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Monday, July 2, 2007

Solar Electric - Government role

It is often argued that solar electric is not yet economically viable except in speciality applications*. One such application is for someone who is so far from the grid that the connection cost  is prohibitive. There are many technical fixes being worked on which will reduce the cost of solar electric in the future but there are administrative fixes that any government can undertake right now to greatly reduce the cost. While this blog talks about solar electric, it is equally applicable to solar water heating, house insulation and even electric cars. Measures any government could take include:

* As of 2012, panels have come down to the oft quoted value of $1US per nominal watt and less, that is considered necessary to make solar panels economically viable.  Now all that is necessary in the various countries of the world is a legislative framework that make the generation of power fair to both the small generator and the power company.

Bulk Purchase*(of solar equipment)
The government itself could buy solar equipment in bulk from the manufacturer and sell-on to retailers or to private individuals at cost plus expenses. This was a suggestion by the New Zealand Green Party.  A guaranteed market of a known size results in savings at a number of levels for the manufacturer which he can pass on to the purchaser. Savings in shipping are also made.  Sending a full container of solar equipment from one factory rather than making up a container with some solar equipment and unrelated goods from other sources effects savings both at source and at destination. This option is open to all levels of government. Lets be conservative and say this would reduce the price of solar-electric equipment to 90% of the full retail price.

Cut Sales Tax*
The government can wave GST (VAT/sales tax) on all solar electric equipment.  In New Zealand, with our 15% sales tax, this will reduce the cost to 85% of its full retail price.  The benefits of a strong take up of solar technology to New Zealand far outweigh the revenue the government would collect from sales tax on the equipment.

*This suggestion is predicated on the assumption that the government sees the benefit to New Zealand of becoming even more energy independent as a higher goal than collecting a relatively small amount of additional revenue.  The Labour party has declared itself convinced of this.

Note that it costs money to collect money and costs money to distribute money.  It is far more efficient to simply leave the money in the hands of people who are installing solar panels (wave GST) than to collect the GST and to distribute a subsidy.

Tax Write Off
The government can allow a income tax write-off of the full price of the solar equipment. For someone in the 33% tax bracket, this would reduce the price of the equipment by a third. This reduces the price to 66% of the full retail price. Note that in Germany, someone in the top tax bracket has a marginal tax rate of 45% plus a special levy of 5.5%. The cost reduction to someone in this tax bracket is enormous.  Note that if not allowing a write off means that the person will not purchase solar panels then the government doesn't get the tax revenue anyway. 

Power Buy Back (feed in tarrifs)
The government can ensure, through legislation, that the power companies must buy back power from all private generators providing the small generator has in place the necessary grid-compatibility equipment. They could ensure by legislation that the buy-back-price is according to some formula which is fair to the private generator and fair to the power company. There will always have to be a price differential between the purchase price and sales price for power. After all the power company has to build and maintain the distribution equipment.

Power price to the small generator can be fair rather than punitive. There are a few considerations to take into account.

Power from solar panels is generated during the day, when the power company charges the largest rate for its power. Electricity generated during the day is more valuable to the power company than power generated at night and the price they pay should reflect this fact. Also, power generated close to the user has less grid loss and is more valuable than power generated by a remotely located power station. This should also be reflected in the price. A possible way of structuring this would be to give the same price for power generated as for power used but have a line charge for the privilege of being connected to the grid*.

* If this approach is taken, it is most important that the formula is the same for power users as for power user/generators.  Otherwise, the power companies will be tempted to spin the system to the detriment of both types of customer. By far the simplest and fairest system is to have one meter which simply turns backwards when the small generator produces more than he is using. Essentially, the power company pays the same for power it buys as for power it sells.   A line charge then compensates the power company for maintaining the lines.

Some countries, notably Germany and Spain, have legislated very generous tariffs for people generating their own power and supplying the grid. Typically a power generator is given three times the rate for the power he sells than he pays for the power he buys.  While these prices are not sustainable in the long run, they do give a great incentive for people to install small renewable energy generators and will see these countries in a very advantageous position when the energy crunch really begins to bite*. A more equitable, fairer and more sustainable system would be to simply let the small generator turn back the meter one kWh for every kWh he generates.  As mentioned above, the power company gains in a number of ways with this system. Power is generated during the period when they charge the highest rate, and power is generated, on average, closer to the user lowering line losses. Having extra generation capacity at their beck and call reduces their need to borrow to invest in new generation capacity since they then save, for instance, water in their dams to be used as necessary for peak shaving. This system also eliminates the need for them to pay taxes on both the power they buy (GST) and power they sell (income tax). They still get the line charge from every customer.

Note that two factors mitigate against the often used argument that renewable power is intermittent and hence not reliable.

Firstly, as solar (and wind power for that matter) spreads all over New Zealand, places in the sun provide for places not in the sun and places with wind for places without wind.  In addition, wind fills in for solar and vice versa. 

Secondly when proper smart grids are in place and the power companies stop purposefully dragging the chain, demand balancing will come into its own ensuring that demand to a greater and greater extent matches supply peaks and thus reduce demand when power is not in great supply.  If you have heated your water cylinder, charged your car and washed your dishes when power was available and cheap, you won't be demanding power when it is in short supply.

* In fact this system is a scam in a number of ways. See the following link.

Legislate single metering
The metering of a small generator can work in one of two ways. The power produced can be measured by one metre and the power used by another metre. This double metering is the German system. Alternately, the power generated can simply turn the existing meter backwards.  The FIT system is a tempting trap when you have double metering.You think you are getting something for nothing but are getting nothing for something.

The end result depends on the jurisdiction you live in and in your tax bracket. Roughly speaking, though, if you are producing the same amount of electricity that you use, if you are double metered you will be still paying about a third as much as the present  power rate for every unit you use.

Alternately, you will have to put in a system between 1.7 to 4 times as much as you need in order to have a zero power bill

Distribution of Carbon Credits
The government could allow carbon credits, according to the amount of carbon dioxide saved from going into the atmosphere due to the power generated by the private generator. This could take the form of a tax credit on income tax. The Kiwi government in New Zealand, has only reluctantly admitted that forestry carbon credits should go to forest owners. Hopefully they will realize, without the need for the same type of "uphill" that the benefits to the country of having diffuse, renewable, local power generation are so great that it will be worthwhile to give every encouragement to people to install solar panels and other renewable energy generators. Lets say that this would reduce the price to 95% of the full retail cost.

The Berkley Option
The local government which charges 'rates', could adopt the Berkley option (pioneered, not surprisingly in Berkley, CA). Berkley finances the capital costs of the solar equipment via a bond and allows the homeowner repay the loan via his rates over, 20 years. The interest on the loan is less than mortgage refinancing since it is raised through a government bond. If the home owner sells before the 20 years is up, the next owner takes up the remaining repayments. This eliminates the up-front cost and the worry about not being able to get back the initial investment if the house is sold. The home owner then gets the power/financial saving and/or revenue from the power he generates........ from the date of installation.

Waive Compliance Costs
When one wants to build a house, put on an addition and even put solar panels or water heating panels on the roof, many jurisdictions insist that you get a permit. There is nothing wrong with this. In the best jurisdictions, the inspector is helpful, gives good advice which saves the home owner from making expensive mistakes and even keeps the home owner from producing an eyesore that annoys the neighbours. However each permit costs money. Depending on the regulations of the individual jurisdiction, the permit (compliance cost)  for installing solar panels can significantly increase the capital cost of the equipment. Here in New Zealand, the Green party has convinced some of our local authorities to waive the price of the permit. All of us from the central government to the private individual are working hard to decrease our dependency on overseas energy. Local governments can be part of this effort by waving compliance costs.

Waive Road Taxes for Electric Vehicles
One of the most attractive uses of a roof covered with solar panels will be to charge the batteries of your completely electrical vehicle. Driving an electric car is reported to cost a third as much as driving a petrol car even when you charge up  at the full day time rate. When you generate your own "fuel" with your own solar panels on the roof, the mind boggles. What a pleasure to wave at the petrol attendant as you drive by. Electric cars are in the works with ranges approaching 186 miles (300km) per charge and their performance is apparently everything one could wish for. If the new Lithium titanate or lithium iron phosphate batteries are even half as good as indicated, they will revolutionize electric cars by extending the driving range per charge and the longevity of the batteries.

In my own case where the vast majority of my driving is within the 50km range, I can quite picture never having to buy petrol again except, perhaps, for the yearly vacation. Then, if the government gets its act in gear and improves the railways, I might opt to take the train or bus instead or even piggy-back the electric lizi on the electrified train. Not only will we save on petroleum products for energy but also on expensive lubricants since electric cars use far less lubricants than internal combustion vehicles. An electric car can probably be built today that would come with its lifetime supply of lubricants in the glove box in the form of a can of 3 in 1 oil to lubricate the door hinges. The government could wave road taxes for electric vehicles for a few decades to encourage the uptake.*

*The National Government has waved road charges for electric cars to 2013.  This is largely symbolic as by then the uptake of electric cars will still be relatively small.  Good start though, Guys. Don't milk the calf.  Wait until it is a cow.

One might ask why the government would consider waiving road taxes, giving a full tax write off or any of the other measures mentioned. There are four reasons.

First, it is in the interest of the country to import less petrol products from the point of view of security, balance of payments and a stability of the economy. At some point down the line, the government will undoubtedly want to tap electric cars for road taxes but for the first couple of decades, the lack of road taxes for electric vehicles will be a great incentive for their adoption.

Secondly, electric vehicles create very very little pollution so there is an overall saving in health costs to the country.

Thirdly, by their nature, electric vehicles tend to be lighter than petrol vehicles and hence cause less damage to the roads. Road damage apparently increases as the 4th power of axle weight. Add to this a reduction of road degradation from leaking petroleum products on asphalt and there is a further saving to government coffers.

Fourthly, with respect to electric cars, as renewable power becomes a larger portion of the mix, there may be problems balancing generation with demand. As has often been mentioned in many publications, a plugged in electric car can take power when it is in excess and return it to the grid when demand exceeds supply. A large fleet of electric cars can contribute to power balancing when they are not in use for transportation while at the same time earning a small income for the car owner. All the above arguments also indicate that giving a full tax write off for the purchase of an electric car may actually be fiscally neutral. Note that most of the above benefits carry on for the life of the car.  Note that a fully charged electric car can also power a home for a few days if there is a power blackout.

Use of Pension Funds
The government could allow KiwiSaver funds (in New Zealand) to be used to purchase solar equipment just as they plan to allow these funds to be used to purchase a first home. A retired couple which owns its own solar panels, not only saves on its power bill, it may even be gaining a small income. Having solar panels is a retirement savings plan. Even better, it is an investment that brings in a 'pension' from the date of installation. Then, as the children leave home, the amount of electricity used decreases and the net gain to the retired couple increases. They can even be crafty and since they are at home during the day, they can carry on power using activities such as cleaning, and cooking, while the sun shines. This way they save on the price differential ( if there is one) between the buying and selling price of their power.

And finally
Diffuse power generation contributes to the security of power supply for the whole country much as the Internet contributes to communication security. Diffuse power generation is good for the individual and good for the country. By doing what it can, the government is assuring a more secure future for New Zealand. Even better it would be getting solar power established before crunch in the fossil fuel market makes it a desperate need. Playing catch up always leaves you "behind the 8 ball".

At first glance, a government might consider that it is losing revenue by instituting the above measures. For the most part this is an illusion. Assuming the above measures make solar-electric financially feasible, more people will install the equipment. Without these measures, they won't so no revenue, from sales tax, for instance, will accrue to the government. These measures, for the most part, are financially neutral for the government.

Note, by the way, that if we multiply the factors from the first few paragraphs, the initial capital cost of the solar unit comes to 0.90 x 0.87 x 0.66 x 0.95 = 49% of the cost without these measures. The return-on-investment calculation for solar electric suddenly becomes much more attractive.

Solar Electric calculation
Just for those that are interested, here is a calculation to work out if solar electric is worthwhile to install

At present solar panels costs about $4.50US or $7.50NZ per watt*. Where I live we have about 3.5 peak hours. This is the way solar people talk about how much sunshine you have. Averaged over the year, each day you have the equivalent of 3.5 hours of sun at right angles to your solar panels. If you multiply this figure by the watt rating of your panel, you will find how much energy you will produce each day (on average). In my case with a 200 watt panel and 3.5 hours of peak sun equivalent each day, I will get 0.75kwh (kilowatt hours). Where I live, electricity costs about 20c** per kwh so each day the panel will produce electricity worth about 15c. A 200 watt panel costs about $1500 or 150000c. At 15c per day this panel will take10,000 days to pay off which is equal to 27 years. The warantee period on the panel is only 20 years and I haven't factored in the necessary inverter and other equipment. In my case, solar panels have to be far cheaper before they are worthwhile***.

*Note - since the writing of this article the per watt price of panels has plummeted and there is no sign that we have reached the bottom yet.  The entry of China into this market seems to be the main driver of this trend.

**Since writing this article, electricity has gone up to 25c per kWh, making solar even more feasible

***Note that the cost of solar panels has dropped to about a seventh of the price at the writing of this article and are still going down. 

You may have noticed that this blog jumps around between insullating houses, installing solar electric equipment, buying an electric car and so forth. That is the nature of the beast. None of these measures by themselves is the answer to our problems. An integrated package of all of them and others not included here, are needed if we are to continue into this coming century with a healthy economy.

1 comment:

Richard Leckinger said...

Green party policy:
Letting a Government tender for a five year programme to produce and install 500, 000 sq metres of solar water heating panels (sufficient to supply about 125,000 homes). The programme will be:

1. Divided between government buildings (such as state houses, prisons, and hospitals) and suitable private buildings (with priority given to low income families, large families, and isolated rural communities) where the cost savings from the bulk purchase will be passed on to the householder, and
2. Designed to build capacity in the manufacturing and installation of solar water heaters and bring down the price substantially and permanently.

While this is not what happened when the industry and officials at EECA got a hold of it, bulk purchasing would still be a cost effective way of getting solar thermal established in this country.