Is it time to consider Production-Based Solar Incentives?

The subject of government incentives for the solar industry can be controversial. There is debate on the need for and the form of incentives. On one hand, the industry does not wish to depend on unpredictable public policy. On the other hand, government support for the electricity industry has been a fact of its entire existence.

RE Insider – May 5, 2003 From huge hydroelectric programs to the nuclear and coal industries, public policy and funding have been at the core of the industry. Some type of incentives for new technologies, products, and new distribution mechanisms would hardly be unprecedented and, considering the overall social benefits including domestic energy production, a more robust energy infrastructure and significant environmental benefits, public support may well be in order. If we are to consider incentives, particularly those that aid the deployment of solar electric systems, it is worthwhile to consider the design of those incentives. Two concepts have emerged; one that might be called a “front-end loaded” incentive and the second a “production-based” incentive. Front-End Loaded Incentives Starting with the very successful California Energy Commission (CEC) “buy down” program and continued in other programs, there has been a trend for direct support of solar system installation in the form of a one time cash subsidy for system purchase costs. This form of support has been successful in getting thousands of new solar systems into service. While the buy down design has had great benefits, should it be the model for the next wave of incentives? Other forms of support may hold more promise for the long term. Despite the positives, the most significant drawback of a one time incentive program is that it doesn’t reward the right thing. Applying the maxim that “you get what you pay for,” subsidizing system purchases motivates customers to buy and install solar systems; however, an argument can be made that in the long run, paying for the production of electricity will get more electricity produced. The difference between installing systems and making power was well recognized in the CEC program. A system of product approvals, installer training and metrics was devised to offer safeguards and consumer protection; however, some argue that no matter how intricate the safeguards, in the long term this approach is inherently flawed. It does not sufficiently reward the innovation necessary to motivate product development and it is vulnerable to manipulation or even gamesmanship. The inevitable unintended consequences resulting from a competitive marketplace are unlikely to work in the favor of increased solar electricity production. Production based Incentives A production-based plan or “pay for performance” incentive is one where system owners are paid based on the kilowatt hour production of their system, sometimes at very high rates. This concept would allow market forces to work in favor of development of products, techniques and technology that would deliver more kilowatts. Not only does this approach unlock the positive creativity of the industry, but it makes it more likely that even the unintended outcomes will benefit the real objective. There is no more effective production monitoring system than the attention of the system owner to their actual results. If incentives and thus cash flow counts on production, everyone’s attention will be focused in the right place. The production incentive concept has been used by others; indeed, much of the highly subscribed German solar programs are based on this approach. For the US market, there are at least three challenges that have made this design difficult to implement in the past. Technology Issues Metering a large number of systems with appropriate accuracy and with minimum inconvenience at low cost has been a challenge; however, several solutions now exist. Several companies, including solar system producers and meter manufacturers are offering products that could fill the role. In addition, information processing via telephone, wireless networks and the internet are all in service at different levels. There is perhaps no single solution to all applications, however, sufficient products and services exist to meet the needs of most program designs. In the end, if we can provide a power bill to every user in the US, it would seem that the issue of collecting data from solar producers would be surmountable. Initial Capital Costs The up-front capital cost of solar systems has been a hurdle for both residential and commercial customers. This is a key advantage of the front-end loaded incentive design. Today, progressive lending institutions have begun to see the opportunity in offering loans at competitive rates using the solar equipment as collateral. The advent of these low hassle financial products is similar to the loan products available for automobiles and is making the financed purchase of solar systems significantly more approachable. As financial institutions, lenders and system suppliers fill this need with more products and services to facilitate the purchase of systems, the up-front cash barrier is being removed. Of course, in addition to market solutions, government program designers could also include their own low interest loans as an additional feature of a production-based incentive program similar to many of the German solar programs. Policy Challenge A lesson from the wind industry is that a production-based program is only as good as the commitment to long-term funding. Some hope on this issue is provided by the design and funding sources for solar incentive programs to date. Responding to either greater political will or closer proximity to constituents, state and local governments have been more willing to implement programs than the federal government. Many of these programs are already multi-year funded and frequently the funding sources, such as system-benefits charges, have reasonably long horizons. Conclusion Creating policy designed to move markets is fraught with landmines; however, several state and local jurisdictions, including the CEC, have worked through many challenging issues in their design and implementation of the watershed programs that exist today. The next generation of incentives should carefully consider the fundamental design choice of “front-end loaded” or “production-based.” There are strong arguments that support the thought that production-based programs are more likely to push industry innovation and will not only result in more solar systems in operation but will assure more solar electricity production in the long run. About the Author Kevin Hagen is Principal of Shuksan Energy Consulting a Renewable Energy consulting firm specializing in helping buyers of Green Power achieve strong return on investment. He has had 20 years of successful, front line business development, marketing and program management experience in the US and Europe. Starting in 1995 with Trace Engineering and then with Xantrex Technology, Hagen has held senior positions including Director of Sales and Marketing for Renewable Energy and Distributed Generation Markets. He is a former member of the board of the Solar Energy Industry Association and is a frequent speaker, author and advocate for Renewable Energy. He can be reached at
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