Disincentives for renewable energy systems in public buildings

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MONTGOMERY VILLAGE, MD., July 16, 2017 – While our energy sources have been evolving, fossil fuels still have a strong hold on our sources of production. Solar and other renewable sources have gained momentum in the last couple of decades and many believe that they are the way of the future. Technological challenges are being resolved every day and renewable energy systems are here to stay and most likely will be our way of life in the not too distant future.

That is why when we see new construction and we don’t see signs of renewable source installation many of us can’t understand. If renewables are cleaner, safer and cheaper to operate to produce energy, why aren’t all new buildings, especially public buildings, equipped to take advantage?


The answer is finances. Capitalism has developed a financial model for the installation of renewable systems that doesn’t favor government installation of these types of systems. Legislature hasn’t kept up with the growth of renewables. Because of this the growth of renewables may be stymied.

Primer on renewable finances

There are three financial participants in the installation and operation of renewable systems:

  1. The installer that provides the expertise, equipment and resources to install the systems. He charges what the market allows and as long as a profit is made, he is home free. He follows the standards for the trade and any requirements made by the government;
  2. The investor that provides the funds to install and maintain the system. In the case of the purchase of a system by a home owner or a private company, the user (below) is also the investor. A solar leasing company would be such investor; and,
  3. The user that provides the platform (a roof in the case of a solar lease) for the system to be installed.

The installer gets his money no matter what. He comes to a building/home, installs the system, gets paid and goes in his merry way.

The investor provides the funds and takes advantage of “ownership” of the system. That includes tax credits of 30% of the cost of installation, Renewable Energy Credits (RECs) and depreciation. In the case that he enters a consortium with a governmental organization to finance the renewable installation, he can take advantage of the tax credit, the RECs and depreciation. Unfortunately, this model with a governmental organization is perceived to be profitable only if it is large scale. This probably has to do with overhead that gets more expensive with the management of small projects v. large ones.

The user provides the platform for the system. If he buys the system outright, he gets the benefit of the tax credit (or most of it in the case of a home owner), RECs and depreciation depending of whether the building or part of it is used for a profit-making purpose. If he enters into a lease agreement, all three of these benefits go to the investor/leasing company.

In all cases, the user benefits from a lower cost of energy either by the production of the system that lowers energy costs (by self-production) or by the purchase of cheaper energy from the investor.

Renewable Energy Credits

Credits are assigned according to the expected energy production of the system. These credits can then be sold/transferred in the open market.

Each state usually requires that power companies operating within its borders provide a percentage of sustainable energy. They can fulfill this requirement by generating power from sustainable sources (e.g. solar arrays, windmill farms, geothermal wells) or by buying RECs from users that have installed renewable systems. As the installation of renewable systems, mostly solar, have proliferated, the value of RECs in a state like Maryland has declined from about $100 per unit a decade ago to less than $10. The market is flooded with RECs. This is a strong disincentive for the investor.

While it is possible that RECs could subsidize a portion of renewable projects in public/government buildings, they would only provide a very small contribution.

This disincentive can be remedied by requiring a larger percentage of power to be provided by renewables in states. This can only be done by the legislature or the executive if there is the authority.

Tax credits

There is a 30% Federal tax credit for the installation of renewable systems. However, this is dependent on the income that is taxable. In many cases the credit must be extended over several years, decreasing its financial impact. On the other hand, large investors can usually claim the credit sooner.

Public/governmental organizations can’t use this deduction as they don’t pay taxes.

Depreciation

Businesses can deduct depreciation from their taxes. Individual home owners can also deduct a portion of their depreciation if they run a business and/or have a home office.

Public/governmental organizations can’t use this deduction as they don’t pay taxes.

It seems that if we want to see more renewable systems in public/government buildings different incentives would have to be used. Legislature could help in this respect by requiring a greater portion of energy to be generated by renewables.

In planning large government projects, a long-term approach should be used that is more akin with the returns from renewable energy.

I would like to acknowledge the assistance of Mr. Dale Good of Paradise Energy Solutions and Mr. Scott Gole of the Montgomery Village Foundation. They made a complex system understandable to the author.

Mario Salazar, the 21st Century Pacifist, is an environmental engineer and a conservationist. He is in Twitter (@chibcharus), Google+, LinkedIn and Facebook (Mario Salazar).

 

 

 

 

 

 

 

 

 

 

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