In July of this year, Connecticut Governor Daniel Malloy signed into law Senate Bill 1243, “An Act Concerning the Establishment of the Department of Energy and Environmental Protection and Planning for Connecticut’s Energy Future.” 2 In addition to provisions intended to centralize state energy policy and promote energy efficiency, SB 1243 created incentives to foster solar energy use. The Connecticut legislation bears several similarities to a law enacted in Massachusetts three years earlier, which also included incentives to foster solar energy. Differences between these two state solar energy strategies reveal how policy goals for solar have changed in the intervening years and some of the lessons learned about how to foster its use. In particular, they reflect the influence of the stagnating US economy, the continuing struggles of solar developers to obtain financing to build their projects and the obvious economies of size available to larger, utility scale solar installations.
As northeastern states with populations concentrated in coastal urban centers, Massachusetts and Connecticut have generally similar socio-economic characteristics and energy consumption profiles. With last year’s election of Malloy, a Democrat, their political profiles became more similar as well. Deval Patrick, the Democratic governor of Massachusetts, made developing clean energy one of his top policy goals. Soon after his election in 2006, he collaborated with legislative leaders to pass the Green Communities Act,3 which provided for a significant enhancement of the state’s existing Renewable Portfolio Standard to encourage development of solar energy capacity. Likewise, Malloy, soon after he was elected, sought and won passage of a law with broadly similar policy goals during his first year in office. However, the Connecticut law contains solar incentives that differ from those in the Massachusetts law in important ways.
Solar Incentives in Massachusetts
The Massachusetts law contained a provision that has come to be known as the “solar carve out.” This provision of the law allowed the state to require utilities as well as retail electric suppliers to purchase, each year, a minimum portion of their power supplies from solar photovoltaic (PV) systems. While Governor Patrick announced a goal of achieving 400 MW of installed solar capacity by 2020, compliance with the regulations is measured in the hours of solar energy generation purchased by utilities and retail suppliers and delivered to their customers.
The ultimate cost of this policy for ratepayers is indeterminate, and fluctuates depending on the market price of solar power output year to year. It is effectively capped by the cost to utilities that make “alternative compliance payments,” but less can be spent if the supply of solar is robust and solar generation prices fall below that payment level. 4
The Massachusetts law does not require long-term contracting for solar generation by utilities or retail suppliers. They are free to contract for mutually agreeable terms or purchase their solar generation on the spot market. To provide some degree of price certainty and facilitate project financing, Massachusetts operates an annual auction in which solar generation credits that generators have not sold at end of a compliance year are given extended compliance eligibility and are offered for sale to the highest bidder several times during subsequent compliance years. The state has set a price “floor” below which credits will not be auctioned. 5
Solar Incentives in Connecticut
The Connecticut law relies upon several targeted requirements that include the total amount of capacity that must be installed, the size of the individual system, and whether it serves a residential or commercial/industrial customer. One provision of the Act calls for a newly created public agency, the Clean Energy Finance and Investment Authority, to provide incentives designed to cause residential customers to install at least 30 MW of new solar PV generating capacity by 2022. This program provides direct financial incentives to purchasers or lessees of residential PV systems on either a per kilowatt-hour basis or as a one-time upfront incentive based on expected system performance.
Under another provision, the Act requires electric utilities to enter into long-term contracts to purchase power from “zero-emission” generation sources up to 1 MW in size and from “low-emission” generation sources up to 2 MW in size. While a variety of renewable technologies qualify, including solar, wind, and hydroelectric, it is likely that, with these size restrictions, most of the eligible capacity in both programs will be solar PV. 6 Notably, there is no minimum amount of energy required to be purchased each year and no limit on the amount of capacity that can be installed.
These two Connecticut programs set the overall cost of the incentive to ratepayers, regardless of the amount of capacity that is installed or their annual production of power. For the zero-emission program, distribution companies must spend an aggregate $8 million in the program’s first year (2012) and an additional $8 million annually until year four, when contracts are reviewed to determine whether the cost of technologies utilized have been reduced. If the program has successfully reduced technology costs, aggregate procurement of RECs will increase to $48 million annually and then decline starting in year 16. If not, procurement will peak at $32 million per year before starting to decline. The low-emission program is similarly structured, but procurement requirements begin at $4 million/year, and increase to a maximum $20 million/year in the program’s fifth year. 7
Evolution in Solar Policy Goals
While both states aim to accomplish the installation of a substantial amount of new solar PV generating capacity, the structure of their incentives differ significantly. 8
Massachusetts established a minimum amount of solar energy that ratepayers would have to subsidize and allowed the cost of that subsidy to be determined by the fluctuating cost of solar power (at least below a “price cap”). Connecticut, by contrast, limits quite explicitly the cost that will be paid by ratepayers to provide solar incentives and allows the amount of solar power purchased to be determined by that funding limit.
The two states also differ in their approach to contracts for solar purchases. Massachusetts required both regulated distribution companies and competitive suppliers to purchase solar generation, but left them free to make use of contracts for any length of time. (Most contracts have been of short durations, rarely longer than three years.) Connecticut, by contrast, requires only the regulated distribution companies to buy solar generation but directs them to make use of long-term, 15-year power contracts to do so.
They also differ in that Massachusetts allows any customer of any size to qualify to sell their solar generation into the compliance market. Connecticut restricts subsidies to projects of limited size, 1 and 2 MW, and differentiates the amount of subsidies according to the owner and/or size of the project.
What might explain these differences? And, what do they tell us about the evolution of concerns and objectives of legislators and solar advocates in the intervening three years?
First, the Massachusetts bill was enacted in early 2008, before the nation fell into its prolonged recession. Three years later, with the recession deeply entrenched and widespread clamoring for public expenditures to be reduced, it is understandable that Connecticut legislators would set firm limits on the amount ratepayers will be required to contribute to solar subsidies. It is a much greater concern now to know how much solar capacity additions will cost ratepayers and to adjust capacity additions to match their politically tolerable fiscal impact.
Second, with the requirement that utilities enter into 15-year contracts for solar output, Connecticut legislators seem to have wanted to solve the difficulties solar developers in Massachusetts have reported in obtaining financing for construction of new facilities. Developers frequently lament their inability to obtain long-term contracts based on the design of the Massachusetts solar compliance market. 9
Third, there is recognition in Connecticut that residential and small commercial solar systems tend to need larger subsidies than the larger systems installed by industrial and large commercial customers. So, not all systems in Connecticut are eligible for subsidies or for long-term contracts, and the amount of subsidies varies according to the type of owner and/or the size of the system. Smaller systems get larger subsidies. Reflecting an appreciation for the economies of size in solar installations, Connecticut provides relatively greater subsidies to smaller solar systems. Massachusetts does not differentiate by project size, meaning that size economies produce relatively greater subsidies for larger projects.
In sum, both laws demonstrate a strong commitment to advancing solar energy and to allocate substantial costs to ratepayers to accomplish that goal. However, the Connecticut legislation reflects the contextual influence of a highly stressed economy. This produced a law which firmly limits the cost of the subsidies to ratepayers. S.B. 1243 also reflects the lessons learned in Massachusetts that long-term power purchase contracts reduce the difficulties of financing solar development and therefore are likely to accelerate the pace of market penetration. And finally, the Connecticut law reflects the recognition that, to expand the participation in solar production and use by residential and small commercial customers, subsidies for their systems need to be made relatively larger than for commercial and industrial customers.
Like all laws, each of these is the product of its unique political and economic context. Time will tell whether their different approaches result in significantly different degrees of success or if each turns out to be a cleverly designed response to a different set of historical challenges that produce equally impressive results.