Marketing Solar: Bring in Elizabeth Warren?

Last month, my husband opened the door to a solicitor from a solar company and eventually agreed to let the polite young gentleman on our porch order a quote for our family to go solar. The three-page form that the company sent had several very misleading figures. I was appalled.

Let me be clear – I am no foe of solar. At some fundamental level, I can see the appeal. If we really want to reduce carbon emissions dramatically and address global warming, solar power of some form likely has to be part of the global solution.

But, I do not think companies should be allowed to misrepresent information.

Here’s half of the first page of our quote:

Solar Quote p1 (I am not revealing the company’s name because I don’t want to out any one person or company. I will say that this is no fly-by-night outfit.) From the first two numbers under “YOUR FINANCIAL BENEFITS,” it looks like we will spend approximately $12,400 and save $39,500. And, if you look more closely at the savings, they are net of the upfront cost. How could we not sign up right away? Seems like we would be ripping up a check for $39,500, right?

Go to the second page, and you see how the company calculated the $39,500. They’re adding up savings over the next twenty five years without discounting savings in the future. This company would fail my colleagues’ introductory finance course.

Solar Quote 2

We would pay the costs of $12,400 in today’s dollars, in order to save $3,576 in the year 2038, assuming we’re lucky enough to be alive and buying $100 cheese pizza for our grandchildren.

There’s another part of the quote that’s potentially misleading. The savings the company projects reflect their estimates about our electricity bills in the future. The first two columns on the second page of our quote titled “Utility Without Solar” and “Utility With Solar” are their guesses about what our electricity bills will be with and without solar. The difference between these columns yields their “Annual Savings” estimate. The columns embed assumptions about how our usage and electricity prices will change over the next 25 years.

The company estimates that our utility bills without solar will go up by more than 5 percent a year. The escalation in electricity payments is also reflected in the upwards slope of the red and blue lines on the first page of our quote.

It’s not clear from our quote which part of this is the growth in electricity prices and which part is the growth in our usage, but apparently other solar companies break out the components. Greentech Media reports that a gentleman in California has sued Sunrun, the company that convinced him to lease a solar system, for deceptive marketing. The company’s promotional material suggested that utility prices would go up by 5 to 6 percent, while his have leveled off since he bought his system in 2011.

There are at least two more components of the quote that are misleading, but this post is already long, so I will continue with another installment.

Certainly, some people want to go solar for reasons other than saving money on their utility bills, and for them, the numbers aren’t important. But, for the rest of us, who want reliable guidance on how much money we will save with a large financial decision, companies like the one on our porch are doing a disservice. It’s time to impose better oversight on the way these companies present information.

About Catherine Wolfram

Catherine Wolfram is the Cora Jane Flood Professor of Business Administration at the Haas School of Business, Co-Director of the Energy Institute at Haas, and a Faculty Director of The E2e Project. Her research analyzes the impact of environmental regulation on energy markets and the effects of electricity industry privatization and restructuring around the world. She is currently implementing several randomized control trials to evaluate energy efficiency programs.
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34 Responses to Marketing Solar: Bring in Elizabeth Warren?

  1. Jardinero1 says:

    Where I live electric rates have fallen by about forty percent over the last 10 years. Rising electric rates are not always a valid assumption. There is no net savings to a grid tied electric consumer from solar power. The only reason for a grid tied customer to go solar would be for the personal satisfaction. A non-grid tied customer might have practical reasons to utilize solar, in whole or part, after comparing it to other power generation methods.

  2. Jurgen Weiss says:

    I suppose you might question the home appreciation number, too. And if the house really does appreciate, did you get an estimate of the additional real estate taxes you will have to pay? While I totally agree with you about the need to force honest comparisons, I guess it may be worth pointing out that if the savings numbers (in terms of kWh) are reasonable, the discounted value of the savings would likely still exceed the upfront cost. So enforce “truth” in information disclosure, but don’t suggest that with recent cost declines we may not be entering a period where the economics begin to be interesting – even if properly calculated.

  3. Kevin Ng says:

    Good post Catherine — I think what this post highlights is not an uncommon problem in the industry for all long-term cash flow analyses. Good firms specializing in engineering, forecasting, energy policy and energy economics are few and far between.

    As a consolation to your unnamed firm, I’ve heard horror stories of a solar quotes based on simple payback.

  4. Scott Cauchois says:

    This is a long time ago for some people but in the 1980s there were a number of solar fraud (usually had to do with water heating) and QF fraud cases (having to do with misrepresenting particularly wind QFs to investors) brought by the California Attorney General in federal court. Everything from exaggerated avoided costs, oil prices, lack of discounting, and misuse of energy agency forecasts. And jail time resulted for some/

  5. Rik M. says:

    Hmm- maybe thats why so many companies are moving to a lease/PPA model which show instant savings for no cost. Companies that are still hawking the traditional cash model are frequently expensive and buying anything from a door to door salesman without a competitive bid is never adviseable per the CSLB.

    @Jurgen- Solar is property tax exempt. The appreciation is not realized until the home is sold so the initial buyer would never be responsible for higher taxes by going solar. The new homeowner would only have to pay higher taxes on whatever the gross cost of the property was… just like any other home purchased with improvements.

    @Jardinero1 – If you had to bet whether the cost of Natural Gas, coal, and other power sources (currently provided by profit seeking, publicly traded utilites) were going to increase or decrease with time, what would you guess? Expecting rates to drop forever from non-renewable sources is nearly impossible – just look at fuel costs.
    Also, while individual rates per tier (assuming you are on a tiered system) may have dropped, the amount of power allocated to the cheapest tiers is continually declining (causing you to jump into higher, more expensive tiers faster). So your overall costs of electricity are likely still increasing.

    • Jardinero1 says:

      Barring regulatory pressures to the contrary, I expect the cost per kwh of Natural Gas and coal fired electricity to continue dropping for another decade or two. Property taxation varies by state. In Texas, you pay tax on the current years valuation. If your valuation goes up, your taxes go up.

      • Rik M. says:

        Guess i better sell my stock in PG&E/SDG&E then if theyre going to be seeing decreasing net income AND have to be maintaining a an outdated grid!
        http://articles.latimes.com/2012/jun/24/local/la-me-san-onofre-20120624

        Considering the war on ‘carbon’ and other emissions, many regulations against coal are underway (not saying they’re right or wrong)
        http://www.foxnews.com/politics/2013/03/04/obama-to-tap-top-climate-crusader-for-epa/
        This is especially critical since the EPA is lobbying to have most by-products of coal firing to be labeled as carcinogens- most notably coal ash. Which I am guessing will show higher rates (in California).
        http://blog.recsolar.com/wp-content/uploads/2012/10/pge-web-without-reform.jpg

        Correction: Since this article was written regarding solar/incentives/rates/etc in California specifically, I assumed that the questions regarding taxes was applicable to California. in texas, electric rates are heavily subsidized and therefore solar rarely makes sense there. Fortunately, many states label solar as property tax exempt. I apologize for the confusion

      • Jardinero1 says:

        I am unable to reply to your comment below – below the comment, so I comment – above the comment.

        My assertion of declining electric rates is for production, not transmission, which is a different matter. In Texas, our electric market is bifurcated, with transmission, legally separate from production. Production is allocated to a wholesale market where retailers bid/purchase and then re-sell to electric consumers. Consumer electric bills consist of a charge for production from the retailer and a toll to the transmission company. The Texas electric market is mostly unsubsidized. The only part of Texas electricity production which enjoys a direct subsidy is wind; who receive a direct payment of 2.5 cents per kwh from the federal government. The rest of the producers do not receive a direct subsidy for production like the wind producers.

        With regard to your first statement. Higher profits are achieved via increased productivity not higher prices. A producer can achieve higher profits in the face of declining market prices with better productivity. I stand by my hypothesis of lower future electric rates barring unforeseen political pressure to the contrary.

  6. Azmat Malik says:

    In the early 1980′s I got a solar water heating system; there were rebates (Fed and CA I think) that made the net cost that year somewhat lower. About 7 years later the system sensors, motor, controller, etc ‘died’. In those 9 years I barely saved enough to pay for the cost of the system. (BTW I had a ‘gold plated’ lifetime warranty ‘certificate’; there was fine print which was difficult to read, but said among other things ‘labor and parts excluded’!) I had to offer the buyer a DISCOUNT on the sale price to remove the panels. So there was property depreciation.
    One must also remember that in this field there is still a lot of tech improvement coming, and a 10 year old system may make no market value contribution at the sale of the property.

    A true analysis must include repair-maintenance, or be 100% warranty covered, labor and parts, by a durable dependable company which will be around when you need the service.
    Just like the expectation on life of LED lights is exaggerated (based mostly on an observation over 25 years ago that the LED chip was still giving off some light after 50K hours), one must factor in the lifetime costs. The power electronic components are the weak link in PV and LEDs, and must be easily customer replaceable for the economics to work out.

    • Rik M. says:

      Thats a great point, Azmat. Fortunately for PV, lots of installation companies are offering 20 year full service, maintenance, and insurance agreements, with escrow accounts backed by companies like US Bank, Google, and others. Most also offer minimum production guarantees for 20 years, supported by manufacturers 25 year materials warranties on panels.

  7. Ali says:

    Thanks for your insight, Rik M! You provided some much need background information to the discussion

  8. Roger says:

    its good for the long term health of PV in California.

  9. Nitin says:

    Looks like the work of Sungevity

  10. Bill Monsen says:

    The other unmentioned assumption in the analysis is the residential rate design. If there are major changes in residential rate design, then some benefits might be lost (e.g., if the system is sized to take advantage of high top-tier rates and the differentials shrink or if there is a fixed charge implemented that is unavoidable by self-generation).

  11. Kevin Ng says:

    To the commentor above who mentioned PPA — I re-read the post one more time and realize I couldn’t discern if the quote was for a PPA since there was an upfront cost but no utility rebates, unless, of course their home is in a non-IOU territory.

  12. David says:

    I’d love to know the size of the system they proposed as well. This looks not only like a shady deal based on the numbers presented, but the total cost of the system might be high, too. They’re taking the ITC and rebates which seems to imply the pre-rebate cost is much higher, no doubt with installation and product margin built in, too.

  13. Jack Ellis says:

    In California the analysis is complicated by a number of factors, including rate design changes, the as-yet unknown impact of the RPS, costs for “reliability” enhancements, warnings from the IOUs that they have to begin replacing distribution infrastructure, and uncertain load growth and fuel price projections. PV would remove a lot of the uncertainty around what you could expect to pay for electricity in 25 years, and for some folks that might be reason enough, especially if there’s no up-front cost.
    Unsophisticated consumers will overlook the time value of money, but even for those of us who understand the importance of discounting, I doubt most solar salespeople would pick the right discount rate, assuming they knew what it meant in the first place. As much as i sympathize with Catherine’s concern, full disclosure is not a perfect substitute for financial literacy. It’s not unreasonable to expect consumers to be able to think for themselves.

    • Kevin Ng says:

      … and don’t forget the effects of AB32 for both the short- and long-run now that we’re in the first phase of compliance. This auction mechanism is fairly new and although the first sales didn’t generate significant price increases, I don’t doubt that the prices will ratchet upwards per program design, and I also don’t doubt that these costs will be passed through to customers. Per your note on rate design changes, it seems logical that the utilities attribute a higher lbs per kWh generators (e.g. peakers) and subsequently the customer base with the highest summer demand time of use consumers. Customers signed with the “smaller” rate tariffs, such as homeowners and small businesses, may actually see the brunt of the pass through.

    • Azmat Malik says:

      While an NPV discounted analysis is needed for a rigorous comparison, in the environment we have been, and possibly will be for a few more years (in the US, perhaps most of the developed world), the discount rate is so low that it might as well be irrelevant. When I go to buy furniture or a car, I take the price discount rather than their ‘low’ financing rate (usually 6-8%), essentially self-finance and ‘pay myself the interest’.

  14. Jon Kaufman says:

    Solar is not cheap. That’s why the government t has offered subsidies–to make the economics more attractive.
    Go solar for the environmental benefits. Not because you think it will be less expensive than power from the utility.

    • Azmat Malik says:

      If we are able to look at our actions holistically (ie TOTAL overall affect on humans, and perhaps even the planet) I would opine that fossil fuels are much more expensive. Not only do their use significantly changes the environment, we have no idea how much of today’s illnesses (read healthcare expense) may be attributable. That is also not to say that all non-fossil are affect free; after all energy will be used in manufacturing the renewable systems as well their eventual disposal. I hope some people are trying to come up with a closed system analysis of the ‘costs’ of all sources of energy. In the end it would seem that efficiency (ie net reduction in use, at least per capita) is the way to go.

      • Jardinero1 says:

        Don’t you think that if you consider the whole effect of fossil fuels on the environment and health that you have to weigh that against the whole effect of a world with a complete absence of fossil fuels or a world powered wholly by wind and solar. Do you assume that wind and power are completely without adverse impact? Especially on a scale to provide for the needs of seven billion people?

    • Azmat Malik says:

      @Jardinero1: Indeed. THAT is the point. One cannot look at these in isolation. One does NOT want to depend on one technology only. Must diversify. So I am NOT suggesting that we look ONLY at renewables vs ONLY fossil fuels. Rather we need to look at ‘fully’ each source’s impact. Fossil fuels have been, and still are, getting huge subsidies when one considers below market leases, loan guarantees, etc. Renewables are new on the block and the ‘subsidies’ get talked of more openly, while the fossil subsidies are already baked in and people just sort of ‘assume’ and overlook.

      • Jardinero1 says:

        I am unaware of below market leases or loan guarantees to fossil fuels, at least in the United States. I am aware of an extremely adverse and somewhat arbitrary regulatory environment for fossil fuels which makes it hard to discount cash flows. Fossil fuels receive no direct subsidies, as far as I know. They do receive percs in the form of tax breaks. I would not consider a tax break a subsidy since one only enjoy the tax break, if one has earned a profit and paid taxes in the first place.

        A subsidy is a direct or indirect payment to producers for their product which makes their product cheaper to sell. The payments to wind producers are an example of a subsidy. The tax credit to consumers for purchasing a renewable system is a subsidy since it allows the producer to sell his system for a higher price than he would in the absence of the credit.

  15. Azmat Malik says:

    Fossil fuels do receive lots of indirect subsidies; it doesnt really matter direct or indirect, the net effect is the reduction of tax dollars. A tax credit IS a subsidy. Many tax credits are written into the US Tax Code … and not easy to ‘get rid’ of, and without those either fossil profits would be less or prices would be higher. We need a level field before we can do an honest comparison.

    Check http://priceofoil.org/fossil-fuel-subsidies/

    • Jardinero1 says:

      A reduction in tax, via tax credit or special deduction, is not a subsidy. Credits and special deductions reduce the amount of tax owed. They do not add anything to income. The exception to this rule is when a tax credit, to one, allows another to raise their prices; as the tax credit for HEV’s and home renewable energy systems do.

      A net addition to income such as the payment to wind producers is a subsidy. Fossil fuel producers receive no such net additions to income from the government.

      Your link begs the question that our national defense and public infrastructure would be different in the absence of tax reductions to the fossil fuel industry. I disagree. Things would be built out about the same and we would still have an army and navy.

      I agree with you that no taxpayer should receive preferential treatment. I also agree that tax credits and special deductions should be eliminated and the entire tax code should be streamlined. I am dubious that the economic fundamentals for fossil fuels vis a vis renewables would change much.

      • Azmat Malik says:

        A reduction tax by any means is a subsidy, IF it is tied to a specific purpose. The Childcare credit, the dependent exemption, are examples of personal tax subsidies for encouraging families. I am for elimination of this subsidy also. ALL exemptions and deductions should be eliminated … mortgage, health insurance premium, casualty loss, medical expenses, etc. Anyone needing support on specific matters should seek separate assistance based on need. It is not fair to pre-fund wealthy people’s expenses through the tax code, while making the ‘needy’ go through hoops to get even basic subsistence allowance.

        So by that logic, it is necessary to get rid of all “reduction in tax, via tax credit or special deduction,” which “…. reduce the amount of tax owed.” I assume in the following you meant ‘revenue’ not income “They do not add anything to income.”
        The tax credits should not go to the (fossil or renewable energy) companies but to the consumers of their ‘products-services’. So if we want to promote fossil fuel consumption allow lower ‘usage-sales’ taxes, and if you want to encourage renewables, allow tax credits to the consumer-taxpayer. This works because the consumer will look at the value on a net-net basis and make the appropriate decision.

      • Jardinero1 says:

        My view is that allowing a person, whether or human or legal, to retain more of his income or profit, is not a subsidy, because the money belongs to the person first, not the government. If you are allowed to keep something that is already yours, in the first place, it can’t be a subsidy.

        I agree, you can induce behavior by taking away more of someone’s income if they don’t engage in “behavior X”. That is the purpose of tax breaks and I am opposed to all of them, because tax breaks cause a sea of distortions and unintended consequences in the economy and the environment.

        By income, I meant income. People and businesses have income. They obtain income from selling a service or product. For businesses, revenue refers to income during a specific time period. Governments also have revenue, but it has a different meaning than for people and businesses.

  16. Azmat Malik says:

    Jardinero1: Seems like we have gone far off topic; the topic was consumer protection ‘against’ questionable PV sales pitches.
    My position on taxes is that almost all of us have developed our capabilities to earn based on society facilitating it via the infrastructure, education, even national defense. Thus taxes are a ‘must’ to repay, and to develop-maintain. The issue should be what support and infrastructure society should provide (free to all without usage-based fees or contribution, such as national defense, and welfare for the TRULY needy), and which should be facilitated by making sure they are available to all (at reasonable prices, eg utilities, healthcare, pensions ie SS), and which should be left alone to consumers (CHOICE between energy sources, clothes, cars, food, etc)
    So, once (if) society has determined the various spending areas, they must be paid for by taxes or use fees.
    BTW fossil fuel extraction and use HAVE a global-societal effect in the form of pollution and health; and so it must be taxed.

    • Jardinero1 says:

      You are right, we have jumped the tracks. In broad strokes I don’t disagree with you that public infrastructure has to be paid with taxes or user fees. That is stating the obvious.

      I don’t think it’s wise to use taxes as a carrot or stick, mainly because of the unintended consequences and potential for cronyism which that creates. I don’t agree with you that “bads” should be taxed. When a government taxes “bads”, it becomes beholden to those very “bads” and eventually starts enabling them. Cigarrette taxes are a good example of states becoming addicted to the revenue from bads and enabling them. The biggest defenders of big tobacco are the very states who negotiated the tobacco settlement. It was a bonanza for those states and now they can’t afford to let go of big tobacco. I would prefer that government limit or ban “bads” than tax them, that is, if government really wants to do something about it.

      • Azmat Malik says:

        I think we are brothers (possibly siblings) in libertarianism; just a difference in scale.
        I have absolutely no problem with letting people smoke, as long as they do not pollute the air I am breathing when I am in the same breathing space as they are.
        I have no problem with motorcyclists riding without helmets or other protective gear as long as they have enough insurance or otherwise absolve society of the ‘responsibility’ of taking care of the trauma associated with a collision. I have (almost) no problem with letting people drive DUI as long as any associated injury or death is treated as premeditated murder.
        I include healthcare in the same bucket as national defense; if we ‘do’ one we must do the other. Giving insurance companies cover from tort claims (which I am not sure of) would NOT be right, as you are restraining one and not the other.
        The list is long … I feel only that behavior must be regulated or taxed etc IF it will affect others. And that BOTH sides must be regulated equivalently.

        I am getting off this string now, specially since this seems to have become a discussion re: taxation etc between just the two of us. Nice exchanges we had. Cheers

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