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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Spanish Government To Tax Solar Power

Spanish Government To Tax Solar Power

Electric companies may want to look at telecoms for a glimpse of their future. Just as telecom companies faced a challenging transition with landlines over the last twenty years, it appears that utility companies may soon have their own challenges to face.

As residential solar power becomes increasingly popular around the world, utility companies are going to face a stiff challenge. The utility grid is built upon providing consistent reliable electricity in large quantities to every household around the country. This is true not just in the U.S., but all around the world.

Yet more than any other renewable technology, solar power changes the dynamics of this business model. With solar power, consumers generate their own power and hence have only a partial need for energy from the electrical grid. That’s very bad for utility companies. Making matters worse, Tesla’s Powerwall product reduces the need for even partial grid connectivity by allowing consumers to overproduce electricity at peak periods of solar generation and then store the energy for subsequent use. Related: The Next Fracking Boom May Be Closer Than You Think

All of this presents a major challenge to utilities in some areas.

Now of course this won’t be a problem everywhere. In areas with less sun exposure, solar is never going to be a reliable alternative to grid power any more than greenhouses are a reliable producer of oranges in Canada. But in other geographies, this is a very real problem and one that investors need to understand.

Spain provides an example of exactly this situation. Spain has tremendous sun exposure and is a nearly ideal candidate for solar power given its economic development and cultural predilections.

In light of that, Spanish consumers had embraced solar power in droves and solar energy in the country hit grid parity last year. That presents a major challenge for utilities. Once there is no economic benefit to using the electrical grid rather than self-generated energy, the economic rationale for the existence of utility companies becomes questionable. That’s especially true since solar power costs continue to come down around the world, suggesting solar costs below grid costs in Spain within the next five years. Related: OPEC Still Holds All The Cards In Oil Price Game

In light of that, the Spanish government is considering a stiff tax on solar power systems. This tax will artificially boost the cost of solar and keep the electrical utilities profitable. Predictably, Spanish consumers are not too happy about this proposal, but the political reality is that the current government can force the measure through if they choose too.

The larger point for investors is that widespread solar power usage is an existential threat to utility companies in some regions. In these areas, utilities will see their profits severely pressured and they will need to turn to using political clout to maintain their local monopolies. In Spain, the utilities were able to do this because politicians leaving government frequently take up lucrative posts in the utility industry.

But utility companies everywhere are political heavyweights as a result of the taxes they pay and the employment they provide. In the U.S., utilities in several states, including Arizona and Wisconsin, among others, have pushed through fees or taxes on solar. Related: Nuclear Is Not Dead, Uranium Supply Deficit Could Be On The Horizon

Overall, the effect of any such tax on solar will be to make the technology less economical compared with traditional grid electricity. And that is exactly the point. The other alternative which has been widely used in the U.S is for utility companies to charge consumers a connection fee regardless of whether they consume any power from the grid.

If energy storage solutions like Powerwall start to take-off though, some consumers may begin looking to cut themselves off from the grid altogether. At that point, utilities will have to find another way to extract revenues from the local population in order to continue supporting the local grid. Solar and utility executives alike should be looking at telecom and cell phone companies as an example of how to successfully navigate such a transition.

By Michael McDonald Of Oilprice.com

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  • TheMogget on July 09 2015 said:
    They laughed at expensive solar and talked about how impractical it was.

    Now that solar is taking their lunch money they are using outright corruption to get government to tax solar against the will of the people.

    Should I find this hilarious or horrifying?
  • TheShadowBroker on July 09 2015 said:
    Way too think forward Spain.
  • abcdefg on July 10 2015 said:
    Being able to generate enough electricity to power your home on a net basis and being able to disconnect from the grid altogether are two very different things. A powerwall is a step closer but nowhere near enough for someone to reliably disconnect from the grid. There will always be multiple times every year when weather causes enough of a disruption that the average home will draw upon the grid. Coal cost ~$0.03/kwh to produce but most people pay about $0.12 because it costs more to maintain the transmission lines than produce the electricity. Locally produced solar does not take these maintenance costs into account. A connection fee would be an acceptable alternative however it would make the marginal cost of electricity go down and discourage people from conservation.
  • Jozie on July 12 2015 said:
    Aaaaand, the status quo works to preserve itself....
  • Luís on July 13 2015 said:
    The tax on PV systems was already introduced last year. "Grid parity" has long been reached in Spain. Household PV costs are in the 0.06-0.07 €/kWh range right now, as grid rates are close to 0.2 €/kWh.

    But the assessment of this being a monopoly fighting for survival is largely correct.
  • smug_alec on July 13 2015 said:
    I always thought this [eventual taxing of solar energy] was inevitable. And only a matter of time before the corrupt and greedy utils in the UK try and pull off the same stunt.

    Of course, aerosol hazing (i.e. chemtrailing) to reduce sunlight is another trick up their sleeve.
  • Pedro Moraleda on July 14 2015 said:
    Nethier Spanish consumers had embraced solar power in droves: the investment in solar power has been carried out with the purpose of selling electriity to the grid not for self consumption;
    nor solar energy has reached grid parity: it is currently at twice the level of the average wholesale electricity price;
    nor the Spanish government is considering a stiff tax on solar power systems but a levy for solar power producers wishing to keep on buying or selling electricity to the grid to contribute to the overall costs of the system;
    nor Spanish politicians leaving government take lucrative posts in the utility industry more frequently or under different conditions than in any other country.
  • Danny Adams on July 14 2015 said:
    It's not just Spain. Many American utility companies are already slapping charges and fees onto consumers' bills, or are considering doing so, for those who get part of their power from solar energy.
  • Peter on August 18 2015 said:
    Spain is absolutely corrupt when it comes to this stuff.

    Effectively they are taxing the sun.

    These large Spanish electric companies work together to pay off government officials in order to maintain their monopolies.

    It is truly absurd regarding this matter.

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