Renewable Energy: What’s the State’s Role?
HOW STATE FAVORITISM HURTS TAXPAYERS AND DRIVES UP ENERGY PRICES
An attempt to loosen South Carolina energy regulation and licensing constraints for the benefit of solar energy firms has gained a fair amount of attention recently. A bill now in the legislature seeks to enable a process by which solar companies lease solar panels to residents and install the panels to residents’ homes, free of charge; in exchange residents would pay the company for the power they use generated by the panels. The most significant measure the bill takes to allow this solar leasing is removing current regulations that require renewable energy providers to be regulated as utilities, a costly and burdensome process for potential power producers.
Registered electric utilities currently are required to use their revenues to help finance the Public Service Commission, the agency that regulates them. Furthermore, the Commission regulates which customers utilities may serve – essentially allowing the state to grant rights of monopoly to electricity providers. The cost of complying with regulations and the outright prohibition on providing service in certain areas constitute barriers to entry which serve the interests of the existing large utilities by reducing their level of competition. Unsurprisingly, it has been existing utilities which have been the primary force lobbying against this attempt to enable solar leasing.
The traditional argument for the grant of government monopolies to utilities is that these industries are “natural” monopolies: one competitor would gain monopoly power with or without governmental involvement in the market due to the high start-up costs (mostly from infrastructure) in the industry. These high start-up costs, it’s argued, mean that only a very small number of firms can reach the economies of scale necessary to achieve a profit, and other smaller firms attempting to compete with these giants will fail; and since successful companies will be monopolies anyway, it’s better that government control them than that rate-payers be put at their mercy.
Whether or not these arguments have intrinsic merit, they certainly do not apply to the solar industry. The arrangements outlined above do not require expansive fiscal or land resources. The power source and delivery method in these arrangements (solar panels) can be placed on a resident’s property without other necessary components taking up public land. The major cost, then, is that of the panels and their installation, a relatively minor investment compared to traditional utility infrastructure costs. Considering this, it soon becomes clear that the main purpose of regulating solar leasing firms as utilities is not for the public welfare but rather for the protection of existing utilities – companies that benefit from industry regulation.
While traditional utilities are seeking protection from competition by requiring the regulation of solar leasing firms, they aren’t the only ones trying to use the power of the state for their own gain. The renewable energy industry itself benefits from a number of state programs that aim to financially incentivize more activity in the industry. There are currently tax credits for biomass Energy, purchase and installation of solar and hydropower energy systems, renewable energy manufacturing, and energy efficient manufactured homes. There are sales tax exemptions for hydrogen fuel cells and energy efficient manufactured homes, and there are direct subsidies per kilowatt hour of energy produced by biomass energy sources. And government-funded university programs – for instance, Clemson’s wind turbine drivetrain testing facility – provide research for the renewable energy industry. To cap it all off, the state received $1.8 billion in stimulus dollars from the federal government for energy and environmental spending.
The desire among politicians for more renewable incentives has not gone away in recent years. Bills have been introduced this session that give tax credits for the cost of solar energy systems, give sales tax exemptions for machinery used in the production of energy from renewable sources, and give sales tax exemptions for machinery or devices used in the production of hybrid or electric motor vehicles. Most notably, a bill has been introduced, documented in detail by The Nerve, that would lower investment and job creation levels necessary to receive a tax credit worth 10 percent of the company’s total qualifying investment in plants and equipment related to clean energy. The bill would also expand the field of clean energy production that qualify for the 10 percent tax credit to areas such as hydrogen and small modular reactors, and would create a new panel tasked with formulating a clean energy plan for the state.
So what has been the result of this government largesse? According to a study by State Budget Solutions, South Carolina as of 2010 had 10,330 jobs in the renewable energy sector, which represented an 11 percent drop from 2003. For all of the money and incentives that have been thrown at this sector, this hardly represents a good return on investment.
While the renewable energy industry hasn’t offered much to the taxpayers for their forced investment, traditional utilities in South Carolina have not been averse to using and abusing the special privileges granted to them by the state either, as a quick example will demonstrate.
South Carolina utility SCE&G has recently began construction on new nuclear reactors in Jenkinsville (Fairfield County), funding this construction under a process known as advanced cost recovery (the name of the particular law in South Carolina is the Base Load Review Act). Advance cost recovery (a special privilege allowed to regulated utilities) allows utilities to finance any cost overruns of new construction not through their existing financial resources or investors, but instead through hiking rates on customers. Since state law effectively forces customers to use one utility, they can be forced to shoulder the costs of risky utility projects. For a utility, then, there is every incentive to finance questionable projects through advanced cost recovery as they will reap the benefits if the results are profitable, and customers will pay the price if they are not.
Unsurprisingly, a recent report by the Vermont Law School notes that the Jenkinsville reactors under construction are already experiencing or projected to experience large cost overruns to the tune of $453 million. SCE&G has requested the ability to raise rates to pass the cost of these overruns on to the consumer, and has so far been successful. As of this late April 2013, the company has borne none of the cost overruns and has shifted six sevenths of the burden of cost overruns to ratepayers. The Vermont Law study also states that when factoring construction costs and the dollars that could be saved due to the cost and availability of alternatives to nuclear power, the Jenkinsville reactors are estimated to saddle ratepayers and the South Carolina economy with $10 billion in excess costs.
What then is to be done about the energy market? Clearly neither programs designed to aid renewables or traditional utilities have been kind to taxpayers. The answer, then, would seem to be a simple one: End state favoritism to both industries.
The state may have reason to keep traditional utilities regulated due to natural monopoly concerns, but there is no compelling reason that solar leasing firms should also be classified as utilities. Solar panels do not require the large infrastructure of traditional utilities to deliver power to customers, which is the purported justification for the regulation of utilities to begin with.
At the same time, programs that provide financial incentives to renewables (tax credits and subsidies) and existing utilities (advanced cost recovery) should be ended. Just as they reap the rewards, companies should have to bear the costs of their projects and investments.
By allowing solar leasing companies to compete without being subject to unreasonable regulation, and by removing the forced subsidization of all energy businesses, both the choice and voice of consumers will be increased. This shifting of power back to the people will in the long run mean greater efficiency and lower costs in South Carolina’s energy market.