By Elizabeth Crouse, K&L Gates LLP

Early in the morning of Saturday, December 2, the U.S. Senate voted along party lines to approve its version of the Tax Cuts and Jobs Act (the “Act”). The U.S. House of Representatives approved its rather different version of the bill on Thursday, November 16, 2017. Although the two bills now must proceed through the conference process to reconcile their differences, many predict that any bill ultimately sent to the President will largely resemble the Senate version. It is not clear how long the conference process may take, but Congressional Republicans have indicated that they intend to send a final bill to the President before Christmas, perhaps as early as December 15. Ultimately, while it appears that the investment tax credit (“ITC”) and production tax credit (“PTC”) provisions likely will not be changed in the reconciliation bill, the net effect of other provisions, particularly a new “International AMT,” may significantly chill the tax equity market that supports much of the renewable energy industry.

The PTC and ITC Provisions Are Not Expected to Change

The tax reform measure approved by the full Senate includes several changes compared to the version approved by the Senate Finance Committee and also differs in some significant ways compared to the House bill. It is important to note that while the House bill includes dramatic cuts to the PTC and more limited revisions to the ITC, the Senate bill would not change either credit program. During the Senate Finance Committee mark-up, Republicans indicated their intent to address the availability of the ITC and PTC for certain “orphan” technologies before the end of the year. Addressing energy provisions in a different tax package would relieve some of the pressure on revenues in the tax reform bill as lawmakers must stay within the budget reconciliation instruction constraints, including that the deficit may not be increased by more than $1.5 trillion over a ten-year period.

Provisions That May Suppress Tax Equity Investment

However, both bills include radical changes to corporate and international taxation that may suppress investment in renewable energy projects that qualify for the ITC and PTC.

  • First, the change in the corporate income tax rate to a flat 20% rate (or perhaps a 22% rate, based on recent statements from the President), temporary renewal of 100% bonus depreciation and increased expensing of capital investments are expected to reduce appetite for tax credits because of generally reduced corporate exposure to U.S. federal income taxes. In addition, the Senate bill would not repeal the corporate Alternative Minimum Tax. (Under current law, a corporation that is subject to the Alternative Minimum Tax may be required to pay tax on income that would otherwise be sheltered by the PTC or ITC under certain circumstances. However, there is a significant effort to at least reduce the corporate Alternative Minimum Tax in the reconciliation bill.)
  • Second, in the course of changing the United States from a “worldwide” to a “territorial” tax system, the bills would add “base erosion” provisions that may inhibit investment by multinational corporations in the United States generally and specifically in PTC and ITC projects. In other words, under the bills, a person would be required to pay U.S. federal income tax on the income it earns in the United States, but not outside of the United States. The base erosion provisions are intended to limit the ability of a taxpayer to reduce its U.S. income through certain transactions and arrangements with non-U.S. affiliates. One of these rules would discourage a U.S. company from financing its operations with debt from a non-U.S. affiliate beyond a certain point.

Another base erosion provision would require a U.S. corporation to pay tax on 10% (11% if it is a bank) of (x) its “modified” taxable income, less (y) the tax it would otherwise pay without taking into consideration its U.S. federal income tax credits other than the research and development credit. A U.S. corporation is subject to this rule if it pays non-U.S. affiliates for a threshold amount of goods and services, e.g., component parts or administration, and the multinational group has gross receipts of more than $500 million on average over the prior three years (the “International AMT”). Although generally applicable, this rule would require a calculation of adjusted income that would not account for the PTC or ITC, regardless of when the PTCs or ITCs were earned. Thus, a company that is subject to the International AMT will likely be required to pay tax on income that would otherwise be sheltered by the PTC or ITC, including income that may be sheltered under the existing Alternative Minimum Tax rules. There are reports that a coalition of Republican Senators are attempting to exclude the PTC and ITC from the adjusted income calculation for the International AMT, but it is not clear that will be accomplished during the reconciliation process.

What does this mean for the renewable energy industry?

If the bill that ultimately crosses the President’s desk largely mirrors the Senate bill, it is likely that many of the very large tax equity investors will become subject to the International AMT (since many of those investors are banks, they are also likely to become subject to the higher International AMT rate). Some of those investors have indicated that they will attempt to sell their PTC and ITC holdings and will pull back from further investment. While it seems unlikely that the largest investors will completely exit the PTC and ITC market, even a partial withdrawal seems likely to cause significant turbulence in the market. While the provisions applicable to the tax equity investors that are not subject to the International AMT are more of a mixed bag, the reduction in the corporate income tax rate and increase in bonus depreciation may curb their PTC and ITC appetite.

There is a reasonable possibility that the reconciliation bill will diverge from the bills in material ways, particularly if the President’s recent statements considering a 22% corporate income tax rate are taken seriously. In any event, it seems likely that negotiations over the tax bills may convert the Suniva Section 201 proceeding into just one among several concerns for those riding the “solarcoaster” in the months ahead. At the same time, the uncertainty that the Senate and House bills create with respect to the PTC will occupy the attention of the wind industry.

About K&L GatesK&L Gates is a fully integrated global law firm with lawyers located across five continents.  K&L Gates serves clients in virtually all renewable energy and clean technology sectors in developed and developing nations alike.  K&L Gates clients operate in solar, wind, biomass, hydropower, geothermal, and complementary sectors, including energy storage, distributed generation, smart grid, transmission, and corporate energy sourcing.

About Sustainable Capital Finance:  Sustainable Capital Finance (SCF) is a third party financier & owner/operator of commercial & industrial (C&I) solar assets and is comprised of experts that specialize in structured finance and solar development. SCF has a vast network of EPCs and Developers across the US that submit project development opportunities through SCF’s cloud-based platform, the “SCF Suite”. This allows SCF to acquire and develop early to mid-stage C&I solar projects, while aggregating them into large portfolios. SCF has standardized the diligence and transaction process, thus creating cost-efficiencies and risk mitigation, in order to solidify the C&I marketplace as an investment-worthy asset class. For more information, visit http://www.scf.com. Connect with us on Twitter at @SCF_News and follow us on Linkedin and Facebook!

#GivingTuesday is a global day of giving that is celebrated on the Tuesday after Thanksgiving, Black Friday, and Cyber Monday. It’s a chance to give back to your community during the holiday season.

SCF believes that it’s important to give back to local communities and help others in need. The following nonprofits use solar energy as a way to empower the people they serve, whether through policy reform, lowering energy bills, or safely delivering babies. Each of these nonprofits is making a difference in communities through solar power, and for that we are grateful!

1. RE-volv: RE-volv raises money through crowdfunding campaigns, to build solar projects for community-serving nonprofits. As the organizations repay RE-volv for the loan, it pays you back in the form of a portfolio credit that can then be used to invest in more solar projects. It’s a “pay-it-forward model for solar energy.” To date, the organization has installed 10 solar projects and has been backed by nearly 1,000 people. Help bring solar to an underserved community today! Check out projects that need backers

2. GRID Alternatives: GRID works nationwide to provide low income home owners and nonprofits with free solar installations. They have installed over 36 MW of solar nationwide and continue to be an advocate for bringing solar to underserved communities. Not only does GRID install solar, they also provide invaluable workforce development through installation training programs, SolarCorps Fellowships, and its “Troops to Solar” program. GRID has 14 locations nationally and internationally and is always accepting volunteers! It’s an invaluable experience: SCF knows firsthand. Donate here!

3. Vote Solar: Vote Solar has a mission of bringing solar energy to the mainstream, by advocating for solar energy policy reform at the state level. It has been instrumental in the development of numerous policies regarding net metering that can be used across the industry to fairly value solar energy compensation. Its advocacy has also spurred interest from local governments on the topics of community solar adoption, modern energy grid development, and low-income solar access. To help expand the adoption of solar energy, and support Vote Solar, donate here.

4. We Care Solar: We Care Solar was founded in 2009 by Dr. Laurel Scatchel. During a visit to Nigeria, she witnessed a high maternal mortality rate due to lack of proper lighting in medical facilities. She worked with her husband, a solar energy educator, to create a prototype for what would soon become the Solar Suitcase. Every portable Solar Suitcase provides health workers with a reliable source of power and highly efficient lighting.  As of December 2016, 2,260 health centers were equipped with solar lighting and over 1 million newborns were delivered in Solar Suitcase facilities. As an added bonus, all donations received on #GivingTuesday will be dollar-for-dollar matched. Donate here.

5.Everybody Solar: Everybody Solar works to protect the environment through solar energy projects. It provides solar power to local charities to help them reduce their electricity costs. These solar energy savings can equate to thousands of dollars that can be put towards the communities they serve instead of pricey electric bills. It currently has four live projects that are in need of funding, including the Lakota Nation Youth Center in South Dakota. The Center provides shelter, food, and support services for youth in need in their community. With your help, these solar projects can become a reality. Donate here!

6. The Solar Foundation: The mission of the Solar Foundation is to accelerate adoption of the world’s most abundant energy source, solar energy! The Solar Foundation continues to deliver high quality studies related to jobs and diversity in the solar sector. One of its’ most notable programs, Solar Ready Vets, provides training, hands on experience, and job placement assistance for transitioning military personnel. Donate here!

About Sustainable Capital Finance:  Sustainable Capital Finance (SCF) is a third party financier & owner/operator of commercial & industrial (C&I) solar assets and is comprised of experts that specialize in structured finance and solar development. SCF has a vast network of EPCs and Developers across the US that submit project development opportunities through SCF’s cloud-based platform, the “SCF Suite”. This allows SCF to acquire and develop early to mid-stage C&I solar projects, while aggregating them into large portfolios.

SCF has standardized the diligence and transaction process, thus creating cost-efficiencies and risk mitigation, in order to solidify the C&I marketplace as an investment-worthy asset class. For more information, visit http://www.scf.com. Connect with us on Twitter at @SCF_News and follow us on Linkedin and Facebook!

23 Nov 2017
November 23, 2017

November Industry News

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Regulatory News

Section 201 Suniva Trade Dispute Update:

On November 10th, The International Trade Commission officially submitted 3 reports pertaining to the Section 201 Trade dispute on imported solar cells & modules. The reports explained the meaning behind the ruling and recommended several remedy scenarios to address the dispute. The president has 90 days to review these reports after-which he can choose to accept the proposed remedies or initiate others. Utility News

Puerto Rico Leadership Resigning Amidst Questionably Awarded Hurricane Response Contract

Aber Gomez, the Director of the Puerto Rico Emergency Management Agency resigned earlier this month as a result of pressure amounting from the failure in emergency response & lack of remedial action. One of the most pressing issues is that the island’s electrical grid is still under immense pressure and stress with as much as 50% of the island remains without power. Another main story to come out of the recovery efforts is a controversial contract signed with Whitefish Energy Holding, a small outfit that seemingly did not have the credentials or solution offering to have been awarded this $300 million contract.

PG&E Investigated for liabilities from Napa & Sonoma Fires

Officials from California’s Department of Forestry and Fire Protection disclosed that they have been investigating Pacific Gas & Electric’s power equipment as a possible cause for the Napa & Sonoma County fires that took place last month. PG&E has combatted this initial claim for the mean time while investigations will continue to shed light on the wildfires.

Technology News

Hybrid Wind+Energy Storage Technology Ready For Deployment

A Danish Wind Project Developer, KK Wind Solutions, is developing a wind turbine + Energy Storage System (ESS) combined product which would help to reduce fluctuations in output by 90%. The main purpose of the project is to develop a scalable modularized system that is more resilient to fluctuating environmental factors. Another company, Toshiba, recently installed a 2 MW storage system to go alongside NRG Yield’s Elbow Creek Wind Farm in TX. These hybrid systems are starting to leave the lab and meet real-world conditions so there will be much more insight into these projects moving forward.

 

 

Guest Blog By: Molly Suda and Ben Tejblum of K&L Gates 

Blockchain technology is on the rise.  Reports indicate that over $4 billion has been invested in blockchain startups in 2017 alone, and the general consensus is that the technology, coupled with smart contracts, has significant implications for a wide range of industries, with the potential to revolutionize how we manage and share data, streamline transactions, and reduce the costs of doing business. Although blockchain technology is still most commonly associated with crypto currencies (Bitcoin) and financial transactions, it also has widespread applications in the energy sector, particularly with respect to the integration of renewables, energy storage, and electric vehicles.  We see the top five trends in the development of blockchain technology for the renewable energy space to be the following.

  1. New Ways to Invest in Renewables – Powered by Blockchain

The rise of blockchain has provided new avenues for investing in renewable energy.  Using blockchain, companies are creating platforms through which investors can seamlessly invest in and promote renewable energy development around the world.  Some of these platforms allow investors to purchase a share of actual projects (similar to crowd-funding), while others sell tokens entitling the investors to a portion of project profits (similar to an investment fund).  Low transaction costs and real-time settlement allow these blockchain platforms to facilitate micro-transactions, and the blockchain software provides a secure, trustless architecture that is accessible to interested investors, regardless of their geographic location.

While many of these platforms are still under development, a few are already operational.  For example, the Sun Exchange has established a blockchain-powered marketplace that allows investors from all over the world to purchase interests in solar panels, which are then leased to projects in Africa.  Similar to conventional crowd-funding, investors can purchase shares of solar cells (using either local currency or Bitcoin) required to develop a project, and their ownership interests are recorded on Sun Exchange’s blockchain platform.  Once a project is funded, the solar panels are leased to the host facility, and the solar panel owners receive rental income through the blockchain-powered payment system.  According to the company’s website, Sun Exchange has already successfully funded four projects in South Africa.

  1. Technology to Facilitate Peer-to-Peer Energy Transactions

Blockchain’s ability to facilitate real time, peer-to-peer micro-transactions also has significant implications for distributed energy resources and transactive energy.  The basic premise is to use a blockchain-powered network, coupled with smart technology like smart meters or smart inverters, to create a secure, peer-to-peer marketplace where consumers can monitor their energy consumption, respond to favorable price signals, and sell excess energy produced by rooftop solar arrays.

The most commonly cited peer-to-peer application in the United States is the Brooklyn Microgrid, which aims to allow neighbors in Brooklyn to buy and sell energy generated from participants’ residential rooftop solar arrays, without the need for a central, third-party market operator.  Similar pilots are also emerging internationally, however, with blockchain-powered microgrid projects under development in Australia, England, and India.

Along with peer-to-peer energy sales, numerous blockchain-powered platforms are also being developed to facilitate peer-to-peer electric vehicle (“EV”) charging.  In California, startups like eMotorWerks and the Oxygen Initiative have launched networks to enable owners of EV charging stations to grant access to other EV owners and charge them for charging station privileges (think AirBnB for EVs).  Blockchain technology enables these platforms by allowing users to share pricing information and engage in real-time transactions in a secure, peer-to-peer environment.  Notably, development in this space is not limited to energy startups.  In Germany, one major utility has deployed a set of EV charging stations powered by a blockchain network that will allow users to purchase charging time through a blockchain-powered marketplace.

  1. Large Utility Investment

Along with EV charging, traditional utilities are also exploring the use of blockchain for many other applications, including utility billing, grid management, and energy trading.  To date, utility acceptance has been more prevalent in Europe and Asia, where utilities have already begun developing or testing a variety of blockchain-based pilots, including programs in the Netherlands and Germany designed to facilitate renewables (and EV) integration and promote grid stability, and a program in Japan to explore the viability of peer-to-peer energy transactions.  Although United States utilities have thus far been slower to publically embrace blockchain, momentum is growing.  Leading the charge is the Rocky Mountain Institute, which, together with a number of utilities, launched the Energy Web Foundation (“EWF”), a nonprofit organization formed to “accelerate the commercial deployment of blockchain technology in the energy sector.”  Along with exploring specific utility use cases for blockchain, EWF is also developing an open-source, energy-specific blockchain platform designed specifically to support energy applications.  EWF hopes its platform will become the standard platform for energy-specific blockchain networks.

  1. Search for Standardization and Interoperability

One of the challenges in the energy sector’s wide-scale implementation of blockchain technology is the need for interoperability across different blockchain platforms and the standardization of smart contracts.  To date, energy blockchain applications have been developed using a wide range of blockchain platforms, including popular “mainstream” platforms such as Ethereum and Hyperledger, as well as with custom blockchain solutions developed for a specific use case.  Because each of these platforms functions differently and may contain a different ruleset, the industry faces the challenge of how to share information across multiple blockchain networks, each with its own set of standards and protocols.

The need for standardization is one of the driving factors behind the development of the EWF blockchain, which aims to be the go-to blockchain for energy applications.  Blockchain companies are also coming together, however, to develop standards that could be applied across different blockchain platforms to ensure interoperability.  In September, the Trusted IoT Alliance was formed to align companies to develop standards to support “internet of things” technology with the goal of removing barriers to wide scale adoption of blockchain technology.

  1. Government Action and Regulatory Response

Finally, despite its relatively nascent stage, blockchain technology and its implications for the energy industry have already received a substantial amount of attention from legislators and government agencies.  Just last month, the Department of Energy selected several firms to receive a multi-million dollar grant to develop and enhance the security of blockchain technology specifically for energy grid applications, with a particular focus on distributed energy resources.  And, earlier this year, the state of Illinois announced that it was studying the development of a renewable energy credit marketplace as part of its state blockchain initiative.

Outside of the United States, several countries have already established “regulatory sandboxes” to allow companies to experiment with blockchain applications and other cutting-edge technologies without the need to comply with stringent energy-related regulations.  In June, Singapore’s Energy Market Authority outlined the framework for creating a regulatory sandbox to allow developers to test “innovative energy solutions” in a relaxed legal and regulatory environment.  A similar initiative was announced by the UK’s Office of Gas and Electricity Markets last February, and led to the testing of a blockchain-based peer-to-peer energy trading platform.  The success of the sandbox prompted OFGEM to announce a second regulatory sandbox last month, and to hold a roundtable to share information on how blockchain technology is being applied in the energy sector.

Interested in learning more about blockchain as it related to energy? Sign up for Blockchain Energizer, a biweekly newsletter highlighting recent blockchain developments in the energy space.

About K&L Gates: K&L Gates is a fully integrated global law firm with lawyers located across five continents.  K&L Gates serves clients in virtually all renewable energy and clean technology sectors in developed and developing nations alike.  K&L Gates clients operate in solar, wind, biomass, hydropower, geothermal, and complementary sectors, including energy storage, distributed generation, smart grid, transmission, and corporate energy sourcing.

About Sustainable Capital Finance:  Sustainable Capital Finance (SCF) is a third party financier & owner/operator of commercial & industrial (C&I) solar assets and is comprised of experts that specialize in structured finance and solar development. SCF has a vast network of EPCs and Developers across the US that submit project development opportunities through SCF’s cloud-based platform, the “SCF Suite”. This allows SCF to acquire and develop early to mid-stage C&I solar projects, while aggregating them into large portfolios. SCF has standardized the diligence and transaction process, thus creating cost-efficiencies and risk mitigation, in order to solidify the C&I marketplace as an investment-worthy asset class. For more information, visit http://www.scf.com. Connect with us on Twitter at @SCF_News and follow us on Linkedin and Facebook!

The solar Investment Tax Credit (ITC) is one of the most important federal policy mechanisms to support the deployment of solar energy in the United States.  The ITC continues to drive growth in the industry and thereby job creation across the country.  The ITC is a 30 percent tax credit for solar systems on residential (under Section 25D) and commercial (under Section 48) properties.

The existence of the ITC through 2021 provides market certainty for companies to develop long-term investments that drive competition and technological innovation, which in turn, lowers costs for consumers.  The ITC is based on the amount of investment in solar property.  Both the residential and commercial ITC are equal to 30 percent of the basis that is invested in eligible property which has commenced construction through 2019.  The ITC then steps down to 26 percent in 2020 and 22 percent in 2021.  After 2021, the residential credit will drop to zero while the commercial and utility credit will drop to a permanent 10 percent.

The residential and commercial solar ITC has helped annual solar installation grow by over 1,600 percent since the ITC was implemented in 2006, which represents a compound annual growth rate of 76 percent.  According to the Solar Energy Industries Association (SEIA), solar installations increased 30% in 2014, thanks partly to cheaper photovoltaic panels (according to GTM Research).  Solar proponents note that the solar industry employs more than twice as many U.S. workers as coal mining and has added jobs 20 times faster than the rest of the economy. Additionally, approximately 27 gigawatts of solar energy were installed in the US in 2015 with installations expected to reach nearly 100 gigawatts by the end of 2020.

The 30% investment tax credit is paying dividends for America.  Solar is growing faster than any other domestic energy source as prices continue to plummet, even beating out coal and cheap natural gas in some markets.  The solar industry created one in 78 of our country’s new jobs last year while providing living-wage salaries for more than 200,000 Americans.

Moreover, the roughly 210,000 Americans currently employed in solar is expected to double to 420,000 in the same time period, all this while spurring roughly $140 billion in economic activity.  The continued success of the ITC demonstrates that stable, long-term federal tax incentives can drive economic growth while reducing prices and creating jobs in one of America’s fastest-growing industries.

Many supporters say the abrupt end date of the 30% credit represents a “cliff” for the industry.  Without the current incentive, they argue, installation of solar-power systems will plummet, and thousands of jobs in the industry will be lost as a result.  However, others argue that the “cliff” isn’t as steep as it appears, and that solar will continue to grow even without the 30% credit—albeit not as quickly as before.

Can the solar industry survive without the current credit?

According to Energy Information Administration data in 2015 (when the ITC was scheduled to expire at the end of 2016), if the 30% credit was not extended, rooftop solar photovoltaic installations would plunge 94% in 2017 from a year earlier and utility-scale projects would decline 100%, with neither recovering anywhere close to today’s levels even a decade from now.  Bloomberg predicted solar installations would drop by two-thirds in 2017, which the Solar Energy Industries Association estimate would cost America 100,000 jobs.

The ITC provided certainty in the business model.  The multiyear assurance provided by the eight-year (2008 thru 2016) 30% credit leveraged billions in new high-tech innovation and project development, lowered risks to allow startups to launch new products and services, and resulted in tens of millions of panels installed across America.

According to the Natural Renewable Energy Laboratory (NREL), the elimination of the ITC would not impact the industry growth because financiers, not developers, grab about half of the tax credit.  The credit has proved an essential financing mechanism to getting solar built, even though some projects rely on complex tax-equity structures to monetize the credit.

Optimists also speculate that it will get easier for people to finance solar systems themselves with loans if the credit goes away.  The residential solar market is shifting to more self-financing, but rising prices in the absence of the credit could make solar uneconomical and scare off buyers.  The lack of a credit will also make it harder for utility-scale projects, which account for most solar investment dollars, to compete for scarce capital and against more carbon-intensive generation alternatives.

A study from Bloomberg estimates that the loss of the tax credit will cause solar capacity to only quadruple, instead of quintuple, by 2022, which is still a substantial increase.  A Wall Street Journal analysis reinforces this assessment.  In 22 states, at least one gigawatt of solar (and often much more) could be installed at a comparable cost to retail electricity prices by 2017, tax credit not included.

So why are the grimmer predictions about the future of solar incorrect?  For starters, the cliff that people talk about is smaller than it appears.  Most folks with solar on their rooftop used a third-party lease or power-purchase contract.  That third party took on much of the financial risk and the responsibility for redeeming the 30% tax credit.  These financial middlemen have absorbed nearly half of the tax credit, and as a result, solar developers and customers have received an effective discount of 15% instead of 30%.  So the current incentive isn’t as big as it looks, and the effect of losing the incentive won’t be as severe as many think.

What’s more, the change to the tax credit will open up new options for financing.  Solar energy’s low risk and steady returns are attracting new investors whose profit expectations are much lower than many currently participating in solar financing.  Additionally, solar securitizations are becoming more widely utilized, attracting new institutional investors.

If the change in the tax credit opens the door to more sizable, low-margin investors that offer a discounted cost of debt and equity for solar projects, The Wall Street Journal estimates that the net cost of solar would rise just 2.5% with the loss of the tax credit.

The change to the credit may also drive prospective solar clients, with decent credit, from leasing to lower-cost self-financing.  With less paperwork to file, the relatively lower costs and higher returns of ownership become more evident.

A November 2014 pro forma analysis by the National Renewable Energy Laboratory suggests that self-financing lowers the cost of solar by 23% for residential customers and 87% for commercial customers.

It’s easy to assume that losing the federal tax credit is nothing but a 30% cut in the growth potential for solar energy.  But this ignores several countervailing forces, from the middlemen’s current cut to falling costs to the advent of low-cost financing.  Even though coal and gas retain subsidies like heavily socialized pollution costs, solar doesn’t need the federal tax incentive to compete.  Instead, the market provides several ways to glide over the solar tax cliff.

Comparison of costs

A comparison of the cost per KWH for solar and existing electricity is as follows:

  1. Non-renewable retail residential electricity rates per kWh have increased about 4% on average (Nov 2005 thru Nov 2014), per year, over the last 10 years. According to the Energy Information Administration, residential electricity rates have increased nationally by around 30% in the last 10 years – from about 9¢ per kilowatt-hour (kWh) in 2005 to about 13¢/kWh in 2014.
  2. Natural gas prices are expected to increase, as a result of higher anticipated infrastructure costs.
  3. Coal-fired electricity will continue to rise.
  4. Solar rates per kWh have decreased from approximately $.071 in 2009, to $.050 in 2015.

The cost of renewable energy is decreasing, while the cost of traditional non-renewable energy sources is increasing.  However, the existing electrical grid is designed for continuous energy flow and is not designed to “store” any excess electricity.  If a new grid was to be built today, it would bear little resemblance to the existing system.  The United States electrical grid is wearing out.  Depreciation expense exceeds new investment.

Costs of generation, both fixed and variable are rising.  Costs of transmission and distribution are rising.  The costs of doing business are rising.  On the other hand, utility revenues from energy sales are declining as a result of conservation, energy efficiency, distributed generation and competition.  Utilities generally collect a majority of their revenue through charges for energy usage, a variable quantity, yet the majority of their costs are due to capacity, a fixed quantity that doesn’t diminish with diminished energy consumption.  Traditional approaches to rate design are no longer sufficient.  Simply raising rates to overcome declining revenues only increases the incentive for customers and competitors to further displace purchases from their utility.

According to Philip Moeller, a member of the Federal Energy Regulatory Commission,  “We are now in an era of rising electricity prices”,  the steady reduction in generating capacity across the nation means that prices are headed up.  “If you take enough supply out of the system, the price is going to increase”.

In fact, the price of electricity has already been rising over the last decade, jumping by double digits in many states, even after accounting for inflation.  In California, residential electricity prices shot up 30% between 2006 and 2012, adjusted for inflation, according to Energy Department figures.  Experts in the state’s energy markets project the price could jump an additional 47% over the next 15 years.

New investment has diminished:

  1. Growth in consumption has slowed since 1973
  2. Environmental and other concerns restrict construction of new facilities
  3. Utility companies now incur significant risk of not recovering all their costs much less a reasonable return on investment.

Other factors to consider

A key development and new concept is the “grid edge”.  As further discussed herein, the most important and impactful developments in the electric utility industry in the foreseeable future will be at the distribution edges of the grid, many if not most on the customers’ sides of the meter.  This means tremendous challenges for electric distribution utilities, but at the same time fantastic opportunities to bring a new and better world to their consumers and communities.

The key to the success in renewable energy sources is the development of a new grid system, which provided the following:

  1. Distributed generation and storage
  2. Two-way power flow
  3. Microgrids

The problems confronting the electricity system are the result of a wide range of forces: new federal regulations on toxic emissions, rules on greenhouse gases, state mandates for renewable power, technical problems at nuclear power plants and unpredictable price trends for natural gas.  Even cheap hydro power is declining in some areas, particularly California, owing to the long-lasting drought.

New emissions rules on mercury, acid gases and other toxics by the Environmental Protection Agency are expected to result in significant losses of the nation’s coal-generated power, historically the largest and cheapest source of electricity.  Already, two dozen coal generating units across the country are scheduled for decommissioning.  When the regulations go into effect next year, 60 gigawatts of capacity — equivalent to the output of 60 nuclear reactors — will be taken out of the system, according to Energy Department estimates.

Moeller, warns that these rapid changes are eroding the system’s ability to handle unexpected upsets, such as the polar vortex, and could result in brownouts or even blackouts in some regions as early as next year.  He doesn’t argue against the changes, but believes they are being phased in too quickly.

The federal government appears to have underestimated the impact as well.  An Environmental Protection Agency analysis in 2011 had asserted that new regulations would cause few coal plant retirements.  The forecast on coal plants turned out wrong almost immediately, as utilities decided it wasn’t economical to upgrade their plants and scheduled them for decommissioning.

The lost coal-generating capacity is being replaced largely with cleaner natural gas, but the result is that electricity prices are linked to a fuel that has been far more volatile in price than coal.  The price of natural gas now stands at about $4.50 per million BTUs, more expensive than coal.  Plans to export massive amounts of liquefied natural gas, the rapid construction of gas-fired power plants and the growing trend to convert the U.S. heavy truck fleet to natural gas could exert even more upward pressure on prices.  Malcolm Johnson, a former Shell Oil gas executive who now teaches the Oxford Princeton Program, a private energy training company, said prices could move toward European price levels of $10.

The loss of coal is being exacerbated by problems at the nation’s nuclear plants. Five reactors have been taken out of operation in the last few years, mainly due to technical problems.  Additional shutdowns are under consideration.

At the same time, 30 states have mandates for renewable energy that will require the use of more expensive wind and solar energy.  Since those sources depend on the weather, they require backup generation — a hidden factor that can add significantly to the overall cost to consumers.

Nowhere are the forces more in play than in California, which has the nation’s most aggressive mandate for renewable power. Major utilities must obtain 33% of their power from renewable sources by 2020, not counting low-cost hydropower from giant dams in the Sierra Nevada mountains.

In some cases, the renewable power costs as much as twice the price of electricity from new gas-fired power plants. Newer facilities are more competitive and improved technology should hold down future electricity prices, said former FERC Chairman Jon Wellinghoff, now a San Francisco attorney.

But San Francisco-based Energy + Environmental Economics, a respected consultant, has projected that the cost of California’s electricity is likely to increase 47% over the next 16 years, adjusted for inflation, in part because of the renewable power mandate and heavy investments in transmission lines.

The mandate is just one market force. California has all but phased out coal-generated electricity. The state lost the output of San Onofre’s two nuclear reactors and is facing the shutdown of 19 gas-fired power plants along the coast because of new state-imposed ocean water rules by 2020.

“Our rates are increasing because of all of these changes that are occurring and will continue to occur as far out as we can see,” said Phil Leiber, chief financial officer of the Los Angeles Department of Water and Power. “Renewable power has merit, but unfortunately it is more costly and is one of the drivers of our rates.”

“While renewables are coming down in cost, they are still more expensive,” said Russell Garwacki, manager of pricing design and research at Southern California Edison. The company is imposing a 10% price hike this year to catch up with increased costs in the past.

Officials at the California Public Utilities Commission, responsible for setting utility rates, dispute predictions of large-scale electricity price hikes in the near future.  Edward Randolph, head of the PUC’s energy division, said price increases were not likely to exceed the rate of inflation, though the commission has refused to spell out the data on which it bases its projections.  In any case, while California already has some of the highest hourly rates for electricity in the nation, the average consumer in the state pays bills that are below the national average because overall electricity use is so low.

The push to wean California off fossil fuels for electricity could cause a consumer backlash as the price for doing so becomes increasingly apparent, warns Alex Leupp, an executive with the Northern California Power Agency, a nonprofit that generates low-cost power for 15 agencies across the state.  The nonprofit was formed decades ago during a rebellion against the PUC and the high prices that resulted from its regulations.  “If power gets too expensive, there will be a revolt,” Leupp said. “If the state pushes too fast on renewables before the technology is viable, it could set back the environmental goals we all believe in at the end of the day.”

Conclusion

The solar industry will be economically viable without the ITC.  However, the planned growth would not be as dynamic.  Perhaps this is a good thing as the current grid system is not able to absorb this growth.  If you consider the increasing costs of energy as detailed above, perhaps the ITC could be used as an incentive to fund rebuilding the current grid system focusing on storage, sensors, meters and smart technology.  Hence, the ITC is important in terms of financing future development.

About Sustainable Capital Finance:  Sustainable Capital Finance (SCF) is a third party financier & owner/operator of commercial & industrial (C&I) solar assets and is comprised of experts that specialize in structured finance and solar development. SCF has a vast network of EPCs and Developers across the US that submit project development opportunities through SCF’s cloud-based platform, the “SCF Suite”. This allows SCF to acquire and develop early to mid-stage C&I solar projects, while aggregating them into large portfolios.

SCF has standardized the diligence and transaction process, thus creating cost-efficiencies and risk mitigation, in order to solidify the C&I marketplace as an investment-worthy asset class. For more information, visit http://www.scf.com. Connect with us on Twitter at @SCF_News and follow us on Linkedin and Facebook!