energy by 75 percent of 2012 levels by 2020.110 This goal, however, is not realistic. The NREL study "Residential, Commercial, and Utility-Scale Photovoltaic System Prices in the United States: Current Drivers and Cost-Reduction Opportunities" predicts utility-scale solar PV system prices dropping to $1.71 per watt in 2020, still

significantly higher than SunShot goals of $1.00.111

The Rocky Mountain Institute investigated the future viability of solar energy in conjunction with battery technology that would allow homes to store solar energy and disconnect from the utility grid completely. RMI estimates that during the next 35 years, advancements in battery technology will enable solar energy to achieve grid parity in all five of its sample regions (Hawaii, New York, California, Kentucky, and Texas), thus enabling consumers to power their homes

day and night.112

Widespread residential grid parity may not happen as quickly as RMI projects. This study assumes both a rise in overall energy prices and a drop in the cost of residential solar energy, which is already favorably estimated. the RMI report shows that revolutionary improvements in solar technology may not be needed for solar energy to reach grid parity. As federal regulations increase the cost of producing electricity from conventional energy sources like coal, these higher energy prices for conventional sources may bring grid parity to solar before the price of solar can reach current grid parity levels on its own.

In Figure 9, the solid lines represent the slowly falling costs of residential solar energy. Although the estimates for current solar prices are highly optimistic, an eventual and slow decrease in residential LCOEs is realistic, mostly as a

108 Pindyck, R. S. 2013, July. "Climate Change Policy: What do the Models Tell Us?" National Bureau of Economic Research. Retrieved from: http://web.mit.edu/rpindyck/www/Papers/Climate-Change-Policy-What-Do-the-Models-Tell-Us.pdf 109 Sunshot. 2012, February. "Sunshot Vision Study." U.S. Department of Energy (DOE). Pg. 73. Retrieved from: http://energy.gov/sites/prod/files/2014/01/f7/47927_chapter4.pdf 110 Goodrich, A., James, T., & Woodhouse, M. 2012, February. "Residential, Commercial, and Utility-Scale Photovoltaic (PV) System Prices in the United States: Current Drivers and Cost-Reduction Opportunities." Pg. 1. Retrieved from: http://www.nrel.gov/docs/fy12osti/53347.pdf 111 Ibid. 112 Rocky Mountain Institute. 2015. “The Economics of Grid Defection.”Retrieved from: http://www.rmi.org/electricity_grid_defection


result of incremental resource and manufacturing improvements. These low prices are also highly dependent on the development of cheap battery storage technology. The dotted lines represent the retail cost to consumers of connecting to the grid.

Figure 9: Solar-Plus-Battery Levelized Cost of Electricity (LCOE) VS. Utility Retail Price Projections113

Storage capacity is the key factor if solar energy is to become a competitive energy technology. Higher efficiency rates combined with a higher storage capacity would mean solar could produce and store energy during the day and continue to provide that energy to the grid at night. One example of such advances in battery storage is the company Torresol Energy, which built a 19.9-megawatt solar thermal project with storage called Gemasolar. In summer of 2013, this

project produced energy for 24 hours a day for 36 consecutive days.114

113 Rocky Mountain Institute. 2015. “The Economics of Grid Defection.” Retrieved from: http://www.rmi.org/electricity_grid_defection 114 Fitzpatrick, E. 2013, October. “Solar storage plant Gemasolar sets 36-day record for 24/7 output.” Retrieved from:http://reneweconomy.com.au/2013/solar-storage-plant-gemasolar-sets-36-day-record-247-output-12586


Tesla is currently working on a factory to increase battery production and reduce costs. The Nevada-based lithium ion

battery factory is expected to start construction in 2017 and operate at full capacity by 2020.115 The company estimates that by producing batteries in bulk, they may be able to reduce by 30 percent the cost per kilowatt-hour of lithium

batteries.116 This would lower the overall cost of storage, potentially creating affordable storage for residential solar systems. These developments are distant, however, and solar therefore relies heavily on state and federal subsidies to ensure its survival.

KEY FINDINGS

Despite attempts to spur solar energy development through federal and state policies, solar energy is the most expensive way to produce electricity. Thanks to government intervention at the state and federal level, generating electricity from the sun entails many unseen costs that must be born by taxpayers and electricity consumers. Any cost estimate for solar energy is likely to account for the explicit costs of production, such as capital costs, operations and maintenance, capacity factor, and transmission costs. A more-accurate estimate of the cost of producing electricity from solar energy must also take into account the following, more implicit, cost considerations:

• Federal policies intended to boost solar energy production distort the market, unfairly transfer wealth, add to taxpayers’ burden, and transfer risk from solar power producers to taxpayers.

• State policies like mandates, tax incentives, feed-in tariffs, and net metering arbitrarily pick winners and losers and increase the burden on state taxpayers.

• Federal and state policies result in opportunity costs— taxpayers lose the benefits their tax dollars could have paid for had those funds been left in the hands of individuals with better local knowledge of how to spend their money.

• Government policies incentivize solar energy, distorting the energy market. Solar energy’s inability to meet demand consistently leads to reduced grid reliability.

• Because solar energy is unreliable, conventional generators must be kept on reserve to meet demand when solar energy is unable to do so. This drives up the cost of electricity for consumers, as two plants are kept running to do the job of one.

• Solar energy is not as environmentally friendly as many claim because baseload cycling offsets the carbon reduction benefits of solar and wind by 20 percent, on average.

115 Tesla Motors. 2015. "Tesla Gigafactory." Retrieved from: http://www.teslamotors.com/gigafactory 116 Ibid.


Federal Policies

State Policies

Capital Costs Opportunity Cost

O&M Reduced Reliability

Capacity Factor Baseload Cycling

Transmission Costs Social & Environmental Costs

Explicit Costs + Implicit Costs = The Overall Cost of Solar Energy

CONCLUSION

Because of solar power’s perceived environmental benefits, US policymakers have attempted to boost the technology by prematurely choosing solar power as the eventual winner in the energy market. To do this, they have created subsidies and tax programs that result in solar energy being less environmentally friendly than it is advertised to be and more expensive. Government policies also discourage innovation and destabilize the energy market, making the development of smarter and less-expensive technologies even less likely. Without the support of such policies, many solar power projects would no longer be economically feasible.

The federal and state renewable energy policies discussed in this report burden US taxpayers and electricity consumers with unseen costs and lending risks, unfairly transfer wealth between American citizens, destabilize the US power grid, and discourage innovation in energy technology. Instead of attempting to predict or hasten the future of America's energy needs, US policymakers should leave energy decisions to markets.


APPENDIX A:

COMPARATIVE ANALYSIS OF TAX CODE PROVISIONS RELATED TO ENERGY PRODUCTION

By: Jonathan E. Jenkins, JD, LLM

1. ABSTRACT

This note aggregates sections of the Internal Revenue Code and comparative studies of federal tax policy towards energy production, and answers the question about whether tax policy treats equally all sources of energy production (coal, oil, natural gas, wind, solar, etc.). Tax policy does not treat all energy sources equally, but instead, during the past ten years, federal tax policy has shifted to give greater tax preferences to renewable energy sources over fossil fuels. Congressional Budget Office (CBO) estimates show significantly more tax expenditures for renewable energy than for fossil fuels during the years 2008-2011, by ratio of approximately four to five times greater.117 A graph prepared by the CBO illustrates the estimated tax expenditures/preference by the type of fuel or technology (see the CBO graph attached at the end of this note as Exhibit A).

2. BRIEF HISTORY OF TAX INCENTIVES FOR ENERGY PRODUCTION

“The Internal Revenue Code (I.R.C.) has been intimately linked to tax subsidies for investment, development, and production of American energy sources for much of this nation’s history. The same year that Congress adopted the federal income tax in 1913, it also passed legislation permitting oil companies to receive a subsidy for depleting an oil-based resource.”118

“In contrast to the first traditional energy tax subsidies in 1913, Congress passed the first renewable energy tax credits in 1978,119 likely as a response to the energy crisis of the late 1970s.120 From 1978 until 2015, Congress created new incentives, extended existing incentives, and renewed expired incentives for renewable energy.”121 In December 2015, as part of the spending bill for the 2016 federal budget, Republicans in Congress agreed to extend the tax incentives for renewable energy, which would lapse, in exchange for an agreement with the Obama Administration and Democrats to end the four decade long ban on the export of US produced crude oil.122 This note does not identify or discuss special

117 Congressional Budget Office. Federal Financial Support for Fuels and Energy Technologies. Testimony before U.S. House of Representatives, Subcommittee on Energy (March 2013). 118 Blake Harrison, Expanding the Renewable Energy Industry Through Tax Subsidies Using the Structure and Rationale of Traditional Energy Tax Subsidies, 48 U. Mich. J.L. Reform 845 (2015) (Quoting Mona L. Hymel, Environmental Tax Policy in the United States: A “Bit” of History, 3 Ariz. J. Envtl. L. & Pol’y 157, 159 (2013)). 119 The first legislation creating tax credits for renewable energy was the Energy Tax Act of 1978, Pub. L. No. 95-618, 92 Stat. 3174 (1978). Hymel, supra note 1, at 160. 120 See Hymel, supra note 2, at 160. 121 In 2005, Congress passed the Energy Tax Incentives Act of 2005, Pub. L. No. 109-58, 119 Stat. 986 (2005). In 2008, Congress passed the Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-343, 122 Stat. 3765 (2008) (codified at 12 U.S.C.§§5201-61). In 2009, Congress passed the American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5, 123 Stat. 115 (2009). In 2012, Congress passed the American Taxpayer Relief Act of 2012. Hymel, supra note 2, at 160 n.11-13; Database of State Incentives for Renewables and Efficiency (hereainfter “DSIRE”), Federal Incentives/for Renewables & Efficiency: Modified Accelerated Cost-Recovery System (Jan. 1, 2013), available at: http://www.dsireusa.org/; American Taxpayer Relief Act of 2012, Pub. L. 112-240, 126 Stat. 2313 (2012), and see, 122 Associated Press. “Congress OKs ‘16 Budget, Tax Breaks, Even Sledding.” Denver Post [Denver] 17 Dec. 2015, sec. A: 20. Print.


appropriations or spending measures made by Congress (i.e., “pork”), because those are beyond the practical spoke of this note. For example, part of the $1.1 trillion spending bill to fund the federal government for the 2016 budget included a provision, at the request of Senator Thad Cochran (Republican, Mississippi), for an appropriation of “at least $160 million to a financially troubled ‘clean coal’ power plant” located in Kemper County, Mississippi.123 Identifying all such special appropriations is not feasible.

Most subsidies to fossil fuels were written into the U.S. Tax Code long ago as permanent provisions, while subsidies for renewables are time-limited initiatives implemented through energy bills that have set expiration dates.124 The expiration dates built into short term renewable subsidies, lasting one or two years, and this short term expirations create an unstable investment environment for renewable energy. The short term nature of these subsidies has the effect of discouraging long term investment into renewable energy.125

An overlap of tax incentives exists among fossil fuels, and also among renewable energies, so it is not always possible to allocate the value of the annual subsidy for a specific energy industry, such as coal or wind.126 Some subsidies though are industry specific, and are noted below.

3. COAL

3.1 CREDIT FOR PRODUCTION OF NONCONVENTIONAL FUELS

(annual subsidy: $14 billion)

I.R.C. Section 45K. This provision provides a tax credit for the production of certain fuels. Qualifying fuels include: oil from shale, tar sands; gas from geopressurized brine, Devonian shale, coal seams, tight formations, biomass, and coal-based synthetic fuels. This credit has historically primarily benefited coal producers.127

3.2 CHARACTERIZING COAL ROYALTY PAYMENTS AS CAPITAL GAINS

(annual subsidy: $986 million)

I.R.C. Section 631(c). Income from the sale of coal under royalty contract may be treated as a capital gain rather than ordinary income for qualifying individuals.128

123 Id. 124 “Federal Coal Subsidies.” SourceWatch. The Center for Media and Democracy, 9 July 2014. Web. 03 Mar. 2016. 125 See Harrison, supra note 2, at 861-66. 126 See, e.g., Oil Change International. Cashing In on All of the Above: U.S. Fossil Fuel Production Under Obama. July 2014. 127 “Federal Coal Subsidies.” SourceWatch. The Center for Media and Democracy, 9 July 2014. Web. 03 Mar. 2016. 128 Id. (Quoting the 2011 report, “What Would Jefferson Do?: The Historical Role of Federal Subsidies in Shaping America’s Energy Future” calculated this subsidy totaled over $1.3 billion in government tax expenditures from 2000 – 2009).


3.3 EXCLUSION OF ALTERNATIVE FUELS FROM FUEL EXCISE TAX


I.R.C. Section 6426(d). This section applies to liquified petroleum gas (LPG), P-series fuels (defined at 42 U.S.C. 13211(2)), compressed natural gas (CNG), liquefied natural gas (LNG), liquefied hydrogen, liquid coal, and liquid hydrocarbon from biomass.129

3.4 OTHER-FUEL EXPLORATION & DEVELOPMENT EXPENSING


I.R.C. Section 617. Identical provisions as applied to oil and gas (above). Including, for example, the costs of surface stripping, and construction of shafts and tunnels.130

3.5 OTHER-FUEL EXCESS OF PERCENTAGE OVER COST DEPLETION


I.R.C. Section 613. Taxpayers may deduct 10 percent of gross income from coal production.131

3.6 CREDIT FOR CLEAN COAL INVESTMENT

(annual subsidy $186 million)

I.R.C. Sections 48A and 48B. Available for 20 percent of the basis of integrated gasification combined cycle property and 15 percent of the basis for other advanced coal-based generation technologies.132

3.7 SPECIAL RULES FOR MINING RECLAMATION RESERVES

(annual subsidy $159 million)

I.R.C. Section 468. This deduction is available for early payments into reserve trusts, with eligibility determined by the Surface Mining Control and Reclamation Act and the Solid Waste Management Act. The amounts attributable to mines rather than solid-waste facilities are conservatively assumed to be one-half of the total.133

129 Id. 130 Id. 131 Id. 132 Id. 133 Id.


3.8 CARBON DIOXIDE (CO2) SEQUESTRATION CREDIT

($0 in 2009, $60 million in 2013, for both coal and oil combined)

Tax credit of $20 per ton of CO2 sequestered (largely from coal plants); $10 per ton for CO2 used for enhanced oil recovery.134

3.9 BLACK LUNG DISABILITY TRUST FUND

(total subsidy $1 billion)

Pays health benefits to coal miners afflicted with pneumoconiosis, a long-term degenerative disease from constant inhalation of coal dust, also known as “black lung.” Created in 1978, it is funded through an excise tax on coal to support a trust fund covering health costs of affected workers, however the tax is not sufficient to cover all costs, and the BLDTF was given “indefinite authority to borrow” from the U.S. General Fund. By the end of FY 2008, the BLDTF had accrued nearly $13 billion in debt. In 2008, Congress partially “bailed out” the BLDTF, which the Environmental Law Institute (ELI) tabulated as a subsidy to coal.135

3.10 EXCLUSION OF BENEFIT PAYMENTS TO DISABLED MINERS


30 U.S.C. 922(c). Disability payments out of the Black Lung Disability Trust Fund are not treated as income to the recipients.136

4. OIL AND NATURAL GAS

Estimates for annual tax expenditures for oil and natural gas production are often grouped together, since those tax expenditures come from the same sections of the I.R.C., and because the extraction methods are similar. Total oil and gas subsidies are estimated at $5.3 billion in 2009, and $10.5 billion in 2013.137

4.1 MASTER LIMITED PARTNERSHIPS (MLP)

($2.3 billion in 2009, and $3.9 billion in 2012)

More than three-quarters of MLPs are fossil fuel companies.138 The MLP is a complicated and creative tax avoidance structure.139 “[The MLP] ‘is a business structure that is taxed as a partnership, but whose ownership interests are traded on a market like corporate stock.’140 Instead of a typical corporate structure - investors, managers, and officers

134 Id. 135 Id. 136 “Federal Coal Subsidies.” SourceWatch. The Center for Media and Democracy, 9 July 2014. Web. 03 Mar. 2016. 137 Cashing In on All of the Above: U.S. Fossil Fuel Production Under Obama. July 2014. 138 Id. 139 The explanatory discussion in this section comes from: Blake Harrison, Expanding the Renewable Energy Industry Through Tax Subsidies Using the Structure and Rationale of Traditional Energy Tax Subsidies, 48 U. Mich. J.L. Reform 845, 855-56 (2015). 140 For instance, the I.R.C. states that, for corporations in general, “[a] tax is hereby imposed for each taxable year on the taxable income of every corporation.” I.R.C. § 11(a) (2012). Partnerships, a taxable entity that will be discussed, infra, are another type of taxable entity that


- an MLP’s members resemble more closely a partnership and are split into two categories: limited partners, who usually hold ninety-eight percent of the enterprise but have no control in the MLP’s operation, and general partners, who hold a two percent ownership stake in the enterprise and oversee the MLP’s operation.141 Similar to forming one’s business as a corporation, an MLP seeks investors and promises to reward them with dividends from the company’s profits following investment. Unlike a corporation, however, if particular conditions are met, then the MLP is be treated as a partnership instead of a corporation.142 This means that the entity’s income is only taxed once, on the dividends it gives out to its investors. Thus, MLPs provide many of the same benefits of incorporation without the added double tax liability. The result is more money saved and, thus, more money for an MLP’s investors in the form of dividends. Only businesses that fall under a categorical exception143 may take advantage of all that an MLP structure provides. The default position of the I.R.C. is to treat MLPs as corporations.144 However, if ninety percent of an MLP’s gross income comes from a qualifying source, the I.R.C. treats the MLP as a partnership.145 Qualifying sources include interest-based income, real property rents,146 and, most importantly, ‘income and gains derived from the exploration, development, mining or production, processing, refining, transportation (including pipelines transporting gas, oil, or products thereof), or the marketing of any mineral or natural resource […]’147 Ultimately, if an oil and gas producing taxpayer structures its business as an MLP, the taxpayer may avoid corporate double taxation and instead give that money to its investors. The current market capitalization of MLPs is nearly $ 490 billion.”148

4.2 INTANGIBLE DRILLING COSTS (IDC)

(Estimated between $43 billion and $55 billion during 1968-2000, $1.6 billion in 2009, $3.5 billion in 2013)

This expenditure provides a 100% tax deduction for costs not directly part of the final operating oil or gas well (such as labor costs, survey work, and ground clearing, including oil and gas exploration and development costs.)149 The value of the IDC between 1968 and 2000 was between forty-three and fifty-five billion dollars in lost revenue.150

4.3 ENHANCED OIL RECOVERY CREDIT (EORC)

($1 billion between 1990 and 2000) 151

receives unique treatment under the I.R.C.. However, a type of partnership that specifically targets oil and gas companies is best understood as a subsidy and will be treated in the following section about subsidies. See U.S. Sen. Chris Coons, The Master Limited Parity Partnership Act 1 (Apr. 24, 2013), available at http://coons.senate.gov/download/mlp-white-paper/ (explaining that Master Limited Partnerships are traded on the market like a corporate organization but only taxed at the lower level of a partnership). 141 Id. 142 See I.R.C. § 701 (2012) (stating that, in partnerships, partners owe taxes in their individual capacities, not the partnerships in their capacities as entities). 143 See I.R.C. § 7704(c) (2012). 144 I.R.C. § 7704(a) (2012). 145 I.R.C. § 7704(c) (2012). 146 I.R.C. § 7704(d)(1) (2012). 147 I.R.C. § 7704(d)(1)(E) (2012) 148 Blake Harrison, Expanding the Renewable Energy Industry Through Tax Subsidies Using the Structure and Rationale of Traditional Energy Tax Subsidies, 48 U. Mich. J.L. Reform 845, 855-56 (2015). 149 Id. 150 U.S. Gov’t Accountability Office, Tax Incentives for Petroleum and Ethanol Fuels 7-9 (2000), available at http://www.gao.gov/new.items/rc00301r.pdf. See also, Blake Harrison, Expanding the Renewable Energy Industry Through Tax Subsidies Using the Structure and Rationale of Traditional Energy Tax Subsidies, 48 U. Mich. J.L. Reform 845, 855-56 (2015). 151 U.S. Gov’t Accountability Office, Tax Incentives for Petroleum and Ethanol Fuels 9-13 (2000), available at http://www.gao.gov/new.items/rc00301r.pdf.


“This subsidy152 covers expenses related to oil and gas in hard-to-drill areas and nearly dry wells in addition to oil and gas wells that are particularly difficult to drill.153 As a result, the EORC ‘encourages oil companies to go after reserves that are more expensive to extract, like those that have been nearly depleted or that contain especially thick crude oil.’154 The EORC awards taxpayers a credit for any taxable year in an amount equal to fifteen percent of the taxpayer’s qualified enhanced oil recovery costs for such taxable year.155 Qualified costs include the IDC costs detailed above, expenses exceeding those costs that are integral parts of the project incurred in an attempt to extract more oil (tertiary injectant expenses), and depreciation of tangible property.156 Certain restrictions and limitations apply to the EORC as well,157 and the EORC is only available to parties who have an operating mineral interest in the property.”158

4.4 NONCONVENTIONAL SOURCE CREDIT (NSC)

($11 billion between 1980 and 2000)159

“In general,160 the NSC provides an incentive for taxpayers to produce oil and gas domestically from sources that typically require more investment to extract oil and gas.161 The difficult-to-drill sources include “oil from shale and tar sands, gas from geopressured brine, Devonian shale, coal seams, [and] tight formations.”162 The NSC gives a three dollar-per-barrel credit, which is adjusted for inflation and may be reduced if the market cost of oil per barrel increases above a predetermined price.

4.5 LOST/REDUCED ROYALTIES FROM LEASING

($2.2 billion in 2009, and again in 2013)

Lost/reduced royalties from leasing of federal lands for onshore and offshore drilling.163

152 Discussion in this section comes from: Blake Harrison, Expanding the Renewable Energy Industry Through Tax Subsidies Using the Structure and Rationale of Traditional Energy Tax Subsidies, 48 U. Mich. J.L. Reform 845, 854-55 (2015). 153 I.R.C. § 43 (2012). 154 Mark Zepezauer, Take the Rich Off Welfare 3, 119 (2nd ed. 2004). 155 I.R.C. § 43(a) (2012). 156 Mona L. Hymel, Environmental Tax Policy in the United States: A “Bit” of History, 3 Ariz. J. Envtl. L. & Pol’y 157, 171 (2013); I.R.C. § 43(c) (2012). 157 I.R.C. § 43(b) (2012) (detailing a pro-rated credit if the price of the oil is above a certain price per barrel); I.R.C.§§43(c)(2)(A) (2012) (detailing that a party must domestically produce a significant increase in amount of crude oil recovery), 43(d) (detailing that a taxpayer must also reduce the otherwise deductible or capitalizable costs). 158 Enhanced Oil Recovery Credit, 57 Fed. Reg. 54,919, 54,920 (Nov. 23, 1992) (codified at 26 CFR pt. 1, 601). 159 U.S. Gov’t Accountability Office, Tax Incentives for Petroleum and Ethanol Fuels 9-13 (2000), available at http://www.gao.gov/new.items/rc00301r.pdf. 160 Discussion from this section comes from: Blake Harrison, Expanding the Renewable Energy Industry Through Tax Subsidies Using the Structure and Rationale of Traditional Energy Tax Subsidies, 48 U. Mich. J.L. Reform 845, 854-55 (2015). 161 I.R.C. § 45K (2012). 162 In determining what constitutes taxable income, the I.R.C.’s congressional underpinnings play a large part in what amounts to a series of political, accounting, economic, and social considerations. See Boris I. Bittker & Lawrence Lokken, Federal Taxation of Income, Estates and Gifts §§ 2.1, 27.6. (2012) (“The statutory base is ‘taxable income,’ a term whose content not only reflects accounting principles and economic concepts but also embodies numerous legislative judgments about fairness, administrative convenience, and the desirability of encouraging or not impeding a host of social, personal, and business activities.”). 163 Oil Change International. Cashing In on All of the Above: U.S. Fossil Fuel Production Under Obama. July 2014.


4.6 PERCENTAGE DEPLETION ALLOWANCE

($340 million in 2009, $900 million in 2013)

Independent producers can deduct 14-15% of large investment costs from income taxes. “Percentage depletion allows the firm to deduct a fraction of the revenue arising from sale of the resource. Historic percentage depletion rates have been as high as 27.5%. Currently percentage depletion is allowed for independent producers at a 15% rate for oil and gas and 10% for coal.164 Percentage depletion is allowed on production up to 1,000 barrels of average daily production of oil (or its equivalent for natural gas). In addition, the depletion allowance cannot exceed 100% of taxable income from the property (50% for coal) and 65% of taxable income from all sources.165 Despite the curtailed availability of percentage depletion, it continues to be a significant energy tax expenditure, costing $3.2 billion over five years in the federal budget.”166

4.7 DOMESTIC MANUFACTURING DEDUCTION


Allows oil producers to claim a tax break intended for U.S. manufacturers to prevent job outsourcing.167

4.8 EXEMPTION FROM PASSIVE LOSS LIMITATION


Exempts investors from limits on deductions of losses from oil and gas activities in which they are not directly involved.168

4.9 DEDUCTION FOR TERTIARY INJECTANTS

($0 in 2009, $7 million in 2013)

Allows companies to deduct the costs of fluids, gases, and other chemicals used for enhanced oil recovery from existing wells.169

164 Id. “Independent producers are defined as producers who do not engage in refining or retail operations. EPACT increased the amount of oil a company could refine before it was deemed to engage in refining for this purpose from 50,000 to 75,000 barrels per day.” 165 Id. “Amounts in excess of the 65% rule can be carried forward to subsequent tax years. The net income limitation has been suspended in years past but the suspension lapsed as of this year.” 166 Gilbert E. Metcalf. Federal Tax Policy Towards Energy. The MIT Joint Program on the Science and Policy of Global Change. January 2007. 167 Oil Change International. Cashing In on All of the Above: U.S. Fossil Fuel Production Under Obama. July 2014. 168 Id. 169 Id.


4.10 DEEP GAS AND DEEP WATER PRODUCTION ROYALTY RELIEF


Suspension of royalty payments for deepwater oil and gas production.170

4.11 DEDUCTION FOR OIL SPILL REMEDIATION COSTS

($679 million in 2011, with a spike of $9.9 billion in 2010)

This deduction allows companies to deduct from tax payments the costs associated from cleaning up oil spills. In 2010, an extraordinary spike occurred with the claim of this deduction, because of the British Petroleum Deepwater Horizon oil spill in the Gulf of Mexico.171

4.12 THE LOW INCOME HOME ENERGY ASSISTANCE PROGRAM

(annual subsidy $6.3 billion)

“The main structure of the program is to provide low-income households with the means to make their utility payments, the vast majority of which is energy generated by fossil fuels [mostly natural gas]. The U.S. Department of Health and Human Services has tabulated the percentage of households using fossil versus non-fossil heating fuels in 2001, and ELI used the percentage as a proxy for fossil versus non-fossil expenditures for 2002-2008.”172

5. WIND AND SOLAR

Estimates for annual tax expenditures for wind and solar renewable energy production are often grouped together, since those tax expenditures come for the same sections of the I.R.C..

5.1 MODIFIED ACCELERATED COST-RECOVERY SYSTEM (MACRS)

I.R.C. Section 168. This incentive, 173 “permits businesses to recover investments in certain property through depreciation deductions at a faster rate than otherwise permissible under the IRC’s standard depreciation deduction.174 The relevant qualifying properties include a variety of solar technologies and small-scale wind turbines.175 For example, the MACRS allowance permits a business to purchase solar or small-scale wind technology that would normally depreciate over a lifetime of five to ten years, and instead deduct its depreciation over five years.176 Additionally, the 2012 extension of the MACRS deduction extends a bonus depreciation, which “allows industrial and commercial

170 Id. 171 Id. Joint Committee on Taxation score of H.R. 3852 of the 112th Congress bill to amend the Internal Revenue Code of 1986 to disallow a deduction for amounts paid or incurred by a responsible party relating to a discharge of oil as cited by Senator Bernie Sanders, End Polluter Welfare Act list of current subsidies, 2012, http://www.sanders.senate.gov/imo/media/doc/EPW_Act_Section_by_Section.pdf , and see, Russ Britt, “BP taking $10 Billion Tax Credit from Gulf Spill”, The Wall Street Journal, July 27, 2010. 172 Id. 173 Discussion in this section comes from: Blake Harrison, Expanding the Renewable Energy Industry Through Tax Subsidies Using the Structure and Rationale of Traditional Energy Tax Subsidies, 48 U. Mich. J.L. Reform 845, 857-58 (2015). 174 I.R.C. § 168 (2012). 175 I.R.C. § 168(e)(3)(B)(vi) (2012). 176 Id.


businesses to recover investment in, among other renewables, solar and wind and deduct a depreciation allowance up to 50 percent in the first year that the equipment is purchased and placed into service,”177 as long as it was purchased between 2008 and 2012.”178

5.2 PRODUCTION TAX CREDIT

($18 billion between 1992 and 2015) 179

I.R.C. Section 45. This incentive,180 “allows taxpayers to receive a credit on their taxes for the electricity that they produce from qualifying renewable energy technology and sell to unrelated parties.181 It is ‘a per-kilowatt-hour tax credit for electricity generated by qualified energy resources and sold by the taxpayer to an unrelated person during the taxable year.’182 Unlike the MACRS, which primarily allows a party to deduct the purchased renewable energy technology’s depreciated value from their taxes and thus pay fewer taxes on the technology, the PTC benefits parties who produce and sell electricity with their renewable energy technology by giving the taxpayer a credit on their income taxes. The PTC is available for any scale wind project, but not for solar energy production.183 This restriction against solar panels may be due to the disturbance that a production tax credit’s application could have on a taxpayer’s income tax burden as well as on the utility industry. Because residential scale solar energy production is becoming increasingly feasible and popular across the country,184 tax credits for electricity production by owners of small-scale solar panels would disadvantage utility competitors and reduce individual homeowners’ income tax burdens. A taxpayer who wishes to produce and receive a tax credit for wind power must follow certain conditions. First, according to the most recent legislation passed in January 2013, a wind developer must begin construction on the project prior to January 1, 2014 in order to receive a tax credit.185 Second, a PTC-eligible facility only qualifies if it is within its first ten years of operation.186 If a wind farm meets both conditions, once the wind farm begins to produce wind energy, the taxpayer is eligible for a tax credit - currently 2.2 cents per kilowatt-hour - for each kilowatt of electricity the facility delivers to the grid.187

5.3 THE RENEWABLE ENERGY INVESTMENT TAX CREDIT (ITC)

($2.7 billion between 2011 to 2015)188

177 Wang Mingyuan, Government Incentives to Promote Renewable Energy in the United States, 24 Temp. J. Sci. Tech. & Envtl. L. 355, 362 (2005); see DSIRE; and see American Taxpayer Relief Act of 2012, Pub. L. 112-240, 126 Stat. 2313 (2012). 178 Blake Harrison, Expanding the Renewable Energy Industry Through Tax Subsidies Using the Structure and Rationale of Traditional Energy Tax Subsidies, 48 U. Mich. J.L. Reform 845, 857-58 (2015). 179 Impact of Tax Policies on the Commercial Application of Renewable Energy Technology: Hearing Before the H. Comm. on Science, Space, and Technology, Subcomm. on Investigations and Oversight & Subcomm. on Energy and Environment, 112th Cong. 3 (2012) (statement of Molly Sherlock, Specialist in Public Finance), available at http://.house.gov//.science.house.gov////-SY21-WState-MSherlock-20120419.pdf at 3. 180 Discussion in this section also comes from: Blake Harrison, Expanding the Renewable Energy Industry Through Tax Subsidies Using the Structure and Rationale of Traditional Energy Tax Subsidies, 48 U. Mich. J.L. Reform 845, 857-58 (2015). 181 I.R.C. § 45. 182 See DSIRE; and see American Taxpayer Relief Act of 2012, Pub. L. 112-240, 126 Stat. 2313 (2012). 183 See I.R.C. § 45 (2012) (omitting solar as a qualifying energy source). 184 Shayle Kann et al., Solar Market Insight Report 2014 Q1, at 3 (Solar Energy Indus. Ass’n 2014). 185 Melissa Powers, Sustainable Energy Subsidies, 43 Envtl. L. 211, 222 at n54 (2013), see also I.R.C. § 45(d)(1) (2012) (limiting the production tax credit to those facilities whose construction begins prior to January 1, 2014); U.S. Internal Revenue Serv., Notice 2013-29 (2013) 186 Powers at 222, see also I.R.C. § 45(a)(2)(A)(ii) (2012) (limiting the credit for the first ten years of the operation of a facility). 187 Powers, at 222, see also 26 I.R.C. § 45(b)(2) (2012) (credit and phase-out adjustment based on inflation). 188 Impact of Tax Policies on the Commercial Application of Renewable Energy Technology: Hearing Before the H. Comm. on Science, Space, and Technology, Subcomm. on Investigations and Oversight & Subcomm. on Energy and Environment, 112th Cong. 3 (2012) (statement of Molly Sherlock, Specialist in Public Finance).


I.R.C. Section 48. This incentive is smaller than PTC.189 The ITC190 permits “businesses and energy producers to deduct up to thirty percent of the cost of purchasing solar and small-scale wind technology (less than 100kW), but not large-scale wind technology.191 The ITC historically represented a smaller loss of tax revenue, compared to the PTC. […] Although some of these parties would be glad to receive a tax credit for potential investments in large-scale wind, the thought of making it easier for competitors to enter the electricity market would result in significant pushback from utilities and the producers of traditional energy sources. Although the ITC does not apply to the full range of renewable energy technology, its benefits are numerous. Unlike the PTC, the ITC does not require the purchaser to produce any electricity to earn the credit.192 Additionally, the Tax Code does not limit how many credits a taxpayer may receive in a taxable year for purchasing solar and wind technology.193 However, the ITC has its disadvantages. For example, it explicitly disallows companies to elect the ITC for property for which, in the same taxable year or in prior taxable years, they elected the PTC.194 In other words, for renewable energy technology that produces electricity, a party cannot in the same year deduct the cost of purchasing the technology and receive a tax credit for producing renewable energy. The qualifying investments under the ITC include costs such as ‘installation costs and the cost for freight incurred in construction of the specified energy property.’195 Absent an exemption from the restriction on deducting capital expenditures, however, the ITC does not include all potential project costs such as the cost of land, buildings, certain land improvements,196 siting the technology,197 and connecting transmission lines to the grid.”198

189 Discussion in this section also comes from: Blake Harrison, Expanding the Renewable Energy Industry Through Tax Subsidies Using the Structure and Rationale of Traditional Energy Tax Subsidies, 48 U. Mich. J.L. Reform 845, 859-61 (2015). 190 I.R.C. § 48. See generally DSIRE. 191 I.R.C.§§48(a)(1)-(2) (2012) (percentage deduction and duration of credit); I.R.C. § 48(a)(3)(A)(i) (2012) (solar energy); I.R.C. § 48(a)(3)(A)(vi) (2012) (small wind energy). Large-scale wind investment is likely not included in the ITC for political and economic reasons. It is unlikely that coal and gas companies would permit Congress to heavily subsidize investments in large-scale wind technology because more investment in wind technology would lead to less coal and gas investment. In addition, large-scale wind technology paired with the PTC makes wind technology investments cost competitive with subsidized natural gas. But, in line with the Note’s central theme, wind technology being cost competitive is insufficient because it does not fully incentivize the adoption of renewable energy. 192 Erin Dewey, Sundown and You Better Take Care: Why Sunset Provisions Harm the Renewable Energy Industry and Violate Tax Principles, 52 B.C. L. Rev. 1105, 1116-17 (2011). 193 See DSIRE. 194 “Such term shall not include any property which is part of a facility the production from which is allowed as a credit under section 45 for the taxable year or any prior taxable year.” I.R.C. § 48(a)(3). 195 Howard Cooper, PTCs, ITCs and Section 1603 Grants: Compare and Contrast, U.S. P’ship for Renewable Energy Fin. (Feb. 2011), available at http://reffwallstreet.com/us-pref/wp-content/uploads/2011/06/PTC-ITC-and-Section-1603-Grants-v2.2.pdf 196 Id. 197 See Shalini P. Vajjhala, Siting Renewable Energy Facilities: A Spatial Analysis of Promises and Pitfalls, Res. for the Future, 2-3 (July 2006), available at http://www.rff.org/rff/Documents/RFF-DP-06-34.pdf 198 Compare I.R.C.§§48(a)(3)(A)-(B), referring only to equipment technology and construction, with the interpretation of intangible drilling costs to include all costs reasonably related to drilling wells.


6. QUANTITATIVELY DE MINIMIS TAX EXPENDITURES

The following tax provisions are viewed as tax expenditures by the staff of the United States Congress, Joint Committee on Taxation,199 but these expenditures are not itemized or quantified in federal reports, because the estimated revenue losses for fiscal years 2013 through 2017 are below the de minimis amount ($50 million/year):

• Credit for producing oil and gas from marginal wells (I.R.C. 45I)

• Credit for producing fuels from a nonconventional source (I.R.C. 45K)

• Seven-year MACRS Alaska natural gas pipeline (I.R.C. 168(e)(3)(C))

• 50-percent expensing of cellulosic biofuel plant property (I.R.C. 168(1))

• Partial expensing of investments in advanced mine safety equipment (I.R.C. 179E)

• Expensing of tertiary injectants (I.R.C. 193)

EXHIBIT A

199 U.S. Congress Joint Committee on Taxation (2013). Estimates of Federal Tax Expenditures for Fiscal Years 2012-2017. (USGPO Publication No. 78-317 JCS-1-13) Washington, DC: USGPO.