A better (more cost effective) mousetrap? How much do U.S. tax benefits cost per kWh of solar production?

Michael Mendelsohn's picture

I frequently wonder: what is the cost to the taxpayer/ratepayer of the various benefits (federal, state, utility) bestowed on renewable energy projects, and is there a more cost-effective way to support these fledgling technologies? Also, how do U.S. support structures compare in cost to other places, say, Germany, which incentivizes investment in renewable technologies through feed-in tariffs (FITs)?

Of course, that's not so easy an exercise — state and utility payments and support programs differ wildly across the country. So, let's limit the analysis to federal support programs. We'll also limit the analysis to a single technology: solar photovoltaics (PV).

Today, the federal benefits for solar PV include: (1) the investment tax credit (or the recently-expired 1603 Treasury grant), representing 30% of installed costs; and (2) the accelerated depreciation benefits, representing approximately an additional 25% of installed costs [1].

Current installed costs — on average — range from approximately $5/watt for residential systems (fixed mount) to roughly $3/watt for utility scale systems (with single axis tracking). Our analysis also assumes capacity factors of 17% for fixed mount (residential and commercial) systems and 23% for single-axis tracking (utility) systems.

Table 1. Sum of Tax Benefits and Electricity Prices in US
  Est. System Cost ($/W) Tax Benefits (@55%) Capacity Factor Annual kWh/W Total kWh/W (20 years w/ degradation) Unitized Tax Benefit ($ / kWh)
Residential $5 $2.75 17% 1.49 21.24 0.129
Commercial $4 $2.20 17% 1.49 21.24 0.104
Utility $3 $1.65 23% 2.01 28.73 0.057

Under these assumptions, the federal tax benefits provided for PV projects cost taxpayers about $0.06/kWh for utility-scale systems and $0.13/kWh for residential systems, as reflected in Table 1 (see Unitized Tax Benefit column).  The kWh/W and Total kWh/W columns in Table 1 represent the first year and total energy received for each watt installed in the project.  The total energy calculation includes a 0.5% degradation rate, a 3% discount on the value of kWh [2], and a 20-year facility life.

While those values are insightful, they can't be directly compared to other, broader incentive structures such as a FIT in Germany or other locales. That's because the FIT also pays for the power. That is, the FIT represents a combination of the support structure and the power purchase rolled into one. To provide an apples-to-apples comparison, we need to combine the support structure with the value of the power based on the ultimate customer. For U.S. residential and commercial customers, the relevant costs are the approximate retail rates those sectors procure electricity at. For utility systems, the cost is the wholesale price of power at which the utility could procure it (at least for utilities in areas with deregulated wholesale markets).

In Table 2, national average electricity prices — ranging from $0.05/kWh for utility procurement (i.e., wholesale generation) to $0.12/kWh for residential sales — are added to the federal tax benefit to calculate the total price paid for each kWh [3]. Including both components, the compensation to solar power systems ranges from roughly $0.13/kWh for utility-scale systems to $0.27/kWh for residential systems. Utility, state and municipal rebates and REC purchases can increase those numbers depending on region-specific policies and practices.

Table 2. Sum of Tax Benefits and Electricity Prices in US
  Unitized Tax Benefit ($ / kWh) Average U.S. Electricity Rate Combined U.S. Compensation
Residential 0.129 $0.117 $0.246
Commercial 0.104 $0.099 $0.203
Utility 0.057 $0.050 $0.107

Table 3 compares the U.S. payments calculated above to the German FIT payments. German FITs, which — if recent mediation holds up — range from $0.23/kWh for residential to $0.16/kWh for utility-scale systems [4]. Importantly, the German FIT is calculated on the solar resource available in that country; the solar resource is generally better throughout much of the US. If we adjust the German compensation based on the solar resource is available in — say Richmond, Virginia, the German FIT is actually quite small, representing approximately 56-89% of U.S. compensation.

Table 3. U.S. Payments to Solar Energy Systems vs. German Feed-In Tariffs
  Combined U.S. Compensation German FIT (in U.S. $/kWh) Revised German FIT (based on U.S. solar resource) % Ratio of Revised German FIT to Comb. U.S. Compensation
Residential $0.246 $0.231 $0.139 56%
Commercial $0.203 $0.195 $0.117 58%
Utility-scale $0.107 $0.160 $0.096 89%

And yet, Germany induces PV deployment of roughly 5 times the U.S. rate! [5] One factor that slows US deployment — the use of tax policy to support solar and other renewables in the U.S. can lead to cumbersome financial structures that incur significant transactional costs to implement [6].

The cost-effectiveness of taxpayer investment will be increasingly important as the investment tax credit (ITC) declines from 30% to 10% in 2017. And while there will likely be calls to renew the 30% ITC, given our current national debt landscape, the industry may be wise to prepare for an environment of reduced support. Perhaps alternative mechanisms can incentivize more energy per taxpayer-dollar invested.

References:

[1]: Mendelsohn and Harper, 2012, "§1603 Treasury Grant Expiration: Industry Insight on Financing and Market Implications", NREL, June 2012, https://financere.nrel.gov/finance/content/renewable-electricity-faces-financing-challenges-end-federal-1603-grant-program . Accelerated depreciation benefit referenced is gross. Net benefit, over straight line depreciation, would yield roughly half the benefit.
[2]: Representing the approximate yield on 20-year U.S. Treasuries
[3]: Residential and commercial electricity prices are year to date 2012 prices as reported in EIA's Electric Power Monthly, April 2012, http://www.eia.gov/electricity/monthly/epm_table_grapher.cfm?t=epmt_5_3. Utility prices are year to date PJM West prices as reported by EIA via its Wholesale Market Data page, http://www.eia.gov/electricity/wholesale/index.cfm
[4]: Lang, Dr. M.; Mutschler, Dr. U. (2012) "Bundesrat Clears Reduced German Solar Feed-In Tariffs", http://www.germanenergyblog.de/?p=9756. Values were converted to U.S. dollars based on a conversion rate of $1.22 per Euro per FX-rate.net, http://fx-rate.net/EUR/USD/, accessed July 20, 2012.
[5]: See "Where Did All the Solar Go? Calculating Total U.S. Solar Energy Production", Mendelsohn, M., June 2011, https://financere.nrel.gov/finance/content/calculating-total-us-solar-energy-production-behind-the-meter-utility-scale. See also "Best of Both Worlds: What if German installation costs were combined with the world's best solar resources", April 2012, https://financere.nrel.gov/finance/content/germany-solar-feed-in-tariff-FIT-insolation-resource-comparison  
[6]: Mendelsohn and Harper, 2012, op cit.