Originally published on RMIOutlet
by Owen Smith, Christa Owens
What state boasts beaches, mountains, and a booming solar industry? California may come to mind first, but now so could North Carolina, thanks to its rapid emergence as a solar energy leader. According to a recent report from Pew Charitable Trusts, North Carolina ranks fourth nationally and first in the Southeast in installed solar capacity. The state shines in particular in the category of large, utility-scale projects, where it ranks second in the nation, behind only California.
In 2007, there was less than 1 MW of solar capacity in North Carolina, but as of December 2014 there was 953 MW of installed capacity. In 2014 alone, 397 MW of solar was installed in the state, which placed North Carolina second nationally in new solar capacity. Navigant Research forecasts that 2,600 MW of solar will be installed in the state by 2023. And importantly, this is happening in a state that enjoys some of the lowest retail electricity prices in the country—and without introducing upward pressure on those prices.
As a newcomer to the leadership ranks of our nation’s solar market, North Carolina offers some valuable lessons, both in terms of how the state accomplished this, as well as the myriad benefits the state has captured along the way. North Carolina achieved this through a combination of policy decisions and leadership from the private sector, alongside, of course, the rapidly falling cost of solar energy. Here, we dig in and offer our take on the top five reasons North Carolina quickly became a leader in solar energy.
1. THE NC RENEWABLE ENERGY PORTFOLIO STANDARD
In 2007, North Carolina became the first state in the Southeast to pass a Renewable Energy Portfolio Standard (REPS), which in North Carolina’s case requires 12.5 percent of the state’s electricity sales to be sourced from renewable energy (or replaced by energy efficiency) by 2021. Before the REPS was established, a resource assessment prepared on behalf of the North Carolina Utilities Commission (NCUC) predicted that biomass would be the primary contributor to meeting the REPS targets, while solar was deemed too expensive to contribute materially. However, to encourage a more diversified renewable energy industry in the state, a specific (though very modest) target for solar resources was established, stating that 0.2 percent of the state’s electricity sales must be generated by solar resources by 2018. This specific solar requirement served to establish a modest solar industry in the state. Fairly quickly, however, solar became less expensive and less complex than biomass, and the solar industry capitalized on the circumstances to quickly become the dominant player in meeting the REPS targets, far exceeding the requirements of this solar-specific minimum target.
2. STATE AND FEDERAL TAX CREDITS
In addition to the state REPS, North Carolina offers a 35 percent state renewable energy tax credit. This, combined with a 30 percent federal solar investment tax credit (ITC), serves to reduce the after-tax installed cost of solar by more than half. These generous incentives have further spurred development of solar resources, and have attracted the attention of major corporations in the state that see investing in renewable energy as an attractive means to lower their tax burdens. Importantly, Duke University and RTI International recently reported that for every dollar of the investment tax credit the state has provided, $1.93 has been returned to state and local governments. Further, according to RTI, from 2007 to 2014, the solar industry attracted $3.5 billion in investment in the state’s economy—roughly 18 times more than what the state invested in tax credits and state spending. Clearly, these policy decisions have not only served to establish a fast growing industry, but have also paid for themselves many times over.
3. QF REGULATIONS
PURPA (the Public Utility Regulatory Policies Act) is a long-standing federal law that, among other things, promotes energy production from renewable resources. Generation facilities that meet certain criteria under PURPA are known as Qualifying Facilities, or QFs. Simply stated, most renewable energy facilities, including solar, are QFs under PURPA. And although PURPA is a federal law, each state has its own set of practices for overseeing the development of QFs.
In the case of North Carolina, the state established a set of QF-friendly practices long before the solar industry came on the scene in any material way. The roots of North Carolina’s QF-friendly practices served to benefit a small segment of independent hydropower generators in the state, but have more recently been capitalized upon by the solar industry.
The key component of North Carolina’s QF practices that sets it apart from most other states is the certainty of long-term cash flows that QF developers can expect from their projects. Specifically, any QF under 5 MW can receive a 15-year fixed price contract at the utility’s avoided cost. This long-term certainty of cash flows has enabled QF developers to attract low-cost financing for their projects, and has been a key driver behind a slew of projects right at the 5 MW threshold—alongside many others that are significantly larger—that have been popping up all over the Tar Heel State.
The fact that these projects have been happening at Duke Energy’s avoided costs is also worth underscoring. This means (setting aside the intricacies of how the avoided cost rates are determined in North Carolina) that these fleets of new solar farms are not placing upward pressure on retail electricity prices in the state.
4. DECLINING COSTS OF SOLAR
Over the past decade, the costs for installed solar PV have declined dramatically across the country, and the cost reductions seen in North Carolina have been better than average. According to Lawrence Berkeley National Laboratory, the cost of installed utility-scale solar PV systems fell 40 percent from 2007 to 2013, while costs in North Carolina fell 52 percent in the even shorter time period of 2006–2012. Today in North Carolina, the median cost of installed solar PV systems greater than 10 kW is well below the national median cost (see chart below).
There are likely two key reasons for North Carolina’s cost advantage relative to the national average: scale and market structure. To the first point, and perhaps obviously, now that North Carolina has one of the biggest markets for utility-scale solar in the country, it can benefit from economies of scale relative to other states where the solar market is smaller.
And to the second point, the nature of the market in North Carolina, specifically the QF regulations described above, likely provides cost advantages for the state. The QF market provides solar developers with certainty of economics and the ability to plan multiple projects that can be constructed in sequence over an extended time period. This enables labor and logistics advantages in construction, and is inherently different than many other markets, where utility requests for proposals (RFPs) are the primary signal to solar developers of a market opportunity. RFPs do not necessarily happen on a schedule that the market foresees, and as such may not allow the same types of cost advantages that North Carolina developers are achieving given the structure of the North Carolina market.
To be clear, utility RFPs have resulted in significant amounts of solar development in the state, but the backdrop of the QF market provides an underpinning that contributes to the cost advantage the state is seeing.
5. PRIVATE-SECTOR LEADERSHIP
From major tech companies, to investor-owned utilities, to local solar businesses, the private sector has been paving the way for solar market growth in North Carolina. Apple, Facebook, and Google all have data centers in North Carolina, and in early 2013, these companies began advocating for the option to purchase renewable energy directly from utilities. Later that same year, Duke Energy introduced and the NCUC approved the Green Source Rider, a program in which large commercial customers can purchase renewable electricity directly from Duke. Under this program, Duke will build or procure, and subsequently dedicate, additional renewable capacity directly to the subscribing customer.
For its part, Duke Energy has demonstrated leadership in renewable energy development—beyond mere compliance with the state REPS. Since 2007, Duke has invested over $4 billion in 1,800 MW of utility-scale renewable energy. February 2015 held two noteworthy developments: 1) Duke released an RFP for 50 MW of solar PV capacity in North Carolina to meet customer requests as part of the Green Source Rider, and 2) the acquisition of a majority interest in REC Solar, which specializes in residential and commercial solar. Additionally, Duke committed $500 million to expanding the NC solar market last year, and has also been making moves in other states where it operates, such as Florida and South Carolina.
In addition to major tech companies and utilities, local businesses have driven the growth of solar in North Carolina. The state’s approach to developing a solar market certainly attracted the attention of some of the largest solar companies in the world, but more importantly it also fostered the creation of its own leading solar companies that originated from within the state. For instance, Strata Solar is a young, Chapel Hill-based company that has installed 500 MW of solar capacity across the state and has over 1,000 MW of additional capacity under development. All told, Strata Solar has brought nearly $1 billion in investment to North Carolina, created 1,200 jobs within the state, and now even ranks among the world’s top 10 in utility-scale solar development. And Strata is not alone. Other fast-growing companies in the North Carolina utility-scale solar space include FLS Energy, SunEnergy1, Narenco, and O2 Energies, just to name a few. And although these companies are all based in North Carolina, they are positioning to move well beyond the state’s borders to continue their rapid growth. This is a boon for North Carolina, as these companies will continue to grow and create jobs in the state, even while they expand their operations to other geographies.
Today, there are 450 solar industry companies in North Carolina representing 4,300 new jobs. Investment in North Carolina’s solar industry is expected to continue; Pew Charitable Trusts projects an additional $7.8 billion in investment between 2014 and 2023.
NORTH CAROLINA AS AN EXAMPLE FOR OTHERS
Through private sector leadership and solar-friendly state and federal policies, North Carolina has fostered an environment ripe for investment. In just eight short years, North Carolina has gone from having almost no solar capacity to becoming a national leader. The benefits to the state have included not only cleaner energy, but also billions of dollars invested and thousands of jobs in the state.
Actors in other regions of the country, including state lawmakers, utilities, and solar market participants, can learn from North Carolina. Thoughtfully constructed policies, market structures that provide long-term visibility into opportunity, and a private sector responsive to these opportunities, have been the keys to North Carolina’s accomplishments.
For its own part, if North Carolina is going to maintain its status as a solar leader, it will need to continue making and supporting the types of thoughtful policy decisions, market structures, and industry actors, that have been key to its recent successes. As John Morrison, senior vice president of Strata Solar has said, “North Carolina is good for solar, but solar is also good for North Carolina.”
Owen Smith is a principal in RMI’s electricity practice and the former director of Duke Energy’s renewable strategy and compliance team. Christa Owens is an associate in RMI’s electricity and buildings practices, and a graduate of Duke University’s Nicholas School of the Environment.
Image courtesy of Shutterstock.
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