Friday, December 28, 2007

A National Solar PV Incentive

The US congress was unable to agree on legislation that would expand incentives for solar energy in 2007, but there are compelling reasons why an expanded national solar program would generate significant benefits across the country. The primary benefit would be the investments made by business in the US solar supply chain sufficient to support significant annual capacity additions. One additional import benefit would be to signal to the world our commitment to supporting renewable/low carbon energy sources.

What would a national policy look like and how much would it cost? The US could set-up a nation wide solar production incentive set at $0.10 kWh paid annually for 20 years from installation and provide a national net metering law. This incentive would replace the current $2,000/kW federal tax credit, and it would end when the US has installed 20GW of PV, approximately 1% of US electric demand. The costs would be modest (< $100 million/yr) in the first few years of the program growing to just over $4 billion per year once all 20GW of solar were installed. If the US doubled the amount of solar it installed each year, it would take 6 years before the US could install 20GW. In total, the 20 year cost of the incentive would cost around $80 billion, less than 1% of what Americans will pay for electricity in the over this period.

Although some might suggest a higher national incentive, the $0.10 kWh level and national net metering should be sufficient incentive when combined with local or regional incentives to ensure that the US installs 20GW of PV within the decade. Anything higher on a national level might stimulate demand faster than supply can ramp up, leading to temporary supply disruptions and price increases like we currently see in solar cell feedstock’s, such as silicon, due to Germany’s high incentive level. This incentive would ensure that virtually anywhere in the US, the owner of solar panels will be paid from 18-26 cents/kwh generated (base electricity rates are 8-16 cents/kwh). Picking the middle of the range, 22 cents, a solar regime with 5 hours of average sunlight (common in the western US), an $8/W installed system price will generate a 5% annual return, about what investors expect from long term low risk investments like US bonds from these national incentives alone. The price of solar would have to fall to $5/W installed for an equivalent return in areas with as little as 3 hours of average sunlight/day. But of course states and other local regions could provide additional incentives. In fact combining a national solar incentive with California’s current incentive would provide annual returns of 10% or more at very low risk for people who install solar.

What would the US get for instituting a long term solar incentive? It would provide the kind of long term stable incentive that the solar industry has repeatedly asked for, and which Germany’s feed-in-tariff has demonstrated leads to long term reductions in the installed cost of solar. Based on the historical rate of solar cost reductions, installing 20GW of solar should put solar on the threshold of grid parity in less than 10 years time.


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