On February 16, Xcel filed a request with the Public Utilities Commission (PUC) to reduce its Solar*Rewards payment, a subsidy for on-site solar photovoltaic installations, from $2.35/watt installed electricity generating capacity, to $1.25/watt. The next day, Xcel suspended the program, pending the PUC’s decision on its request.

Last Friday, solar industry supporters descended on the Capitol to protest Xcel’s suspension of solar subsidies. They claim that as many as 3,000 jobs have been jeopardized by the utility’s decision. Tomorrow (Wednesday March 2), the Senate Agriculture, Natural Resources, and Energy Committee will hold a hearing on the subsidy cut.

Clearly, the Solar*Rewards program is now at the fore of Colorado energy policy. This post is a long, dry primer on the matter.

What’s at Issue: Solar*Rewards

Xcel’s Solar*Rewards program subsidizes “on-site” solar power. It was implemented by Xcel in 2006, in order to help meet the goals set by Amendment 37, a 2004 ballot initiative that established a renewable energy production quota. The quota, known as Renewable Electricity Standard, required investor-owned utilities to generate at least 10 percent of their electricity with renewable energy by 2020. In 2007, the General Assembly enacted, and Governor Bill Ritter signed, HB 1281, which increased the production quota to 20 percent by 2020. And in 2010, the General Assembly enacted, and Governor Bill Ritter signed, HB 1001, which increased the Renewable Electricity Standard to 30 percent by 2020.

By statute, 2 percent of this green energy standard must come from on-site solar. On site solar takes many forms, usually rooftop panel installations, although there are larger, land-based panel arrays (like the one in this photo). It is “on-site” because it is a photovoltaic panel “on” an Xcel customer’s property. Most subsidy recipients have installed systems smaller than 10 kilowatt capacity.

For the past 5 years, the Solar*Rewards program has offered two types of subsidies to on-site solar installations. The first is a per watt direct rebate, paid upfront. The second is another upfront, per watt payment for the value of the energy produced over the lifetime of the solar panel. In order to limit confusion, henceforth I’ll refer to the first on site solar subsidy as a “rebate,” and the second subsidy as a “production credit.”

History of Subsidy Payments

The Rebate

The Solar*Rewards rebate was set by Amendment 37 (the 2004 ballot initiative that established Colorado’s Renewable Electricity Standard) at $2.00/watt for on-site systems between .5 kilowatt capacity and 500 kilowatt capacity. Larger systems, with capacity greater than 500 kilowatts, bid for contracts, just like conventional energy resources.

Although the $2.00/watt rebate is set by statute, Colorado lawmakers included a provision in HB 1001 (the 2010 law that raises the Renewable Electricity Standard to 30 percent by 2020) that allows the Public Utilities Commission to lower the rebate to the extent that market conditions support such a change.

The Production Credit

Unlike the rebate, Xcel is afforded more discretion over the production credit. At the start of the Solar Rewards program the production credit was set at an upfront payment of $2.50/watt for systems up to 10 kilowatts. For systems between 10 kilowatts capacity and 500 kilowatts capacity, the subsidy was determined monthly, based on how much energy is produced.

In October 2008, Xcel abruptly lowered the production credit upfront payment to systems up to 10 kilowatts from $2.50/watt to $1.50/watt, due to increases in the federal subsidy.

In January 2010, Xcel reconfigured the production credit for systems up to 10 kilowatts. Instead of offering a uniform subsidy, it linked the production credit to Xcel’s demand for solar, as established by the Renewable Electricity Standard. At the start of every year, the utility has a target for on-site solar resources, set by statute. The production credit would start at $1.50 a watt, but as the annual on-site solar target was increasingly met (as more customers applied), the subsidy would decrease, thereby reflecting Xcel’s decreasing demand. On February 15, the day before Xcel’s application to the PUC to cut the Solar*Rewards rebate, the production credit was $.35/watt.

The February 16 Application

On February 16, Xcel requested that the PUC lower the rebate to $.25/watt for the first 100 kilowatts, down from $2.00/watt. If the PUC granted this request, Xcel promised to raise the production credit for small systems to $1.00/watt, for a total Solar*Rewards subsidy of $1.25/watt. The utility asked the PUC to decide by May 1.

Contemporaneously, Xcel lowered the upfront payment of the production credit to small systems from $.35/watt to $.01/watt. Because the rebate is set by statute, Xcel could not lower it below $2.00, so the total Solar*Rewards subsidy became $2.01 (it had been $2.35). Xcel said that this subsidy rate would apply only for the 3 megawatts of applications, on a first come basis. The 3 megawatt limit was reached within 24 hours.

In attendant testimony by Robin Kittle, Xcel’s Director of Regulatory Administration, the Company cited two primary reasons for the reduced Solar*Rewards subsidy: (1) decreasing costs of photovoltaic panels and (2) increased solar energy requirements (HB 1001 effectively increased the on site solar requirement from two percent of the 2020 Renewable Electricity Standard, to almost 15 percent of the requirement).

A History of Cost Overruns

The staff of the PUC long has criticized Xcel’s management of the Solar*Rewards program.

The staff has had two problems with the program. The first was that Solar*Rewards drained limited renewable energy funds that were better spent elsewhere. In 2008, 2009, 2010, and (projected) 2011, the utility was spending 90 percent or more of its total renewable energy budget on on-site solar, despite the fact that Xcel has acknowledged these resources are the least cost-effective solar power technologies. In 2009, the staff noted that it “does not believe that the Company’s accommodation of this segment (on-site solar) now at the expense of all available resources results in cost-effective acquisitions of solar resources.”

The second complaint had to do with Xcel’s “passive” management of the program. For whatever reason, the Company has showed little restraint in trying to keep the program within its budget. There have been significant cost overruns. In 2007, Solar*Rewards exceeded its budget by almost $5 million. In 2008, it exceeded its budget by almost $10 million. And in 2009, it overshot by another $3 million. In its February 16 application to reduce the rebate subsidy, Xcel estimated that it would spend $97 million on on-site solar n 2011, which is about 4 percent of total sales, or almost double the utility’s 2 percent rate cap on expenditures for renewable energy to meet the Renewable Electricity Standard.

And for What?

To be sure, generous solar subsidies are good for the solar industry. But are they good for Coloradans? As I noted before, Xcel is on record acknowledging that on-site solar is cost-ineffective*, even by solar energy’s expensive standards. This year, Xcel expects to spend almost 4 percent of its forecasted electric retail sales to obtain about .3% of its energy through on-site solar photovoltaic panels. That’s not a good deal.

*See: Rebuttal Testimony of Robin Kittle, Docket 07A-462A, p 2 line 9 to 19.

William Yeatman is an energy policy analyst at the Competitive Enterprise Institute