Since last June, when global oil prices began their precipitous slide from over $110 a barrel to less than $50 a barrel, we have had numerous corporate clients ask how this phenomenon will impact the solar industry at large, and more specifically, how the decline in oil prices will affect the economic returns associated with onsite solar photovoltaic projects.
The short answer is that oil prices have very little direct impact on solar, and perhaps counter-intuitively, in many parts of the U.S., the slide in oil may actually improve solar project economics.
The first takeaway is that solar projects “compete” with the retail price of delivered electricity (i.e. the kilowatt-hours that are no longer purchased from the grid when clean solar electricity is generated onsite), whereas in the U.S., oil is primarily used for transportation. According to the U.S. Energy Information Association (EIA), only 1% of electricity is derived from petroleum in the U.S., with coal (39%) and natural gas (27%) comprising the largest sources of electricity generation. So while oil price volatility has a huge impact on transportation economics (and related technologies like electric vehicles), it has negligible direct impact on electricity prices.
OK, but how can these free-falling oil prices be good for solar? Interestingly, in much of the U.S., the marginal price of electricity is driven largely by the price of natural gas. And to a large degree, the recent abundance of natural gas in the U.S. (and its extremely low pricing) is a result of the significant increase in “fracking” activity, where wells targeting oil often harvest natural gas as a by-product. As global oil prices have declined, the economics for new oil fracking wells have deteriorated sharply. And as the number of active fracking wells is reduced in the U.S., the supply of by-product natural gas from these wells will shrink, which we believe will lead to higher electricity prices, which in turn will lead to improved solar project economics.
Going forward, whether electricity prices are whipsawed by future natural gas price volatility, or the increased need for utility investment in transmission & distribution lines, or the additional regulatory costs for coal generators – onsite solar generation can “immunize” businesses from this risk by providing long-term certain power pricing (often at kWh rates that are below current spot market rates).
In early 2015, CL&P and United Illuminating (UI) will formally issue requests to bid for the 2015 Connecticut Zero-Emission Renewable Energy Credit (ZREC) solar incentive program. For Connecticut businesses with large under-utilized roof or land areas, the ZREC program provides a lucrative way for companies to ‘go green’.
By way of background, a ZREC represents the renewable attributes of one Megawatt-hour (MWh) of solar generated electricity and can be more commonly referred to as ‘carbon credits’. Connecticut requires its investor-owned utilities to buy a certain number of ZRECs annually in order to meet the state’s Renewable Portfolio Standard requirements. The purchase of these ZRECs in the form of a 15 year contract provides secure and highly visible and predictable revenue to businesses and property owners with solar energy systems.
Whether your business is interested in owning a solar PV system, leasing one, or simply purchasing low-cost solar energy with no capital outlay, EnterSolar will clearly demonstrate how Solar will boost your bottom line.
We hear this question all the time, from our clients and potential clients, from our solar industry partners, even from our friends and family. And with the upcoming 2017 stepdown in the 30% Investment Tax Credit for solar projects – the primary federal incentive for solar – the question of solar’s need for continued subsidies is front and center.
As advocates of free markets (and free trade), we tend to have a visceral aversion to “subsidies” of all kinds. However, this question of when solar subsidies should be eliminated in the U.S. is often predicated on a fundamental – and false – premise, namely that that the retail cost of electricity reflects a pure and appropriate market-driven price.
The fact is, the “market” cost of a delivered kWh of electricity derived from fossil fuels is highly subsidized (and has been for decades) – both in terms of direct subsidies (i.e. advantageous tax treatments for the coal, oil & gas industries that are permanently embedded in the U.S. Tax Code) as well as “externalities” (fossil fuel costs that are not reflected in the purchase price of electricity, such as pollution and adverse public health impacts).
According to a 2013 study published by researchers at the EPA, properly accounting for just the health impact alone of fossil fuel-derived electricity would add an average of $0.14 to $0.35 per kilowatt-hour to the average U.S. retail cost of electricity. Note that this estimate reflects only the cost of health impacts, and excludes all other externalities such as climate change.
We agree completely with the sentiment stated in the Economist’s December 2014 Technology Quarterly that “the world would no doubt be a better place if the externalities imposed by fossil fuels were properly accounted for in the price of electricity”. We welcome the concept of a “level playing field” – one in which all relevant costs are properly accounted for – and the value of clean, quiet, sun-powered renewable electricity can be accurately measured and compared with its brown power competition. But until that day comes, we will argue aggressively for appropriate and prudent solar incentives that help re-balance the uneven playing field.