Incentive Programs

Incentive programs were considered necessary to accelerate the adoption of solar energy technologies that were in the national interest. Without incentives, it was felt, conversion would be delayed too long and become more costly and even dangerous to energy security. Incentives might be needed to develop a sustainable market, but should not be necessary to sustain it. The government established a number of financial and non­financial incentives for the solar programs. The financial incentives included the tax credits, the Solar Bank, and the grant programs. Each of these is covered in volume 10.

In addition, the gove^rnment provided disincentives for solar and other renewable energy technologies in the form of continuing subsidies for established energy providers. The Alliance to Save Energy (ASE) esti­mated that in 1993, gove^rnment energy subsidies amounted to about $36 billion annually, of which less than 1 percent could be counted as incen­tives for the use of solar energy. Some analysts have placed the total value of subsidies accorded oil, including the costs of international security, in the neighborhood of $100 per barrel. Whatever the figure, the goal of a level playing field for all players in the energy business is far from a reality.

Of the financial incentive programs provided for solar thermal tech­nologies, only the commercial and residential tax credits were large enough and lasted long enough to have any significant impact on the development of a market. Although their long-term impact on the devel­opment of the industry they were intended to establish has been described before in negative terms in the present volume, in the short term, they did achieve the limited objective of increasing the sales of solar equipment and creating jobs. Unfortunately, too many of the jobs they created were for door-to-door salespersons, not factory workers and technicians. Whether the total economic value of the solar tax credits exceeded their cost has never been determined.

Not only was the market for solar energy systems unsustainable with­out the tax credits, but the energy savings the systems were intended to achieve were often unsustainable as well. Systems that were badly designed or installed did not deliver the savings they should have, and the system owners generally had no way of knowing if their systems were even operating. As installers went out of business, owners were left with­out anyone to tum to for maintenance and repair. At the same time, the costs (real) of natural gas and electricity were dropping and home owners were much less concerned with energy availability and cost. As a result of poor installation and poor maintenance and repair, it is likely that the actual total energy savings have been far less than the 0.2 quad that could have been realized if all systems installed had performed as expected.

However, in the present author’s opinion, the failure of the government incentives to produce a sustainable market and industry should not be interpreted as a failure of the technology, nor even a condemnation of the economics of solar water heating. The technology is capable of delivering long-term performance, and with the proper market delivery mechanisms, it can compete on even terms with conventional water heating in some parts of the country. The main problem, as we are just beginning to acknowledge, was that the products were being sold in the wrong markets and the incentives were designed to produce sales and did not assure continued performance. The most recent extension of the commercial tax credits for renewable energy technologies corrects that latter error and bases the credit on the energy actually delivered. The next step is to realize that solar technology can be marketed to utilities or third-party energy services that can profitably sell the thermal energy service (not products) to the end user. This market delivery mechanism has numerous advan­tages, but what is most important, it makes the service provider, rather than the end user, responsible for the efficiency and reliability of the energy conversion equipment.

Because of the end-user marketing strategy, most of the market action was in the residential sector. Commercial and multifamily markets proved disappointing because the commercial end users either could not benefit from energy savings or required high rates of return on energy-saving investments. Apartment owners generally passed costs through to a renter and had little knowledge or interest in energy conversion technologies. Except for a brief period in California when third-party systems were popular with investors seeking tax shelters, solar water heating has been excluded from the substantial rental sector of the residential market.

The experience with the residential and commercial tax credit incen­tives suggests to the author that these incentives should be based on results, that is, the delivery of energy from renewable resources, or the reduction of the use of energy from nonrenewable resources, not on the sale of equipment. Hardly anyone disputes that the tax credits were a major cause of market abuses. The new tax credits for wind and biomass power are based on energy delivered. It remains to be seen how successful these will be. Even if the approach is 100 percent correct, they could fail because the incentive level is not set correctly or timed properly. It is clear that the incentives should also be tied to the cost and availability of conventional energy resources, but the proper relationship is difficult to predict.

The nonfinancial incentives provided for solar thermal power through the PURPA legislation, which required utilities to purchase electricity from third-party providers and gave some preferences (and restrictions) to renewable energy resources, when combined with the federal and state tax credits and exclusions, could have been successful. If the present volume had been completed in 1991, it would have said that Luz’s accomplish­ment is the first real success story in the solar industry and demonstrates that solar energy can succeed in the marketplace with the proper assis­tance at the right time. It would have pointed out how properly stmctured and timed government and utility incentives can help a fledgling indus­try compete successfully on a playing field otherwise badly tilted in favor of the established energy technologies. Unfortunately, in July 1991, Luz was forced to file for bankruptcy and liquidate its assets. Although this development has not affected the operation of the nine existing plants, which are owned by investors, it has brought to a halt, at least tempora­rily, construction of new plants that had been proceeding at a rate of 80 MW per year and were expected to increase and expand into northern California and Nevada before the end of the century. There are potential successors to Luz who may decide to purchase rights to technology and the utility contracts, but if this option does not materialize soon, much of what Luz accomplished technologically will be lost, and it may be a long time before anyone will be willing to risk the treacherous game in which the yearly success or failure of an industry is in the hands of legislators who have little interest in or knowledge of that industry and its problems.

Now all that can be said is that the federal gove^rnment and California, after bringing the solar thermal power industry to the brink of success, allowed it to fall back into an abyss. The Congress and the governor of California did this through procrastination, not malice, but the effect was the same. Delays in approving an extension of small, but still vital, gov – e^rnment incentives were the final straw that led already nervous potential investors in SEGS X, the tenth solar electric generating system scheduled for construction in 1991, to withhold capital so long that Luz could not meet its cash flow requirements and had to close its doors. The incentives that made it possible for Luz to establish itself and advance its technology no longer exist, and it may be a decade before “business as usual” energy economics will make it attractive for even the most risk-tolerant com­panies to enter the business in a substantial way.

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