11. Solar and Photovoltaic

The Luz Experience

In 1984, Luz International built its first Solar Electric Generating System (SEGS) plant and immediately became the world leader in solar power generation.^a^ Luz put eight more plants into operation over a period of less than 7 years. A number of factors contributed to its success: tax credits, a quick move up the experience curve, the ability to provide bulk power, and several market factors, including expectations of rising natural gas prices and high avoided-cost rates for utilities. Initially, the company received 25-percent Federal tax credits, which were matched by the State. As successive plants were built, costs decreased and performance increased (the first plant had an installed cost of $5,979 per kilowatt of capacity, compared with $3,011 per kilowatt for the ninth). Natural gas was used to supplement 25 percent of the solar generating capacity, so that plant output could be tailored to meet utility peaking requirements. And expectations of higher fossil fuel prices in the future made Luz's alternative energy projects more desirable. Yet Luz went bankrupt while constructing its 10th plant.

Although Luz relied heavily on tax credits and property tax exemptions to reduce costs, it was still fighting an uphill battle in some areas of tax equalization with conventional fuel power plants. Under most State tax codes, solar plants face heavier tax burdens than conventional fuel plants because their "fuelū supply and sourcing are the same. Most States treat solar collectors as capital equipment, with the solar field representing real property. Solar plants can thus incur both a recurring property tax liability and sales taxes on the purchase of equipment for plant construction. Because conventional fuel plants buy fuel directly and own no equipment to "create" the plant's fuel, they pay no property or sales taxes at the time a plant is built.

Luz was also hampered by changes in the tax codes that helped it become successful in the first place. The uncertainty associated with the continuation of beneficial State and Federal tax policies added to construction risk and increased the cost of financing. This type of uncertainty in various aspects of the solar energy industry continues today, and it continues to add risk to commercial solar development.

While uncertainty in tax policy and the elimination of tax credits contributed to Luz's downfall, its financial failure can also be attributed to changing forces and price expectations in the electric power market. As natural gas prices fell in the late 1980s, utilities' short-run avoided costs for new electricity generation also fell. As a result, it became more difficult to finance new SEGS projects, and in the end Luz simply could not compete with the continuing decline of natural gas prices.