by Becki Gray
Former Senior Vice President, John Locke Foundation
ICYMI – this op-ed appeared in the Greensboro Record yesterday. An engineering professor from NC State hits it right on the money….
Solar incentives need to be re-evaluated soon
By Herbert M. Eckerlin
Electricians work on the 64,000-panel solar array that SunEdison is building on a 356-acre farm on New Jersey Church Road in Davidson County.
I have been involved in solar for many years, beginning with the design and construction of the N.C. State University Solar House in 1980. I also founded the N.C. Solar Center is 1987.
So, people from across North Carolina often call me with their solar questions. One of the more recent questions is, “Who is paying for all these solar farms?” To properly answer this question, some background information may be helpful.
The size of the typical solar farm in North Carolina is 5 MW or 5000 KW. A 5 MW solar farm requires about 40 acres of land and costs between $11 million and $14 million. A solar farm can be erected by solar developers in two to three months. Developers generally do a good job and have become quite wealthy in the process. Once the solar farm is in operation, little additional labor is required.
To answer the question “who pays,” we have to refer to Senate Bill 3, legislation that was passed by the N.C. General Assembly in 2007. This 28-page bill was written to promote the development of renewable (green) energy in North Carolina, but a significant portion of the bill focused on solar energy systems. The bill required all utilities in the state to buy renewable power in accordance with the following schedule: 3 percent of all sales by 2012, 6 percent by 2015, 10 percent by 2018 and 12.5 percent by 2021.
The law requires the utility to buy all the green power generated by the solar farms, even if the utility doesn’t need it. In other words, the utility may have to shut down some of its boilers to adjust to the green power available. The utility must pay the solar developer for the green power it has generated (at present, this cost is in the six-cent to seven-cent per kwh range). This cost is substantially higher than what it costs the utility to generate the power in-house. Keep in mind that this solar power is intermittent and available about five hours per day on average.
Another objective of Senate Bill 3 was to get people to invest in this new technology. This is accomplished by offering potential investors a state tax credit of 35 percent. For example, an investor can invest $2 million in a solar farm and reduce his or her taxable income by 35 percent, spread over a five-year period. This was a game changer and has attracted many investors like large banks, insurance firms and large companies that have large electric loads (e.g., Walmart, Lowe’s, Google, Amazon, etc.). The response to this tax credit offer has been so positive that a typical solar farm can be funded by only five or six investors. In fact, the tax credit is so attractive that the solar developer often does not have to put any of its own cash into a project.
The final step in evaluating this solar farm process is to determine the impact that the tax credits have on the state’s economy. In 2014, for example, the tax credit incentive program enabled the solar farm investors to reduce their overall tax obligation to the state by a total of $124 million. This is a significant benefit for the solar farm investors and a significant loss to state government. In practical terms, this loss in revenue reduces the services that the state can provide. It impacts a whole host of issues (e.g., salary increases for our teachers and state employees, economic development, highway construction, etc.).
North Carolina teachers rank 47th nationally in terms of pay. We can’t get much lower. We also have to recognize that the $124 million loss is for 2014 alone. That figure will increase in subsequent years because so many more solar farms are being built. And we can’t forget that each investor will claim his tax credits over a five-year period. This means that an investor who took his or her first tax break in 2014 will still be realizing tax benefits on that investment in 2018. This is a bit scary.
My sense is that my friends in the solar farm business did not anticipate the negative impact their program would have on the state’s tax structure and its economy. I certainly did not. However, now that the results are in, it is time for the General Assembly to re-evaluate Senate Bill 3 and the entire solar farm program. It is clear that we can’t continue down this path if we want our state and people to prosper.
The solar farm program as it is presently configured provides for unprecedented opportunity and prosperity for the few at the top. But for the rest, the opportunity for success is diminishing. If we are not careful, we will be looking at two Americas. The time to change our path is now.
Herbert M. Eckerlin, Ph.D., is a professor of Mechanical & Aerospace Engineering at N.C. State University.