Great Strides in Solar: Preventing Fraud and Abuse

19 january 2013

While Solyndra’s bankruptcy drove public and political attention to solar, Consumer Reports drew some in the retail solar industry into a frenzy. The October issue of Consumer Reports contains an article on rising scams and fraud in multiple industries – including solar energy.

In the same month Politico reported, “A long-awaited initial public offering filing by the solar installer SolarCity confirmed persistent rumors about a federal probe into allegations that some solar companies may have inflated their costs to increase their federal subsidies. In its filing to the SEC, SolarCity acknowledged it had received a subpoena from the Treasury Department’s inspector general for documents about the cost basis of some of its projects that were awarded money under Treasury’s 1603 cash grant program.”

So what’s the deal, and should anyone be concerned?

As the head of the Solar Energy Industries Association for 15 years spanning the 1980’s  & 1990’s, we faced similar issues with new companies entering the field that didn’t conform to generally accepted business practices – some were simply new and small and didn’t immediately understand best practices, while other companies sought to scam federal and state government incentives.

These scams drove the creation of the Solar Rating and Certification Corporation (SRCC), formed by state governments and the solar industry. It established components and system testing procedures with the support of the US Department of Energy and the national labs. SRCC, housed at the Florida Solar Energy Center, has a handful of testing labs and issues a systems directory. EPACT, an earlier energy bill, tied the investment tax credits for solar water heating to an SRRC, or comparable, certification.

The photovoltaics industry, latecomers to the market compared to the solar water heating industry, also worked with the U.S. Department of Energy to establish module testing procedures, which several university labs and United Laboratories oversee – but certified systems are only as good as how they are installed.

With the aid of the Interstate Renewable Energy Council (IREC), state governments created an installer training and certification program for photovoltaics, solar water heating, and small wind. This non-profit, the North American Board of Certified Energy Practitioners (NABCEP) is the gold standard customers can use to insure there systems are installed properly.

SEIA has responded to these issues forthrightly, and stated, “There are tens of thousands of solar water heating systems. The industry employs 100,000 Americans at 5,600 companies, mostly small businesses, across all 50 states. Over the last year, the industry grew by over 100 percent.”

SEIA’s president, Rhone Resch, added that if a company skirts the law it will be expelled from the Association. Aside from the certification requirements still in the tax code, recapture provisions state that if the solar system doesn’t work, the government can “recapture” the tax credit.

State and local government education programs should be expanded and promoted because consumers should be aware of technology and installer certification requirements. If consumers are informed, the scammers will eventually fade into the woodwork.

The Solydra bankruptcy, which was jettisoned into the media, has little to do with the solar industry.  Here, the government backed an unproven management team in a rapidly changing technology industry with rapidly decreasing costs. So sure, there will be failures, and – sure enough – they got one.

But other industries are facing bankruptcies, as well. Investors in Patriot Coal Corporation (NYSE:PCX) had a tough year – a year that has seen shares in the coal industry drop over 73 percent – and Patriot declared bankruptcy on Jul 10, 2012. As natural gas prices dive lower, Seeking Alpha reported in March 2012, “There’s ‘blood in the streets’… many companies in the natural gas industry are near bankruptcy.” In other news, Bloomberg Businessweek reported in August that Edison International’s unregulated generation unit Edison Mission Group may be nearing bankruptcy: “The company is working to restructure about $3.7 billion in debt at Edison Mission, which has been hurt by a slump in power prices and rising environmental-compliance costs for its coal-fired power plants.”

The U.S. Treasury Department is investigating how the Treasury 1603 credit is being tied to solar leasing programs, primarily focusing on valuation of the systems.  A current fallacy is that the Internal Revenue Service (IRS) does not issue guidance memos to industries on how to comply with new tax laws, which means it’s left up to industry to comply unless the agency determines otherwise. Here is a classic example of that ridiculous IRS policy:

Many small solar businesses offer leasing programs – so in fact they actually own a solar system on someone else’s property (risk #1). These companies are leasing a system to a consumer, and partially at the mercy of that consumer (risk #2). They have to make sure that the system is working at all times or the customer won’t pay their monthly lease, so they put local small business solar firms in charge of “real time” maintenance (risk #3).

So the IRS wonders why these solar systems cost more – to them, it looks fishy. But, duh (as my 19-year-old daughter says), there are several factors that drive up the cost of solar systems, such as escrowing capital and paying different levels of insurance to mitigate corporate risk for investors, high service fees to insure fast and high-quality maintenance, and finally, risk and cost. Solar leasing companies are small businesses themselves, so they do not get optimum financing packages, not only because of their size and perceived market risk, but also because we are still coming out of a major economic downturn which dampens capital flow. So while this tangle of interests plays out this complicated review, it has little to do with bad industry practices.

In the end the state and regional chapters of the Solar Energy Industries Association have been admirable in educating consumers on proven companies and proven technologies. The non-profit SRCC, UL, and NABCEP are growing and valuable consumer protection resources. And as solar manufacturing grows, the delivery side of the supply chain will mature – yes, with a few bumps, but overall it will become more sophisticated and reliable.

Local governments still need to step in and help educate consumers – so those seamy players at the fringes don’t get any market beachheads.