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The California Solar Initiative is ending. What has it left behind?

Nearly all the money has been spent, and the California Solar Initiative is winding down.  The direct CSI subsidy for installing PV panels on your house, which started at $2.50 per watt (of installed peak capacity) is now just $0.20 per watt.  As of last week, the program has spent about $1.68 billion on rebates for 111,271 completed solar PV installations of about 1.2 GW in rated solar PV capacity.  That works out to an average rebate of $1.40 per watt of capacity.

The CSI covers from the smallest residential system of 1 or 2 kW capacity up to 1000 kW (1 megawatt), which can fit on the roof of a big box store.  Utility-scale solar generation facilities, up to 500 MW capacity, are not part of the CSI.  The vast majority of the CSI installations, about 93%, are residential and small commercial systems, 10kW or less in size.  But the majority of capacity, about 63%, is in the 7% of systems that are over 10kW.

The CSI has posted detailed data on the program that allows a closer analysis of what solar PV systems cost from 2007, when the program started, up to this year.  The figure below shows that costs have come down for all systems, regardless of size, but the gap between the cost per watt of large systems and small ones has widened.  Data on very large scale solar projects for the utilities (20MW-500MW) are not public, but reports suggest that they have come down the most and now have completed costs around $2/watt.


The persistent cost gap is a reflection of where the cost reductions have come from over the last 6 years: solar panel prices, which have declined from about $4/watt in 2007 to less than $1/watt today when purchased in large quantities.  The companies who install small systems tend to buy in smaller quantities and pay somewhat more for the panels.[1]

The big gap between small and large systems is in installation costs, which haven’t changed much for residential PV.  Installation costs are most of what’s known as “balance of system”, the difference between the total cost and the cost of the panels.  Unfortunately, installation of PV systems seems to suffer from Baumol’s cost disease, the idea that the relative cost of labor-intensive goods and services will rise over time unless there are significant improvements in labor productivity.  Without a major efficiency breakthrough on installation, the cost of small PV systems (less than 10kW) has increased substantially relative to utility-scale solar (which has vastly cheaper installation costs), with the ratio rising from less than 2-to-1 in 2007 ($10/$6) to about 3-to-1 today ($6/$2).

Luckily for the residential solar PV industry, increased federal subsidies for small-scale solar, new financing models, and an extremely solar-friendly residential rate structure have arrived in time to keep the industry going as the CSI has declined.

A decade ago, the federal 30% tax credit for installing solar was capped at $2000 per household.  Around 2007, that cap was removed, so the 30% credit now applies to the entire PV system cost, raising the subsidy for a typical 4kW residential system from $2,000 to about $7,200.

At about the same time, the residential solar industry began offering customers an option to buy the power from the panels on their roof instead of buying the panels.  The company owns the panels and sells you the power at a predetermined rate.  This gives the company an incentive to keep the system working well and gives the customer some certainty about what the power will cost.  But these power purchase agreements also lock the customer in for 10-20 years.  Whether they turn out to be a good deal for the customer will depend on how fast utility rates rise compared to the price escalators that are built into the agreements.  Among systems 10kW or smaller, the share installed under these power purchase arrangements increased from 12% in 2007 to 66% so far this year.

The residential solar industry in California has also benefitted from increasing-block rate structures: the rate increases for each incremental kilowatt-hour as the customer uses more electricity in a month.  The lowest price tier in PG&E territory costs $0.13/kWh while the highest tier is $0.34/kWh.  Most residential solar is replacing power that was being purchased on higher tiers, at prices that are much higher than the utility’s cost of providing that power.  Thus, when customers install solar, the utility sees revenues fall by more than their costs, causing a temporary drop in profits.  In our regulated utility system, however, rates then rise for everyone still buying power in order to make up the shortfall.  If California’s investor-owned utilities charged flat rates, as the majority of U.S. utilities do, that price would be $0.16-$0.18 per kWh and the economics of residential PV would be much less attractive.

So, as the CSI fades away, is residential solar PV on stable footing going forward?  Probably not.  The tax credits are under constant pressure in Washington.   The very-steep increasing-block rates seem unlikely to continue, primarily because the tiers don’t reflect real cost differences of supplying power.  The power purchase agreements don’t lower the basic costs of residential solar, though they do reduce the customer’s risk from poor PV system performance or a utility rate spike.

Fundamentally, the declining costs of PV panels is better news for utility-scale solar than for residential solar.   And in the competition among renewables that means it’s likely to be bad news for residential solar.

[1] Did the CSI help to lower solar PV panel prices by growing the market?  Unlikely.  The entire capacity installed under the CSI is less than 2% of the worldwide PV panel installations since 2007.

Severin Borenstein View All

Severin Borenstein is E.T. Grether Professor of Business Administration and Public Policy at the Haas School of Business. He has published extensively on the oil and gasoline industries, electricity markets and pricing greenhouse gases. His current research projects include the economics of renewable energy, economic policies for reducing greenhouse gases, and alternative models of retail electricity pricing. In 2012-13, he served on the Emissions Market Assessment Committee that advised the California Air Resources Board on the operation of California’s Cap and Trade market for greenhouse gases. Currently, he chairs the California Energy Commission's Petroleum Market Advisory Committee and is a member of the Bay Area Air Quality Management District's Advisory Council.

18 thoughts on “The California Solar Initiative is ending. What has it left behind? Leave a comment

  1. What will hapen when the utility pricing structure changes so that the fixed charges are billed separate from the energy charges? (look at the gas system) It seems that will change the economics of solar systems considerably. Out of the 18 cents or so charged for energy, I would estimate less than 6 cents is energy. If that is the credit that the solar panel owners receive, the investment will not be cost effective. Can one assume that the business model for utilities will remain the same for the next 20 years? I will tell you no.

  2. Severin,
    Good topic covering a number of important points. It is perhaps worth noting that as FIT levels continue to decline in Germany, self-consumption (and hence avoiding the retail rate) is quickly becoming a hot topic there – since retail rates are higher than in the US and perhaps with the exception of the highest block higher than in CA by quite a bit. So fixed cost recovery will likely become an important issue to address. I wonder how Mike (commentor above from MD) will feel when his utility changes the way it charges for distribution and transmission, for example by no longer charging on a volumetric basis, but rather either based on max seasonal demand or by simply increasing the fixed monthly fee. I suspect that won’t be great for the rate of return.

    Another informative addition to this discussion comes from “up the hill”, where Ryan Wiser et al from LBLL have looked at the differences between German and CA/US residential solar PV prices. It suggests a number of contributing factors, apparently not overcome by CSI. Here is the link:

    • On the rate of return that I get (in MD), if they raise the base rate or a charge for all, I would think the return stays the same. If cost of electricity goes up or if the charge the State is going to charge for offshore windpower subsidy goes up, I would think I would do better. On the other hand, yes, if they change charge those with renewables pay, it could go down a bit, but it is pretty generous now, so a bit less would not be discouraging. And indeed, it might well be if they charge on some sort of peak amount, that would likely add incentive to get a battery back-up in order to smooth the peak demand. And I still have things I could do to reduce overall use. After first year, I have found that my peak demand is coming in the winter from a 220 volt steam humidifier put in with my more efficient furnaces and air conditioners–this coming winter I am thinking of going to just little water pumps to humidify, especially as my wife likes the sound of flowing water. Overall, I don’t think there is likely to be significant downside to strong return I get now, and even were there, my concern for environment would still justify having done this. Mike

  3. I find it hard to believe that it’s politically tenable in CA for residential (non-utility) owned solar to experience a precipitous decline any time soon. Both the CPUC and lawmakers have to get to work to change the block structure, and there’s a “big fight” on the horizon over the net metering cap (words of a CPUC commissioner).

    Between now and some point in the future when those two changes take effect, residential solar appears set to continue the fast pace of growth, with or without any incentives. Net metering and the block structure seem to be more than enough subsidy to fuel Wall Street confidence in the PPA model right now.

    The bigger these companies like SolarCity get, the less likely it is, in my view, for their business model to fall off a cliff. Even if policies don’t fall into place their way, I don’t think it means they’ll give up on the prospect of skimming away utility revenues. This will not be a trivial issue for California, I’m beginning to agree with those who say a utility in PG&E’s position could become fragile. My concern is how hesitant people are to talk about it.

  4. I guess there are many reasons why utility-scale projects have lower average costs than smaller residential systems, and the buyers’ purchase power might be a relatively small one (or none). The reason is that by looking it historically, the way big or small installers purchase solar panels didn’t change that much, so does the cost difference between them due to this specific reason. A more appropriate explanation is that since the soft costs are taking a bigger chunk of the system costs, the widening cost difference is because it is simply more efficient to design, get permits and interconnections, and install a very big utility-scale project, compared to many small residential systems.

    • While not all problems of scale can be overcome, the MD legislature, at least, has ruled that homeowner association covenants cannot be applied to limit solar installations. With so many systems going in the local building departments and utility are getting used to approving the designs, etc., so individual questions seem to be mainly about roof strength, and that is pretty straightforward calculation. So, the solar company handles just about everything (roof strengthening, system installation, insurance, any repairs, etc.), and good incentive to make installation in units of an inverter (so 22 panels in my case).

  5. You think it “unlikely” that the CSI helped to lower solar PV panel prices by growing the market, because the world market is much bigger than California. However, no single-jurisdiction subsidy will alone shift the market. The correct question is whether the combination of the programs of California, New Jersey, the US federal government, Germany, Spain, and others have collectively caused enough new business to shift prices. Judging my how much Chinese panel producers mattered, and how much of their production went into subsidized markets, I consider it likely that subsidy programs helped lower production costs.

      • Sure, the group of countries (Italy should be added, and probably China itself) collectively probably contributed significantly to falling panel prices. But even though the great state of California may lead the US in deployment, Germany has crossed the 35GW threshold and several others (Spain, Italy) have many times the CA installed capacity. So I think it is probably fair to conclude that the CSI has not made a significant contribution to global PV panel cost declines.

  6. Severin, A very useful and timely post. My students still have tremendous interest in PV, and it’s hard to point them to objective discussions.
    Do you plan to say anything about the recent news on failing performance from PV panels sourced in China? I gather that similar things may be happening to inverters, as well. As I understand it, the economics of these systems were premised on long lifetimes and steadily escalating electricity prices, so if the output falls off after a few years, then these projects turn out to be very wasteful. I am also curious about who will end up bearing the liability if the panels lose say 50% of their output after a few years.
    This would not be the first time. Both houses I’ve owned in Calif. have residual pipes from rooftop solar pool heaters that were ripped out, probably because they leaked after a few years.

    • For the lease arrangement I have in MD, the guarantee is for the minimum kilowatt hours to be delivered each year, out for 20 years, so it is the solar company bearing that burden. They have come and upgraded the inverter (I think mainly to improve the diagnostics that can be done).

  7. I would just note, as a Maryland homeowner who is a customer of one of the major installers of PV, that I chose the fully prepaid lease option, so paid $17,000 up front for a 10 kW rooftop system, and have no monthly payments for system for next 20 years. Costs of power for me pre-PV were, including about 4 cents in various taxes which are also saved in that my charge is based on net usage, about 13.5 cents per kW-hr (for wind power in lieu of coal-nuclear that was about a penny less). Using this figure, the power I am guaranteed by the lease arrangement guarantees me about a 9% tax-free return, and actual performance is about 1% better. For a retiree, getting 10% tax-free return seems outstanding–which is why the company has a several month long backlog from customer referrals and without major media advertising. And this is all if the rates for electricity don’t go up over the next 20 years, which seems to me unlikely–and the more they go up, the more I would seem to be saving. [I should note our county and state had some subsidies that also went to the installer–subsidies driven by need to reduce peak summer demand in order to be able to avoid constructing a new high-voltage tie-in line to utilities several hundred miles away.]

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