What Conditions Make for a Good Solar Market?
Think it’s the areas that get the most sun? Guess again.
Naturally most people would assume that areas that are very hot and sunny would make for great solar markets due to the amount of energy the solar panels can create, but this isn’t always the case. There are several factors that affect a market’s viability for solar, and we think the amount of sunlight is actually one of the least important factors. In order for a solar marketplace to develop the economics need to make sense for the developer and the customer. There are four factors that come into play and this article will explain them in order of our perceived importance: policy, local incentives, cost of electricity, and finally- the amount of sunlight.
Almost all solar energy systems work with the existing utility infrastructure through a net metering system. Net metering allows customers to get credit for the energy their system generates that they don’t use right away. With a net metered system the user will always have power as they will pull electricity from the grid when their system isn’t producing enough energy to meet their demand, and in times of excess production that power will flow out into the grid and cause their utility meter to spin backwards.
The ideal market conditions for solar have a net metering policy where users are credited for a retail kilowatt hour (kWh) for every kWh they put into the grid. Some states, like Hawaii and Rhode Island, have programs that credit users at a predefined price for the energy they send to the grid. States like California, New York, New Jersey, Connecticut, and Massachusetts give customers a full retail credit. There are currently 41 states with some form of net metering.
Favorable net metering policy is the most important factor to creating a solar marketplace. If users cannot get credit for the energy they produce the system would require a battery, which will significantly increase installation cost and essentially kill the market. We’ve seen this before as Nevada recently reneged on their net metering policy causing the market to immediately dry up, and Arizona imposed a flat, monthly tax on solar customers slowing growth in the market.
Everyone likes a good incentive, and markets that have local incentives for solar see significant growth. These incentives vary by state, utility, and county so certain areas of a state may make for a great market while others may not have favorable economics.
Local incentives are a great way to kick-start a market, but in order for the marketplace to take hold the incentive program needs to be structured in a way that gradually decreases as the cost of solar decreases and awareness increases. New York ‘s Megawatt Block Program is a great example of this. The Megawatt Block Program has allocated roughly $750 million for solar projects in a manner that decreases the incentive allocated for each project as the state’s installed capacity increases. The extension of the Federal Investment Tax Credit is structured in the same fashion so it gradually decreases instead of running off of a cliff.
Incentives can be structured as an upfront cash rebate, a performance based incentive that is earned over time like a Solar Renewable Energy Credit (SREC), an income tax credit, a property tax abatement that reduces the property taxes on a building, or a property tax exemption that ensures the property taxes won’t increase due to the solar installation.
New York State also has a Personal Tax Credit of up to $5,000 for residential installations, which has propelled solar even in areas with relatively low cost of power. North Carolina is an example of poor incentive policy planning as their personal tax credit for residential systems expired causing a significant drop off in demand and ultimately developers leaving the state.
New York City may have the best incentives in the country for solar as customers are eligible for the 26% Federal Tax Credit, an upfront cash incentive from NYSERDA (the state rebate authority), up to a $5,000 personal tax credit, a 20% property tax abatement, and a property tax exemption.
Cost of Power
The cost of solar installations continues to decrease which lowers the effective price of a solar kWh. Customers considering solar are evaluating the cost of solar versus the cost of the utility. The more money that the utility charges for a kWh ultimately makes solar more attractive so it goes without saying that the price of electricity will have a profound effect on the popularity of solar.
The cost of electricity varies between utility companies and can be highly dependent on the cost of the natural resources being used to create the electricity. The cost of a kilowatt hour is based on the cost to generate and distribute the electricity. In metropolitan areas the cost of electricity is higher due to the increased cost to maintain the infrastructure that delivers the electricity, as the population density is a strain on the grid. Certain areas of the country have very low distribution charges, which make the spread between solar power and traditional power much slimmer. Areas with older electric infrastructure see regular increases in the cost of distribution. In New York City the utility, ConEdison, has requested a 7% increase in delivery charges from the public service commission for 2017.
Generation, or supply, charges can spike due to the increase of resources like natural gas, but will generally follow inflation. Most customers know that the utility companies are a monopoly and despite the fact that they are regulated the price for electricity continues to rise which will open more markets to solar as the cost of solar continues to decrease.
Hawaii, California, and most of the Northeast have relatively high electric costs so it makes sense why those are some of the hottest markets for solar. The average cost of a kWh nationally is approximately $0.11, whereas in New York City the average price over the last 2-years is $0.25!
The amount of sunlight does matter, but without the right policy and incentives all that sunshine will go to waste. In some situations the amount of sunlight can offset a low cost of power because of the ratio of electricity produced to the size of the system installed, called production factor.
In the northeast a solar panel placed in ideal conditions can produce 135% of it’s nameplate rating, meaning a 5 kW system can produce 6,750 kWh annually. In the Southwest a system can produce closer to 180% of it’s nameplate rating, so that same 5 kW system would produce 9,000 kWh annually. If you were comparing NYC to Arizona, the value of the electricity would be worth about $1,700 in NYC versus $1,100 in Arizona. When you take into account local incentives the economics of the system in New York City would blow the system in Arizona out of the water even though Arizona gets more sun and produce significantly more electricity.
Solar costs continue to decrease and the industry has a clear path forward thanks to the extension and gradual decrease of the Federal Tax Credit. The solar economy employs hundreds of thousands of Americans and is creating local jobs in the markets where the factors above come together, but clearly it is not just about sunlight!