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Published on May 26th, 2014 | by Guest Contributor

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VOST Pros & Cons

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May 26th, 2014 by
 

Originally published on PV Solar Report.
By Rosana Francescato

Is VOST a Tax on Solar -- and Is That a Bad Thing?

Solar advocates around the country express varying views on the Value of Solar Tariff. Being proposed as an alternative to net metering, the policy has its pros and cons — but some worry that it imposes a tax on solar customers and gives too much control to the utilities.

If it ain’t broke, don’t fix it. That’s what The Alliance for Solar Choice (TASC) and Vote Solar, among others, have been saying about net metering, a policy credited with supporting the residential solar boom in the U.S.

While a number of studies have shown that net metering provides benefits to all utility customers — even those who don’t go solar — utilities continue insisting that it subsidizes the rich at the expense of the poor. Of course, they can’t oppose a policy on the grounds that it eats into their profits.

So far, utilities’ attacks on net metering have not met with great success. Some say that it’s because of this that they’re changing their tactics to support Value of Solar Tariffs (VOSTs), which require solar homeowners to sell the solar power they generate to the utility.

Pros and cons of VOST

Even opponents of VOST agree it comes with some benefits:

  • VOST encourages a transparent conversation about the benefits and costs of solar that factors in its environmental and other benefits — though such a conversation could certainly be had in the absence of VOST.

  • VOST provides long-term rate certainty, which is attractive for both financiers and customers.

However, some concerns remain:

  • Under a VOST, it’s possible that customers could be taxed for income generated from solar systems — while at the same time becoming ineligible for the Investment Tax Credit (ITC).

  • The buy-all, sell-all approach of VOST removes customers’ ability to consume the energy that their systems produce.

  • In states where it’s left to utilities to decide whether to adopt a VOST, utilities are effectively given control of the rooftop solar market.

  • Changing VOST rates can lead to volatility in the solar market.

That’s right — VOSTs are being called out for both providing long-term rate certainty and creating rate volatility. The certainty is for each customer, who is locked into a rate for a term of 20-25 years. That means that for any particular project, a customer or financier would know the rate would remain stable. The volatility concerns the market as a whole, because in places where VOSTs have been implemented, they can generally be changed annually. TASC has called this the “Trojan Horse” element: “Utilities can bait the public with a generous value at a program’s outset, and just as quickly redefine it in a way that undermines their solar competitors.”

Even if a VOST starts out with a good rate, the impending changes could have a chilling effect. As TASC points out, if it’s the utility calculating the VOST, who do you think the rate will favor?

VOST as a tax

In a statement last week, TASC said that the national utility trade association Edison Electric Institute (EEI) “has admitted that its members are pushing for solar taxes.”

The statement continued, “When discussing whether VOSTs are a sale, which results in hidden taxes, EEI’s own General Counsel Edward Comer stated, ‘If [the utility is] required to purchase the power, I think legally there’s a sale.’”

Corner has said that homeowners could face these taxes even if the utility provides payments as a “credit” to the customer. And Corner apparently concurs with a memo from national law firm Skadden, Arps, Slate, Meagher & Flom, which says that tariffs create hidden taxes for solar homeowners.

TASC President Bryan Miller concluded in the statement, “Regulators can now see VOSTs for what they are — hidden taxes that hurt unsuspecting homeowners.”

Some claim that VOSTs are really feed-in tariffs (FITs) by another name. Whether that’s a good or a bad thing depends on your perspective — and gets back the the issue of a customer enjoying a stable rate over the life of their solar system.

Leasing as a tax

Clean energy advocate John Farrell of the Institute for Local Self-Reliance has voiced his support of VOST and doesn’t mind likening it to a FIT. He argues that so far, no customers in places with an active VOST have had to pay income taxes on the solar power they sell.

Furthermore, Farrell notes, even if it did result in added taxes, VOST might not be a worse deal than net metering. As reported by PV-Tech, he believes even if it did take away eligibility for the personal ITC, that could be replaced by the business ITC and depreciation. And in some places, the VOST might be higher than the net metering rate. In addition, a fixed rate for a long-term contract can mean lower financing costs.

Farrell notes that the solar leasing companies who oppose VOST are adding their own costs to home solar generation. In costing homeowners more than solar ownership, he says, solar leasing is like a tax.

The fairness question

It all comes back to fairness. Or does it?

Whether VOST will result in added taxes has yet to be answered definitively. But key to the debate is the question of what’s a fair price for rooftop solar generation.

Farrell notes that the current situation will change as the cost of grid electricity rises, while the value of solar remains steady and its cost falls. In that scenario, under net metering, a homeowner producing solar will be compensated for the power they produce at a much higher rate than it costs them to produce it — and he, says, at a greater value than it has to other utility customers.

Given that, he poses this question for TASC: “What’s the appropriate price premium for solar energy? How much more than what solar is worth should non-solar ratepayers have to pay? A penny per kilowatt-hour? 3¢? 5¢? 10¢?”

This question remains to be answered around the country. But solar advocates can agree that solar is worth some premium.

Even consumer advocacy organization TURN believes that residential solar generators should get a premium rate for the benefits they provide that traditional power sources can’t — such as local jobs, reduced need for transmission lines, and increased grid security. Oh, and then there’s that cleaner environment thing. Surely, we all benefit from those. Surely, that’s worth paying for.

But in the end, this debate is not just about fairness. As much as John Farrell, TURN, and others may care about fairness, utilities are most concerned about their bottom line. As TASC has noted, VOST didn’t enter the discussion about solar’s costs and benefits — nor did net metering come under attack — until an EEI report suggested that distributed generation would hurt that bottom line.

Utilities want to keep their monopoly, and that’s one of TASC’s main concerns: that utilities, seeing they can’t beat the solar game, are now trying to join it — and that their way of joining it is to control it.

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  • JamesWimberley

    Why is it axiomatic that a VOST tariff applies to all the electricity produced in a rooftop installation? It could perfectly well apply only to electricity actually supplied, as SFIK with the German FIT.

  • Omega Centauri

    Wouldn’t a modified VOST, which only concerns power flowing across the media make more sense?

    • Matt

      No, utilities want to go to VOST. So you don’t get the tax credit, and get tax on every watt you produce. Thus making solar less appealing to home owners. Then once in place just set the VOST at less than you charge, and bam, that nasty distributed PV beast is dead.

      • jimbeau11

        I’m not a huge fan of EEI but what TASC is quoting the EEI rep as saying is undoubtedly true. If someone offtakes the electricity for a price, that’s clearly a sale under any reasonable interpretation of contract law.

        Most of these problems would be avoided if there was more customer ownership of solar financed by loans, rather than the SolarCity-style third-party ownership. In that situation, it would matter less over time whether net metering payments got cut, because as solar costs less and less, it won’t need the full retail rate for its net excess generation to be cost-competitive.

        Remember, in most places (save for milder climates, the majority of the savings from solar comes from just simply avoiding using energy from the utility, and those rates show no sign of slowing their upward rise. That offsets losses from cuts to payments for energy sold back to the utility.

        Remember, utilities aren’t trying to get rid of net metering – they’re trying set the value of those payments at the net value of PV relative to the services they provide. No one is currently arguing to get rid of net metering altogether.

        However, it is unreasonable for PV companies to argue that their customers should never pay for the value of grid services provided to them by utilities. That’s just as bad as utilities denying that there are costs they and their ratepayers avoid by going solar.

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