Why Am I Paying $65/year for Your Solar Panels?

Below is a great article from Lucas Davis, a UC Berkeley professor that published a report a few years ago about the closing of San Onofre, the nuclear facility north of San Diego, and how replacing the nuclear energy with natural gas was the equivalent of adding 2,000,000 vehicles to the roads of California.

Why Am I Paying $65/year for Your Solar Panels?

700,000 California homes now have solar panels; what does this mean for everyone else’s rates?

“This is the future,” one of my neighbors recently told me, proudly showing off his rooftop solar panels, “Forget the old, inefficient utility.” The panels do look great, and, for a moment, I got caught up in my neighbor’s “green glow” of eco-righteousness. Should I be doing “my part” for climate?

But wait a second. I already am! As Severin Borenstein has been pointing out for years, a big part of the reason why rooftop solar is so popular in California is our electricity rates. And because of the way rates work, every time another neighbor installs solar, my rates go up. I’m tired of it. Why should they get all the “green glow”? Why should I be paying more for their rooftop solar, particularly given that grid-scale renewables are so much cheaper?

Almost 700,000 homes in California have installed solar, about 5% of all homes in California. Today I want to figure out what this means for the rest of us. No fancy econometrics, no complicated model. I just want to do a simple back-of-the-envelope calculation to try to figure out how big of a deal this is.

brick

Note: Green glow. Image licensed under creative commons.

 

Utilities have a lot of Fixed Costs

It is helpful to take a step back and think about what it takes to deliver electricity. Utilities have lots of what economists call “fixed costs”. For example, utilities have to maintain all the transmission and distribution lines used to deliver power. These costs are fixed (not marginal) because they do not depend on how much electricity is consumed.

truck

Note: Utilities have lots of cool trucks. Image licensed under creative commons.

 

Who pays for these fixed costs? We all do. Every time you use electricity, you help pay for these fixed costs. There is a long history in the United States of regulators setting electricity prices equal to average costs.  Economists have argued that it would be more efficient to set prices equal to marginal cost. But the truth is this didn’t matter much in the past, in part because people didn’t have much choice about whether or not to consume electricity.

Until now. Rooftop solar is an opportunity for consumers to radically reduce the amount of electricity they buy from the utility. In Hawaii there is a lot of talk of “grid defection”, but in 99.9%+ of cases solar homes continue to be connected to the grid. Solar homes use the grid just as much as other households, as they are always either importing or exporting electricity, it’s just that they consume much less grid-electricity.

What this means is that good people like my neighbor contribute much less to paying for utility fixed costs. The fixed costs haven’t gone away, but my neighbor now has a lower electricity bill so pays far less of them. This leaves the utility with a revenue shortfall, and it is forced to raise prices. So who pays for the fixed costs my neighbor used to pay? Everyone else.

wires

Note: Utilities have lots of fixed costs.

 

A key subtlety here is “net metering”. Households who install rooftop solar pay only for the electricity they consume “on net” after solar generation. This is easy and simple, but also wrong. Implicitly, this means that they get compensated for their solar panels’ sales to the grid at the retail electricity rate. This is too high, significantly exceeding what the utility saves from not having to supply that electricity. Under an alternative rate structure, in which households were paid the wholesale rate, you would not have this “cost-shifting” away from solar households.

Cost Shifting 

Ok, but how much cost shifting is actually happening? Outside California, Arizona, and Hawaii, probably not much. But California has a lot of solar, about half of all U.S. rooftop solar. How much have California electricity rates increased due to the 700,000 homes with solar?

spiral.png

Note: Utility Death Spiral? Source here.

 

This is tricky because we don’t actually know how much electricity is being produced by rooftop solar. Almost everyone is on net metering, so we only observe net consumption, not solar production. Fortunately, the California Energy Commission has poured over solar radiation information and other data and estimated that total annual generation from California behind-the-meter solar is 9,000 GWh. About two-thirds of this is residential, so about 6,000 GWh. To put this in some context, total annual residential electricity consumption in California is 90,000 GWh.

So how much “cost shifting” does this imply? The average residential electricity price in California is $0.185/kWh, while the average wholesale price is about $0.04/kWh. Accounting for electricity that is lost during delivery to the end customer adds about 9% more per kWh delivered. Thus, each time a California household produces a kWh, the utility experiences a revenue shortfall of about $0.14. Multiply this by total residential distributed solar generation, and you get $840 million annually. California utilities receive $15 billion annually in revenue from residential customers, so the total shortfall is about 5%.

This is a crude calculation, and it could undoubtedly be refined. For example, distributed solar proponents argue that local generation allows the utility to avoid distribution system upgrades, which would represent an additional benefit. These impacts have been found to be relatively small, but this continues to be an area of active research. On the other hand, I’ve also made an assumption that significantly decreases my estimate of cost shift. In particular, I’ve used the average residential retail price, but California customers actually pay increasing block rates so most solar customers face a marginal price well in excess of the average price.

Conclusion

The total revenue shortfall works out to about $0.01 per kWh, or $65/year for the average California household. This is more than I expected. And, I’d bet most Californians are not even aware that this cost shift is happening.

So why am I paying $65/year for other people to have solar? It doesn’t make sense. Sure, I’m concerned about climate change, but my $65/year could go a lot farther if it was used instead for grid-scale renewables. Moreover, this is almost certainly bad from an equity perspective, as we know that high-income households adopt solar much more often than other households. Rooftop solar isn’t getting rid of the utility. It’s just changing who pays for it.

To read the article please click here.

Lucas Davis

Lucas Davis is an Associate Professor at the Haas School of Business, Faculty Director at the Energy Institute at Haas, and Research Associate at the National Bureau of Economic Research. His research focuses on energy and environmental markets, and in particular, on electricity and natural gas regulation, pricing in competitive and non-competitive markets, and the economic and business impacts of environmental policy. His work appears in leading academic journals including the American Economic Review, the RAND Journal of Economics, and the Journal of Political Economy. He blogs along with other Energy Institute researchers at energyathaas.wordpress.com.

 

From The Energy Collective: Wind/Solar Expansion Will Require Perpetual Subsidies

Wind/Solar Expansion Will Require Perpetual Subsidies

Highlights:

  • Wind/solar advocates point to continued cost reductions due to technological learning.
  • Wind/solar opponents point to continued value declines due to intermittency.
  • It tuns out that these two effects cancel out fairly evenly.
  • Wind and solar will thus remain as subsidy-dependent as they are today.

Introduction

There can be no doubt that wind and solar power will be important players in the energy system of the future. Over the past decade or so, these sources have grown almost as fast as nuclear power did in the seventies (see below). Since 2010, wind and solar have achieved an almost perfectly linear expansion of about 5.5% of global electricity production per decade (2.3% of global primary energy per decade).

Although wind and solar are settled as important energy players, the magnitude of their contribution to the future energy system is a topic of vigorous debate. The advocate camp points to the continued cost declines of these technologies, often claiming that wind/solar power will soon achieve competitiveness without subsidies, spelling the end of conventional power sources. The following graphs from IRENA for wind and solar illustrate this argument.

The complete article can be found here.

From the Salt Lake (City) Tribune: Commentary: Should you be forced to subsidize your neighbor’s #solar panels?

A great commentary on solar and how people that cannot afford it are actually subsidizing those that can…

Should Utahns who don’t want or cannot afford to install solar panels on their home be forced to pay for those who can? That’s the crux of the current net-metering debate in our state.

Net metering allows solar customers to sell excess electricity generated by their rooftop panels back to the utility companies.

A study last year found that solar customers, who rely on and use the electrical grid as much as traditional customers, are not paying their fair share for its use.

What’s more, under the current net-metering arrangement, Rocky Mountain Power, Utah’s electric utility company, pays three times more for energy generated by residential solar panels than it pays for energy generated by commercial solar farms.

As a result, solar customers essentially receive a $400 subsidy every year, which amounts to a $6.5 million cost to the utility company. If things don’t change, as more people install solar panels on their homes, that number could skyrocket to $78 million.

This is bad news for non-solar customers who will foot the bill when Rocky Mountain Power increases prices to cover these losses.

The situation is particularly urgent for low-income households that spend an ever-growing portion of their income on electricity and suffer greatly from higher energy prices. For the 198,000 Utah households that earn less than $30,000, 18 percent of their monthly budget is already swallowed up by energy costs.

Rooftop solar on a home.

What’s worse, a rate increase doesn’t just mean higher utility bills, it also means higher costs for everything else. Local grocery stores forced to pay higher energy rates to light their stores and refrigerate food will likely pass on that cost in the form of higher prices. For families struggling to make ends meet from one month to the next, increased electricity costs could be catastrophic.

And when you consider that more than 60 percent of the state’s 22,000 rooftop solar owners earn more than $100,000 per year, it’s easy to see that the current rate structure is a patently unfair transfer of wealth from less fortunate consumers who can’t afford solar panels to the more well-off Utahns who can.

To level the playing field for all Utahns and protect the more vulnerable in our community, Rocky Mountain Power submitted a request to the Utah Public Service Commission to create a fairer rate structure.

Of course, solar companies that care only about protecting their customers’ lucrative subsidy are attempting to block the correction.

They argue that many customers who choose solar to save money on their electric bills will be disinclined to do so if the new prices requested by Rocky Mountain Power go into effect. And they disingenuously claim that fixing the rate disparity is meant to stifle competition and will kill jobs and harm a “thriving” industry.

But they fail to recognize that cheaper energy prices make Utah a desirable locale for businesses. Utah enjoys some of the lowest energy prices in the country, close to 20 percent lower than the national average. A potential rate increase to cover the ballooning costs of net metering could jeopardize our state’s ability to attract and retain businesses and jobs across all industries.

Moreover, if the solar industry is propped up with forced subsidies from people who cannot afford the product or simply don’t want it, is it really thriving?

The Utah Public Service Commission must eliminate the unfair subsidy for rooftop solar users. For their part, instead of relying on an artificial boost, rooftop solar companies should strive to make products and services that are truly affordable.

Evelyn Everton is the Utah state director of Americans for Prosperity.

Original article can be found here: http://www.sltrib.com/opinion/commentary/2017/08/27/commentary-should-you-be-forced-to-subsidize-your-neighbors-solar-panels/

From Mother Jones: The Problem With Rooftop Solar That Nobody Is Talking About

Here is another article that is almost two years old but still holds true. This is from Mother Jones. A good read.

“A couple of years ago, Steven Weissman, an energy lawyer at the University of California-­Berkeley, started to shop around for solar panels for his house. It seemed like an environmental no-brainer. For zero down, leading residential provider SolarCity would install panels on his roof. The company would own the equipment, and he’d buy the power it produces for less than he had been paying his electric utility. Save money, fight climate change. Sounds like a deal.

“But while reading the contract, Weissman discovered the fine print that helps make that deal possible: SolarCity would also retain ownership of his system’s renewable energy credits. It’s the kind of detail your average solar customer wouldn’t notice or maybe care about. But to Weissman, it was an unexpected letdown.

“To understand his hang-up, you need a bit of Electricity 101. If you have solar panels on your roof, the electrons they produce flow across the electric grid like water, following a path of least resistance. As they whiz around, electrons are impossible to track and look identical, whether they’re coming from solar panels, a coal plant, or whatever. But there is value in keeping tabs on the renewable ones, so energy wonks came up with renewable energy credits (RECs), a tradable financial instrument that corresponds to a certain amount of energy produced by a certain renewable source like solar or wind.”

The complete article can be found here:

The Problem With Rooftop Solar That Nobody Is Talking About