As Lawmakers Consider the Fate of Pennsylvania’s Solar Market, Critics Decry Government Support

By: Rona Cohen

During the last three years, Pennsylvania’s thriving solar sector has become a leading engine of job growth, aided by generous state and federal incentives that in recent months have become too much of a good thing.

The rapid proliferation of solar installations across the state has led to an oversupply of Solar Renew- able Energy Credits (SRECs), which serve as a critical source of financing for solar projects but whose prices have slid dramatically in the last year due to oversupply.

Now, solar proponents say the industry, which outgrew all expectations, has become a victim of its own success. But representatives of traditional fuel suppliers warn that the problems plaguing the solar sector are evidence that government had no business promoting an industry that couldn’t stand on its own.

A legislative effort to bolster companies that are facing massive layoffs has become mired in a debate about the proper role of government in the marketplace.

At stake are more than 4,000 solar industry jobs and hundreds of businesses, which have flocked to Pennsylvania during the last three years to take advantage of its favorable solar policies. Pennsylvania ranks fourth in terms of solar jobs, according to the 2011 solar jobs census released by the Solar Foundation.

“If you want to continue to see solar operations here in Pennsylvania, we need to make an intervention at this point to save those jobs,” said Representative Chris Ross, who chairs the Pennsylvania House Urban Affairs Committee, during a January 11 hearing in Harrisburg on legislation that he has sponsored to bolster the market.

But critics testifying at the hearing, which was sponsored by the House Consumer Affairs Committee, warned that the bill, HB 1580, which seeks to support the plummeting price of SRECs, would saddle consumers with steep electric rate increases and distort the competitive electricity marketplace by interfering with the laws of supply and demand.

Solar industry players claim the cost to consumers will be negligible, whereas the loss of well-paying jobs could devastate the local industry as companies shift their operations to neighboring states with more robust markets.

 

The Visible Hand

 

Pennsylvania’s 2004 Alternative Energy Portfolio Standards Act (AEPS) compels retail electricity suppliers to purchase gradually increasing amounts of alternative energy as part of their overall port- folios, including 0.5 percent from solar photovoltaic sources by 2021. They can fulfill that requirement by buying SRECs produced by solar systems owned by residents or businesses, with each SREC equal to 1 megawatt-hour of generation. Suppliers who fail to provide their share of solar must pay a fee known as an Alternative Compliance Payment (ACP). Among other provisions, Ross’s bill would accelerate electricity suppliers’ SREC requirements between 2013 and 2015 by 4.5 percent, but leave the overall goal of 0.5 percent by 2021 unchanged.

More than half of all U.S. states have clean energy mandates, and one of the stated goals for their implementation was to enhance energy security by promoting domestic sources of power as a hedge against rising fuel prices.

But since the AEPS’s passage, Pennsylvania has experienced a boom in natural gas production, made possible by a controversial new drilling technique known as hydraulic fracturing, which has enabled drillers to access the state’s rich natural gas reserves located in the vast Marcellus Shale region.

Now, critics of efforts to help the state’s beleaguered solar industry say it isn’t fair to make consumers pay even pennies more a month for solar when the state has bountiful natural gas resources whose prices are plummeting.

State solar mandates, they argue, interfere with free markets, and contrary to being good public policy, are a reckless government intrusion in the marketplace.

“The government does not have a great track record of picking winners and losers in the energy market, and we believe that’s what happened in 2004,” said Gene Barr, president of the Pennsylvania Chamber of Business and Industry, during the January 11 hearing. “Energy prices are going down in many ways because of what Marcellus is bringing to Pennsylvania. It’s the biggest economic opportunity we’ve had here quite literally in decades.”

Although the 2004 AEPS created a market for solar, the industry’s explosion came a few years later, after the administration of former Governor Edward Rendell set aside $180 million in grants, rebates, and loans in 2008 to support residential, small business, and commercial solar projects. An additional $11 million was added from federal stimulus grants and other funding sources.

That money, coupled with a 30 percent federal investment tax credit, generated a flood of interest in solar among businesses and homeowners, and has led to the completion of more than 5,000 projects since 2009. Solar capacity in the state currently totals more than 100 megawatts, more than double the current AEPS requirement. In fact, there is already sufficient capacity built and planned to meet the requirements through 2015, according to a status report released last August by the state’s Public Utilities Commission.

Many of the people who have found jobs in the burgeoning solar sector were unemployed construction workers, electricians, and engineers who lost their jobs in the recent housing crisis, said Josh Gold- berg, vice president of policy and business development at Astrum Solar, which employs about 40 people in the state.

“One of the nice things about our business is we’re able to go into areas where construction is slow, and hire folks who now have full- time work in a growing field,” said Goldberg. “These are jobs that can never leave the state.”

But with the bulk of the grants and rebates dried up, and a glut of credits, there is little demand these days for the market to grow, said Goldberg. SREC prices have plunged from an average of around $300 to as low as $20 today.

A provision in the AEPS legislation that allows out-of-state SRECs to be sold to in-state utilities has further depressed the market. Pennsylvania is the only northeastern state that allows the practice; markets in Maryland, Delaware, New Jersey, and New York are all closed to SRECs from other states.

Representatives of electric and natural gas distribution companies who testified against the bill called the in-state requirement protection- ism and warned that it could violate the Commerce Clause of the U.S. Constitution.

Terry Fitzpatrick, president of the Energy Association of Pennsylvania, said the measure could cost ratepayers up to $2.3 billion between now and 2021. “We’re removing the investment risk from the solar industry investor and we’re placing it on the consumer,” he said.

Governor Tom Corbett echoed that sentiment in a January 9 letter to House Consumer Affairs Commit- tee Chair Robert Godshall, which expressed “several concerns” about the bill. “Periodic legislative ‘fixes’ to align demand with a government mandated supply discourages innovation and improved efficiencies within the energy market, shifts risk away from capital investors and onto consumers, and stifles competition within the solar industry itself,” the letter said.

Solar industry sources disputed the cost estimates produced by utilities as wildly elevated. The Pennsylvania Solar Energy Industries Association estimates the bill would increase ratepayer electricity bills by about $2.50 a year.

A source from Solar City, a national solar provider, said forecasts for dire rate hikes did not factor in expected increases in regular grid power going forward, or take into account declining solar installation costs, which have dropped by 40 percent in the last year alone. A solar panel that would cost $325 in 2008 costs less than $100 now, he said.

Costs are falling so fast, due to a variety of global forces and increased efficiencies, that solar could conceivably compete with regular grid power without any need for subsidies within the next five years, several industry sources said.

Others argued that solar installations can actually lower overall electricity prices for customers and reduce costs for utilities by relieving grid congestion. For example, a solar photovoltaic installation near Allentown will save a school district there $3.8 million in electricity costs over 20 years, said Dean Musser, president of Tangent Energy Solutions, based in Kennett Square. In addition, the solar panels will send any excess electricity back into the grid, relieving demand bottlenecks and enabling the utility to avoid making costly upgrades on currently stressed distribution lines, he said.

 

Factoring in Climate Effects

 

One of the topics noticeably absent from the January hearing was a discussion of where solar fits into efforts to tackle climate change. Many states with clean energy mandates explicitly created the standards as part of a broader strategy to lower carbon emissions. In recent years, states such as Massachusetts and New York have accelerated targets for solar and other renewables. California last year enacted the most aggressive requirement of any state, mandating that 33 percent of the state’s electricity mix come from renewable sources by 2020, up from a previous 20 percent.

During a signing ceremony last April, California Governor Edmund G. Brown stated that along with the goal of creating new green jobs, the decision to ramp up the state’s clean energy target was aimed at “improving local air quality, promoting energy independence, and reducing greenhouse gas emissions.”

But as is clear in fossil-fuel-rich Pennsylvania—where coal, nuclear, and more recently, natural gas generation have made the state a net exporter of electricity—in jurisdictions where policy makers do not consider the costs to the environment and public health from traditional power sources, efforts to promote the clean energy economy will continue to be a much harder sell.

In many ways, the debate being played out in Pennsylvania echoes the discourse at the federal level, where support for renewable energy has become anathema to congressional leaders keen on cutting spending. Their distaste for clean energy incentives has intensified in the wake of the collapse of Solyndra LLC, which filed for bankruptcy after receiving a $535 million federal loan.

Echoing the comments made by other opponents of HB 1580, Jacob G. Smeltz, vice president of the Pennsylvania Electric Power Generation Association, told lawmakers in Harrisburg that the bill “is an attempt to intervene in the law of supply and demand. We believe that markets need to be left alone to work correctly.”

But clean energy advocates say that traditional energy markets are hardly competitive. The United States spends more than $4 bil- lion a year to subsidize oil, gas, and coal, and more than $3 billion on nuclear power, according to a report published last October by venture capital firm DBL Investors.

Environmental groups point to the costs to public health and the environment from the pollution spewed by Pennsylvania’s coal plants and from natural gas extraction. The impacts on air quality, water resources, roads, and other infrastructure by hydraulic fracturing have become a heated issue in Pennsylvania, New York, and other states sitting atop the gas-rich Marcellus Shale.

“Clearly, older energy industries like coal and nuclear have not been left to fight it out in the marketplace in the decades of their earlier development,” said Justina Wasicek, of the Pennsylvania Sierra Club, in written testimony. “Many of their costs have been externalized and absorbed by government to pro- mote these energy sources.”

But as far as Pennsylvania’s solar industry goes, government actually was too zealous in its support, said Ross. Its decision in 2008 to flood the marketplace with grants and rebates produced the imbalance threatening its viability today, he said.

“We, the government, did change this marketplace,” said Ross. “I think we have to take responsibility for that, so that those who entered the marketplace in good faith won’t have to suffer as a result.”

At press time, Ross was pre- paring amendments to reinforce his primary goal of correcting the market and not increasing costs for suppliers who would need to comply with the new requirements.

The amendment would offset the near-term 4.5 percent increase in the SREC requirement with a corresponding decrease in later years; establish a cap on SREC prices by placing a ceiling on the ACP that will decline over time; and allow for solar thermal technology to qualify for SRECs.

“We want to send a clear signal that we are not trying to favor the solar industry, and that we want to correct a problem that we created,” he said.

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