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Time of Reckoning by John Kaweske

As solar energy faces increasing competition and decreasing subsidization in the United States, John Kaweske predicts the possible aftermath.

Residential solar energy’s development has reached a crossroads in the United States. To date, much of its advancement has been achieved due to utility and government subsidization. Without the existence of such subsidies, it is unlikely that residential solar energy would have grown to its current scale.

Other energy sources on a BTU (“British Thermal Units”) cost comparison basis have a clear advantage. In the United States, Natural Gas, a clean burning fuel costing between $2.00-$2.50 MCF has the competitive advantage. West Texas Intermediate oil prices of $30 a barrel also win out on a comparative BTU basis. Hydroelectric Power Generation, one of the cleanest energy sources, wins easily on all measures versus solar energy.

A recent unanimous ruling by the Nevada Public Commission puts into effect a change in tariff structure rendering residential solar power generation non-competitive overnight. For net-metered solar customers the compensation for net excess solar generated power sold back to the electric utility will be gradually reduced from a retail rate of $0.116 KWH (“Kilowatt Hour”) to the wholesale rate of electricity of $0.065 KWH over the next four years. Fixed service charges will also be increased for solar customers.

These changes were implemented as of January 1, 2016 and will apply retroactively to all net-metered customers. NV Energy, the largest public utility in Nevada, will determine how high fixed charges will be set. Existing solar customers will be sabotaged and put at great financial risk by these decisions; since their previous investments in solar installations will not provide the return they had anticipated and may prove to be unprofitable. This could lead to customers defaulting on their power purchase agreement (“PPA”). Furthermore, the economic incentive for new potential rooftop solar customers will be eliminated since installation cost reductions will most probably not be able to offset the effects of this policy change.

The precedent set by this regulation regarding existing solar customers is extremely negative for the US solar industry and likely a major blow to investor confidence in the residential solar space. Stable policies that do not disrupt existing contracts are a requirement in order for the US solar industry to flourish. The retroactive application of Nevada’s net metering policy significantly increases the risk to invest in solar in both Nevada and possibly other states.

Arizona recently adopted similar changes for a few public utilities in the state (i.e. The Salt River Project). The change in the tariff and the fixed charge structure immediately caused the largest installer of residential solar power in Nevada, Solar City, to abandon the market.

Moreover, another form of subsidization are the tax credits permitted federally and by the states. Has central government planning worked anywhere? The significance of what occurred in Nevada and Arizona portrays what happens to the competitiveness of solar power when subsidies are removed. Clearly, solar power’s ability to compete with substantially lower legacy energy sources is diminished. The result of the Nevada Public Utility Commission decision is that growth for the residential solar market will be impaired if these Arizona and Nevada changes as noted are adopted by other states.

Subsidization of Central Power Stations

The subsidies available for utility power companies are no less important to their ultimate success than those subsidies that are available for residential solar panel customers. Those solar utilities serving California customers benefit from higher subsidies and consequently are more profitable.

In examining the financial health of companies selling solar power to utilities there are major differences. Solar City, a residential solar provider that is controlled by Elon Musk, is hemorrhaging $100 million in annual losses and has yet to turn a profit. The balance sheet is also somewhat impaired. Sun Edison, who builds central solar power stations, is in precarious financial health with over $11 billion in debt. A bankruptcy filing for Sun Edison is not out of the question.

Clearly, the solar power industry faces three major caveats. First, there is the risk that the rate structure will change. Second, there is the risk of the precarious financial position of a few companies. Third, oil prices at less than $30 a barrel could decline further, thus putting a damper on moving to solar power as previously anticipated.

Because of the net-metered rates the 15,000 solar customers in Nevada must pay, the solar customers filed a class action lawsuit against Nevada Energy and indirectly the Utility Commission. The class action alleges that Nevada Energy, an entity owned by Warren Buffet’s, Berkshire Hathaway Energy in a monopoly structure, is devastating the solar market in Nevada.

Furthermore, the class action also alleges fraud because residential solar customers purchased solar panels under the rate system that was previously in place. These residential solar customers have been put in a difficult position since they are unable to offset the investment made over a period of time.

The major consequence of previous rate regulation is that it was an unfair cross subsidization scheme that penalized legacy power customers.

Conclusion

Perhaps the greatest risk to solar power is that there is no longer a significant cost advantage as compared to carbon sources of energy. With oil prices settling at less than $30 a barrel and daily oil production-exceeding demand by more than 1 million barrels per day for the foreseeable future there may be a marked slowdown in conversions to solar power. Solar power’s advantage has always been government mandates based on climate fears, thus creating an artificial energy economy regardless of the cost considerations. Central planning similar to what occurred in the Soviet Union now haunts the United States.

About

John Kaweske serves as Chairperson and CEO of Bio Clean Energy, S.A. in Sao Paulo, Brazil. Bio Clean Energy, S.A. is a government-licensed producer of biodiesel in Brazil selling to Petrobras, S.A. John is co-author of three patents on biodiesel production technology. He started his career in 1990 at D. Blech & Company as an analyst focused on the private sector of biotechnology. In 1993, he served as Director at First Atlantic Capital in New York, NY. At First Atlantic Capital in 1995, John notably founded, Genome Technologies, Inc., according to Bloomberg news, the second private company focused on genetics sequencing. From 1995 through 2002, he served as President and CEO of Grace Investments until the Company was sold in 2002 to Cardinal Capital Management, Inc. where he worked for 2 years as Senior Managing Director as stipulated in the Share Purchase Agreement.

This article was originally published on Capital Business.