Several weeks ago I blogged about a solar quote my family received. The quote suggested that we could spend $12,400 to save $39,500 on our future electricity bills. My post raised two issues about the quote, including that the savings summed over the next twenty-five years were not discounted and that the company was projecting that our electricity payments without solar would rise at over 5% a year.
In this post, I provide some promised extensions, and address several issues and suggestions that were raised in the (generous and voluminous!) comments.
Recall that the company is trying to forecast what my family’s savings will be in the future if we spend $12,400 for their panels. Forecasting is a tricky business, but we do it when we make many investments, whether it’s buying stock in the hopes of reaping future dividends and capital gains or buying a house in the hopes of avoiding rent and possibly realizing capital gains when we move out. In the case of solar panels, the expected future returns are lower electricity bills. Calculating those returns requires forecasting what you would have paid for electricity had you not installed solar panels.
Electricity bills reflect the price we are charged for power multiplied by the amount of power we consume. In California, and many other states, the price we are charged varies as a function of how much power we consume. For instance, my family pays PG&E 13 cents per kilowatt-hour (kWh) for about the first third of our power, 15 cents for the next third and, in most months, 30 cents for the last couple kWh of electricity. People who consume more than us in Berkeley can pay as much as 34 cents per kWh. (The kWh thresholds, where the rates change, vary as a function of climate zones – they’re higher inland. They also differ between summer and winter.)
PG&E is using what are called “increasing block rates”: the price per kWh is increasing in the number of kWh we buy – the opposite of a volume discount. Here’s the thing: California regulators are currently considering flattening the increasing block rate structure. This could have a large impact on the savings from solar panels.
Keep in mind that the solar panels proposed for our family would not offset all of our power consumption. We’d still be buying about a third of our electricity from PG&E. It would offset the most expensive 30 cent power, and leave us paying 13 cents for most of the remainder. But, if regulators flatten the rate structure, the savings from offsetting the high cost power will be lower, and our remaining charges will be higher.
One suggestion on my last post was to be more concrete: how much lower would the savings be if we discounted them, for instance? To get some sense for specifics and to devise some rough estimates of the impact of bill restructuring, I have devised a very crude spreadsheet.
To calculate discounted savings, I have to take a stand on the appropriate discount rate. One way to think about this is to compare the returns my family would earn if instead of buying the solar panels we made another investment, such as in the stock market. Historical stock returns, say over the past twenty-five years, have been around 10 percent, and given that we are making an estimate over the next 25 years, that’s probably a reasonable prediction. But, to allow for the fact that solar panels are probably less risky than an investment in the stock market, and returns from solar are most likely uncorrelated with the stock market (low beta), I used a 5 percent discount rate. If your alternative investment is something like a Treasury Bill, you might want to use a lower rate. At 5 percent, discounted cumulative savings, net of the panel costs, are negative through the first 12 years and only $13,500 cumulatively, compared to the $39,500 we were quoted.
Rate restructuring could have a big impact as well. I am not aware of specific proposals, so I considered a couple different options. If instead of 13 cents, 15 cents, 30 cents, the rates were changed to 15 cents, 16 cents and 24 cents, our discounted cumulative savings would be over 20 percent lower: $10,500 instead of $13,500. To me, this seems like a big impact from a relatively small adjustment to rates.
If the restructuring is more dramatic, say a flat rate at 16 cents, the savings are reduced by more than half: less than $5,200 instead of $13,500. Note that I am assuming the rate restructuring is effective the first year we own the panels and then kept at the same relative levels into the future, but still escalating at over 5 percent a year. If these new rates only go up at 2.5 percent a year, our solar panels would never pay off.
It’s important to note that I am making pure guesses about rate restructuring. Regulators will have to consider many factors, such as whether the new rates provide PG&E the correct revenue. For most utilities, but not PG&E, households pay a fixed charge no matter how much power they consume. If this is on the table for PG&E in the future, the savings would be lower still.
A team of researchers at Lawrence Berkeley National Labs have put together a comprehensive analysis of the impact of different rate restructuring scenarios on bill savings for solar customers. They conclude that future regulations place substantial uncertainty on future bills, so that, “simple assumptions that project a flat or increasing value of bill savings over time (in real terms) may not be accurate.”
My own hope is that regulators will address this issue and, for instance, devise a more sophisticated version of my spreadsheet, both for potential consumers to use and to constrain how solar marketers display information.
One of my colleagues took pity on the solicitor noting, “Wow, did that company ever knock on the wrong door!” It could be, but everyone will eventually benefit if consumers are making well-informed choices.
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.