Buzz Kill: California Freezes Solar Incentives

Talk about bad timing. Just days before the start of Intersolar North America, a large solar-industry conference in San Francisco, the state of California temporarily suspended part of its popular solar incentive.

Not only did the ruling come -- somewhat embarrassingly -- right as the industry was celebrating its success in the Golden State, the largest solar market in the U.S., but it also came during the industry's busiest season for installations. Adding to the pain, the decision puts large installations on hold at a time when installers are racing to take advantage of federal Treasury grants, which expire at the end of this year.

Industry on Fire, Now on Hold

"The industry's just been on fire, so this is really unfortunate timing," says Adam Browning, executive director of solar advocacy group Vote Solar. "The [California Solar Initiative] has been going gangbusters, and the summer is a wonderful selling season as electricity prices peak, people pay attention and a lot of solar gets sold. And right now is when people should be getting business done in order to take advantage of the Treasury grants."

The grants have played a key role in boosting U.S. solar installations during the recession by defraying the cost of projects with cash instead of with potentially hard-to-use tax credits. To be eligible, developers are required to break ground on projects before the year ends. And uncertainty about California incentives are likely to put customer decisions and installations on hold, reducing the number of projects California project developers will be able to break ground on before the deadline.

The freeze affects new applications for projects that are 30 kilowatts and larger, as well as nonprofit and government projects. In its July 9 ruling, the California Public Utilities Commission said it's considering modifying the incentives for those projects to make sure it can "maximize the effectiveness" of its remaining budget.

In other words, because the program's attracted so much participation, the CPUC may lower its rates to get the most bang for the buck -- and to make sure it doesn't run out of money before meeting its goal of installing 1.75 gigawatts of solar power capacity in the state. In a sweetener for the industry, the program is also considering adding $20 million in incentives by shifting it away from the program-administration budget.

Under the Radar

The decision got little attention, at least partly because the commission also released its annual program assessment for the California Solar Initiative on the same day. The assessment didn't mention the suspension, instead emphasizing the program's success.

And the program has indeed been popular. The state has received 300 megawatts of new project applications since January, a record number in any six-month period since the program launched in 2007. That's in spite of the fact that the incentives have fallen -- as originally planned -- from $2.50 per watt when the program began to as low as 65 cents per watt last week.

For one thing, prices of solar-power systems also have declined, from about $10.04 per watt in January of 2007 to $8.49 per watt now, according to the assessment, which adjusted those prices for inflation. In addition, federal and local incentive programs have also stepped in to make solar more attractive.

But like other incentive programs, most notably feed-in tariffs in Germany and in Spain, the California Solar Initiative could be considered a victim of its own success. To be fair, the California incentive hasn't boosted the market anywhere near the dizzying heights of the German or Spanish programs, and also built in incentive reductions that would kick in automatically when enough projects applied. Still, like those programs, the California program has been more popular than expected -- and that means it's also running out of money more quickly than planned.

Other Ironies

Adjustments are needed for several reasons, including economic changes, new financing models and lower prices for solar panels. One key factor is actually new and improved technology, says Kelly Desy, manager of government relations and public policy for solar manufacturer SolFocus.

More-efficient solar projects now produce more electricity for their size, meaning that a project with the capacity to produce up to 1 megawatt of power today can probably deliver more electricity than a project with the same capacity a few years ago. Because the state pays larger projects for the kilowatt-hours they produce, it's paying more money for less nameplate capacity than it originally reckoned on getting, even though it's getting more actual electricity. And the state goal was set in terms of capacity, not kilowatt-hours. So the CPUC calculated that it will run out of budget before it reaches its megawatt goals, unless it makes some changes, Desy says.

While some solar installers, developers and customers were stunned by the sudden freeze, Browning says the commission had little choice but to suspend the program without warning. "If they announced incentives were going to be changed, there would have been a gold rush to get applications in before that happened, and it would have defeated the purpose of the change," he says.

Adjusting Incorrect Assumptions

"It's not a decision the CPUC made lightly; nobody's particularly happy about it," Browning says. "But any time you begin a new program, you make assumptions about how it's going to work, and it's proper to adjust those if the assumptions prove to be inaccurate." He hopes the program will be reinstated at a CPUC meeting in early September, probably the earliest point at which it could happen.

In the meantime, the freeze is definitely putting projects on hold, stalling some projects of up to 1 megawatt. "Everything's slowing down," Desy says, adding that the CSI is an integral part of these larger projects' financing and customer decisions. "Now that no decisions are being made and everything's kind of in limbo, those projects are in jeopardy." Developers worry that some customers will simply change their minds if the projects can't be completed this summer.

That said, while the adjusted incentive rates remain uncertain, they're likely to fall within a predictable range, so installers should still be able to line up sales based on a spread of possible incentives, Browning says. As he put it: "They will be able to make the foundation of sales, but not to consummate the sales." Of course, if the suspension lasts too long, cash flow will become a problem for some installers focused mainly on larger projects or governmental or nonprofit projects. But if it ends quickly, Browning says, "it's a problem, but by no means an apocalypse."