Forget Tax Credits. These Two Federal Policy Changes Are a More Immediate Threat to Solar

When Donald Trump won the presidential election in November, some in the solar industry worried they might become a political target.

Eliminating federal tax credits or stripping funding for Department of Energy’s renewables programs are one option. But the government can undermine solar in more subtle ways. And some negative policy changes impacting solar may already be underway.

Here’s what to watch for.

PURPA: The solar industry’s biggest growth driver

Every solar project needs a PPA driver, something that incentivizes (or forces) a customer to buy renewable energy. In the U.S., that driver has long been renewable portfolio standards put in place by state legislatures. But lately, RPSs are being replaced by the Public Utility Regulatory Policies Act, or PURPA, as a key driver of new PPAs. And PURPA may be easier to undermine than it seems.

PURPA was passed in 1978 to give renewable energy a way to compete against fossil fuels that dominated electricity generation. In reality, it was a policy that was intended to give small hydroelectric plants a path to the grid if they could generate electricity for less than the "avoided cost" of competing plants, but it’s recently become a huge driver of solar energy development.

With solar pricing falling below 5 cents per kilowatt-hour in many states, solar is now less than the avoided cost of energy from fossil fuels. If the rules stay the way they’re written today, PURPA will drive more solar adoption in more and more states every year.

Utilities are starting to see this as a threat and PURPA challenges are coming in Oregon, North Carolina, Utah, Montana, Utah, and elsewhere around the country. There may be some heavyweight players behind trying to change PURPA in a way that hurts solar energy.

"Berkshire Hathaway and Duke Energy have long wanted to amend PURPA, whether it’s through Congress or FERC, and I would bet there will be another swing at that," said Vote Solar’s Adam Browning.

If these challenges fall on more sympathetic ears in legislatures or at FERC than they have in years past, it could negatively impact solar. States set the avoided cost, interconnection rules, and contract length terms, while FERC acts like a referee for state regulatory bodies. 

Changing the contract length could have a surprisingly big impact on an industry like solar energy. Longer contracts with better offtakers and lower interest rates will decrease the price they have to bid per kilowatt-hour on projects. Any changes in the status quo would likely raise the rate they would have to charge, making them less competitive in the market.

As Browning put it: "If you’re trying to develop a solar project, it’s all capital cost. There’s not a utility in the world who would develop a solar project if they were only on a 2-year contract, and yet those are the terms they want to change the contract terms for [qualifying facilities] from 20 or 15 years down to 2 years."

Now that PURPA is the top driver of new solar developments, it’ll be an important policy for the industry to keep in place. It may not be as easy as it was a year ago.

Interest rates: The invisible killer for renewable energy

The falling cost of solar has gotten a lot of attention over the past few years, but that’s not the only factor leading to lower PPA prices across the U.S. Falling interest rates have been a huge tailwind. Any change in monetary policy, led by the Federal Reserve, could have a big negative impact, particularly on the utility and non-residential markets.

Renewable energy projects have to justify their large capital expenditures with predictable cash flows for 20-plus years down the road. And then those cash flows are discounted in today’s dollars with a discount rate that’s based on market rates. If the Federal Reserve raises rates, the result is either lower value for solar projects or higher prices for electricity from future projects.

Let’s say, for example, you have a solar project that has predictable, contracted cash flows of $1 million per year for the next 25 years. If the rate of return investors demand is 7 percent, then the project is worth $11.65 million. But if the rate of return rises just one percentage point to 8 percent, the value of the project falls 8.4 percent to $10.67 million. A rise to 9 percent reduces the value by 15.7 percent to $9.82 million.

Late last year, the Fed said it expects three rate increases in 2017, and the benchmark 10-year rate is up nearly 100 basis points since July of last year. Rising rates aren’t a crazy risk factor for solar; they’re already happening today.

Margins in the project development business are already under pressure, so even a small change in monetary policy could impact solar energy projects in a big way. Industry observers should keep an eye on what Yellen and Co. do with rates in coming months.

What to watch from a policy perspective in 2017

They may seem like obscure policies to watch, but PURPA and the Federal Reserve’s monetary policy are two major policies for the solar industry to watch in 2017. The Federal Reserve won’t directly target solar, but the industry is impacted by anything the central bank does, whether rates are going up (bad) or down (good).

PURPA may also become a hot topic. If FERC and state regulators are more open to changing rules in a way that negatively impacts the solar industry, it could put a damper on a big growth driver. Don’t be surprised if this becomes a policy fight the industry takes on. From a volume of installation perspective, it may be even more important to win the fight for PURPA than the net metering battles the industry has waged in the last two years. 

Addendum: How the ITC could fall, however unlikely

The one big blow could be a reduction in the ITC, although that would require an act of Congress. Lawmakers have been largely supportive of renewable energy tax credits. But it’s not out of the realm of possibility that the ITC could be bundled into a tax reform package.

While the ITC isn’t likely to be a public target because of the high number of jobs solar has created, there’s a possibility that the ITC could get lost in Congressional horse trading. The industry will be watching any tax reform activity very closely.

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