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December 12, 2011

Government Subsidies for Industrial-Scale Solar

Posted In economics & Industrial solar & public lands issues & subsidies | By Janine Blaeloch

[Updated 12/12/2011]

Industrial-scale solar power generation is economically feasible only because recent policy has brought massive taxpayer-funded subsidies to the table. Ironically, many of the names behind Big Solar that are taking advantage of this policy are familiar from the realms of Big Oil (BP and Chevron) and big bailouts (Goldman Sachs and Morgan Stanley).

Direct subsidies, loan and profit guarantees

Government subsidies have added significant momentum to the development of industrial-scale solar power generation on public lands.  A large commitment of American Recovery and Reinvestment Act (ARRA) funding has been allocated to subsidize solar projects. Initially, solar developers had been offered a 30 percent investment tax credit (ITC) as an incentive to develop new projects. However, because the recession slowed investment (and because investors complained they would not realize the benefits of the ITC for several years), the Administration decided to offer grants in lieu of the ITC for projects that could present substantial progress by certain deadlines. Many projects rushed toward the end-of-year deadline in 2010 to qualify for these grants, and funding was extended through 2011.  The government grants cover up to 30 percent of a project’s cost.

Some individual projects were chosen by the Administration to receive loan guarantees that by December 2011 totaled $5.85 billion for projects on public land and $4.72 billion for projects on private land.

Because it is believed no commercial banks are willing to extend these loans in the current economy, the lender is the Federal Financing Bank, a branch of the Treasury Department, and the guarantor will be the US Department of Energy. In other words, these risky loans are being made and guaranteed by taxpayers.

In November 2011, as the grant and loan-guarantee programs were about to expire, both economic doldrums and an emerging scandal imperiled the chances that the programs would be renewed. Solar-panel manufacturer Solyndra, which had received a loan and loan guarantee of $535 million had declared bankruptcy, and DOE was under fire for having failed to protect taxpayers’ interests when the department was aware of the company’s instability.

Whatever the fate may be of the loan guarantee and grant programs, in addition to taxpayer largesse, energy companies have the advantage of several built-in subsidies that guarantee profit. Power Purchase Agreements between the generators and the purchasers of energy guarantee power will be purchased for an established period of time. And transmission line projects are guaranteed both cost recovery (via ratepayers) and a return on equity that is generally between 10 and 13 percent (varying by state). Remote, industrial-scale projects that will require additional transmission-line development are thus especially lucrative.

New Rental Formula

In leasing, exchanging, or selling public land, the BLM is required to obtain Fair Market Value. In 2007, Interior issued an Instruction Memorandum (IM) outlining the process and regulations by which public land would be leased to solar developers. The IM explained that solar projects would rent rights-of-way on federal land, the same process that applied to uses such as pipelines and transmission lines. Appraisals would be conducted by the Interior Department and rent would be based on the appraisals and local market conditions pertaining to rental rates. Unlike transmission or pipeline corridors, however, where land use is only partial—allowing for other uses to continue under or over the installation—rents for the solar projects would be based on full use of the land.

In June 2010, the agency announced and initiated a new methodology for arriving at the rental fees solar developers would pay for public land rights of way.  The new rental rates would be based on two factors:  a “base rent” that was derived from county-by-county average agricultural land values, and a “Megawatt Capacity Fee” based on the MW size of the project. In the press release that announced the new methodology, BLM Director Bob Abbey stated that with this approach, “we are providing the solar energy industry the level of certainty it needs about the costs associated with projects on the public lands.” Indeed, the IM issued for the new policy listed rental rates by state and county for areas where solar development was proposed, eliminating the normal delay and potential uncertainty involved with a site-specific appraisal.

There is deserved controversy around the new fee basis. Using average agricultural land values is a significant departure from standard federal land appraisal methodology, which would likely base the land value on a “highest and best use” of rural-industrial development and would probably result in a higher value. Land values in the desert based on agricultural use would tend to be low.

On the other hand, the MW capacity fee appears to penalize projects that have higher capacity and include energy storage. In a statement to the press regarding the seeming illogic of this, a BLM spokesperson said, “the agency was following a mandated formula that takes into account the efficiency of a technology. And he noted that more efficient solar thermal power plants can have adverse environmental consequences like greater water consumption.”

Some bills introduced in 2010 proposed to use “lease sales”— such as those issued for oil and gas extraction on public lands, and obtained through competitive bidding—to determine the payment for solar development on public land. This approach is more straightforward than the new formulation, and by the very nature of competitive bidding, would be more likely to arrive at a Fair Market Value.10 None of these legislative proposals has yet succeeded.

Conclusion

Policymakers should closely scrutinize the scope of taxpayer funding for Big Solar. Developers clearly stand to gain with a system predicated on heavily-subsidized, concentrated, remote solar development on public land and large-scale, new transmission infrastructure with guaranteed return on investment. Whether taxpayers and the public interest benefit is less clear.

 

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