Massachusetts – using legal tools to grow solar

I took a great courses at FES last spring which has been pivotal in shaping my summer internship experience with Axio Power: Dan Esty’s Environmental Law and Policy course.

For those of you unfamiliar with Dan, I encourage you to check out how much comes up from a simple GOOGLE SEARCH.  Dan has his own page on Wikipedia, so he is definitely a big deal.  Dan’s course focuses primarily on US environmental laws and regulations, including the political, regulatory and legal aspects of how we attempt to address environmental problems.  We were challenged in the class to approach each regulation critically, and identify ways that we would choose to improve it.  Perhaps someone in the Massachusetts legislature took one of Dan’s courses, as they seem to have improved on past solar regulation problems.

There are three regulatory frameworks that can be used to drive demand for renewable energy installations.  Each has its advantages and disadvantages.  First, you have a Feed-in-Tariff, which is a government guarantee to pay a certain cash rate for every kWh of power produced by a facility.  Germany has famously pursued this approach (with Ontario, Spain and Vermont following suit), and has become the world’s largest solar market.  The advantage here is that developers can easily project the revenues from their solar development, and therefore can easily secure financing.  The disadvantages, however, are threefold: many projects are poorly developed (SEE SPAIN); the best resource areas are not necessarily developed first (SEE GERMANY; yes, the German solar resource is worse than Alaska); and, developers potentially face “Pen Risk,” which means that there is a risk that the government will not allocate the funds to cover their cash commitments.

The second approach, which is the favorite of our federal government, is to award tax credits for renewable energy projects.  As the phrase goes, “If you want to incentivize renewables, give projects cash; if you want to incentivize the banking industry, give projects tax credits.”  The advantage here is that the tax credits ‘cost’ the government very little, and are therefore politically easy to hand out.  One big disadvantage, however, is that you give more power to the banking industry, who ultimately will buy those tax credits at a discount to their face value.  The developers need those tax investors, and the banks know it, so banks make out very well.  Two other disadvantages are the political risk that the credits will not be renewed (SEE US WIND INDUSTRY; 2000, 2002 and 2004 are years where credits were not renewed) and the fact that there is little tax appetite during a recession, and therefore, no interest from tax investors.

Finally, you can create a market mechanism to incentivize the growth of a renewable energy market.  This is usually done via a Renewable Portfolio Standard (RPS), and tradeable Renewable Energy Certificates/Credits (RECs).  Utilities must purchase the environmental attributes espoused in the RECs on a set schedule, and the most economic projects can offer the lowest REC price.  This system creates an incentive to develop the best resource first, which ensures that renewable goals are met at the lowest possible cost.  The problem with RECs is that they are only financeable with a long-term contract at a set rate; that requires negotiating with a utility, which rarely turns out well for developers.  Additionally, RPS markets only tend to work where there are severe penalties for non-compliance, or where there is strong pressure from the public.

So, what did MA do?  They went with a MARKET approach, with steep non-compliance penalties of 60 cents per kWh(!).  Their system requires no cash allocations or tax credit renewals by the legislature.  It provides long-term clarity to both developers and utilities about market demand for SRECs (Solar RECs), which will grow 30% per year for the near-term.  And, what I consider to be their brilliant regulatory add-on, they created a price floor for the SRECs, which should facilitate project financing for developers.  It’s sort of a feed-in-tariff twist to the old RPS system, without the dreaded cash payment by the state government.

That’s all for today.  My wife tells me I need to have more pictures in here, so I will try to include some in future posts.

Brian