A recent article in the New York Times reports:
The United States and other countries are offering incentives to develop their own renewable energy industries, and Mr. Obama called for redoubling American efforts. Yet many Western and Chinese executives expect China to prevail in the energy-technology race.
One key factor in winning the energy-technology race is securing large markets and the right regulation and incentive programs to spur demand for innovative renewable energy technologies. Because of the maturity and low growth of our markets (compared to a country like to China) government regulation and energy policy play a more important role in promoting energy technologies. This blog post will examine this issue through an example in our own backyards: Austin Energy’s program to incentivize rooftop solar panels.
Austin Energy’s Incentive Program
In the past, if you wanted to install solar panels on your roof, Austin Energy would pay you $3.75 per watt of installed capacity for up to $15,000 per home installation or $50,000 per site. In September 2009 the price per watt was reduced to $2.50. This system allows for staged installations, and requires that program participants pick from a group of approved solar providers and installers, and the system must be connected to the grid. This last point may seem obvious, but it belies one of the problems with capacity-based incentives: they reward the installation of rooftop solar, not the contribution of those solar arrays to the energy grid.
Through the solar rebate program at Austin Energy (AE), consumers have received a total of $18 million over the last six years in rebates for the purchase and installation of rooftop solar panels. Nine hundred installations later, Austin is producing three megawatts of electricity from solar. Unfortunately, under the current system, there is neither sufficient time nor money to reach the goal of 100 megawatts of solar power by 2020. AE will have to rethink its incentive program.
Rethinking The Incentive Program
Austin Energy should change from a capacity-based incentive system to a feed-in incentive system. In a feed-in system, utilities promise to pay for the energy that is actually fed in to the energy grid for a long period of time—15 to 20 years. The price must be good enough to ensure a solid return on the investment in a rooftop solar unit. The higher cost of this electricity is passed on to ratepayers, who will see an increase in their electricity bills. The utility may have additional financial burdens associated with upgrading the grid.
This alone would be a significant improvement over the current system, but it is not enough. AE will need to think about a number of additional parameters to craft a better incentive system.
1. Scale Versus Cost
In theory, the more generous the price per watt the faster the solar market will grow. This can have the opposite of the intended effect. Instead leading to cheaper, better solar technology, a spike in demand can drive the price up and slow innovation. Ideally, once the market is a sufficient size, the incentive system will become unnecessary, prices will tighten causing consolidation among manufacturers and installers. Austin will be left with a cleaner, greener energy portfolio, and a stable of strong solar companies to strengthen the local economy, or so they say.
2. How Do You Know When The Price Is Right?
In fact, this can get very complicated. The question of how to set the right price is very difficult to answer. Should price be based on the cost of another, dirtier form of energy like coal, or should it be based on the actual cost of producing energy with solar technology? What impact will price fluxuations in natural gas and goal have on this scheme?
3. Where and When Do We Want Rooftop Solar?
Without market price signals, how can we ensure that solar capacity is built in the right places and feeds energy into the system at the right time? Utilities pay more for electricity at times and locations of high demand. Can a feed-in tariff system price dynamically? If not, we get the equivalent of a really nice centrally-planned road to nowhere.
4. Regulation and Policy
Assuming we can design a superior feed-in tariff system, can it be successful without changes in regulation and energy policy? Utilities have a wide variety of prices, some have rules limiting or prohibiting raising rates. Details like the permit process will have a profound impact on the success of this program as well.