California forecast to lead US to self-sustaining PV as dependency on incentives diminishes

Avoiding the temptation to copy a feed-in tariff (FiT) type program, various local and state authorities in the US have been working to create and implement incentives that are tailored specifically to local conditions and requirements. These aim to strike a balance between the growth of the US PV industry, the level of support from (and burden on) ratepayers or taxpayers and – most importantly – the ultimate goal of driving the US PV industry to achieve self-sustaining status.

Prior to implementing the CSI, California – the largest PV state in the US – had operated several renewable energy programmes. In 2006, the state represented 63% of the national market (140MW). Some of these legacy programmes were operating on an annual-basis and had limited budget allocation. This caused undesirable stop-start demand cycles and caused instability within the industry.

When the CSI was initiated in 2006, it had far-reaching goals: a 10-year commitment not only to install 3GW of distributed solar generation capacity across the state, but also to drive down the cost of solar generated power and establish a self-sufficient solar industry by the end of the programme.

One of the key components of the initiative is that incentive levels are automatically reduced over the duration of the program in ten steps, based on the market demand (MW volume of confirmed reservations issues). The incentive levels are tailored to adapt to dynamic market conditions: the greater the market demand, the faster the incentive level declines and the slower the market grows with reductions in incentives.

Most importantly, industry participants – from PV module makers to installers and consumers – understand the projected rate reduction schedule and therefore market demand (reservation status) conditions are constantly updated, creating predictability and stability.

Figure 2 shows the CSI quarterly trend for the average system installed cost, the average rebate amount paid and the total program installed capacity. As originally planned, the incentive levels have been coming down as the market has grown and installed system cost has come down. Between Q1’07 and Q2’12, there was an 86% correlation between rebate amount and installed capacity; the higher the demand, the less the rebate amount.  There is a 93% correlation between installed system cost and rebate amount; as the system installed cost is lowered, so does the incentive level.

The rebate amount declined between Q1’07 (US$2.03/W-DC) to Q2’12 (US$0.38/W-DC) for average installed systems, or from 25% to just 6% of the installed system cost.

By the end of Q2’12, the CSI had supported 980 MW-DC of installed capacity – will hit 1 GW mark anytime soon. In the PG&E (the IOU in Northern California) territory, the rebate level has already moved to Step 10, the last step, for both residential and non-residential applications and so as the residential segment for the SDG&E territory. The final step provides upfront capacity-based incentives of US$0.20/W or production-based incentives of US$0.025/kWh for five years.

While there is a distinct possibility that the program will end before 2016, California is however already preparing to exist without any state-level incentives.

At the federal level, the Treasury Cash Grant has recently expired. Since the inception of the program in 2009, the Treasury has awarded over US$1.5 billion for PV technologies, equivalent to over 1.5GW of cumulative installed capacity. Without doubt, the Cash Grant has contributed to the growth of the US PV market enormously during 2010, 2011 and 1H 2012.

However, short-term programs may now create market expansion, followed mainly by market regression because such programs are designed to create a temporary boost for the industry.

Compared to other some other PV-leading countries, the US PV market has witnessed relatively steady growth. However, it has experienced two setbacks already (see Figure 3). The 30% ITC became available originally in 2006 for residential and corporate taxpayers for two years (2006 and 2007), but congress extended this to 2008. During 2008, the industry was left waiting nervously, not knowing whether the ITC would be extended. This caused a surge in PV installations. In December 2008, the government extended the ITC for 8 years at a fixed rate of 30%. At that time, the market growth then slowed.

Similarly, the recent expiry of the Federal Cash Grant caused a surge in installations at the end of 2011, in order to qualify for the grant in time. It is anticipated that the market in 2012 will see considerably slower growth rates.

Although the government has made a long-term commitment to PV and other renewables by extending the ITC for eight years, there is one potential flaw: the provision of a flat 30% credit out to 2016 (from 2006), regardless of the market size, growth rates or reduction in system prices.

The success of the CSI program highlights that the market can grow against a backdrop of reduced incentive rates when presented in a predictable and transparent manner.