Steeply tiered rates likely provided more incentive than the California Solar Initiative.
California leads the nation in residential solar photovoltaic installations. In fact, nearly half of all systems installed have been in the Golden State.
So why is California the leader? Sure, California has plenty of sunshine, but there are many other states that can compete on that dimension, including Florida, the Sunshine State. It’s not the federal tax benefits, which are available to all US residents. It’s not California’s Renewables Portfolio Standard, which effectively excludes residential solar. Some point to the California Solar Initiative that gave rebates for new systems from 2007 to 2013, and that is surely part of it.
But another factor is the “solar friendly” residential electricity prices. Not only do California’s two largest utilities have some of the country’s highest average residential electricity prices, the rates are also tiered, meaning that they increase for additional kilowatt-hours as the household consumes more over the month. As a result, large users face rates for much of their power that can be three times higher than rates in many other states, including the Sunshine State.
Have the level and structure of retail rates been a major factor in California’s residential PV boom? I’ve been wondering that for a while, so in the last few months I’ve been sizing up the various solar incentives for customers of Pacific Gas & Electric, the state’s largest utility, which has by far the most residential rooftop solar capacity in the country. The result of this work is being released today in a new Energy Institute working paper, “The Private Net Benefits of Residential Solar PV: And Who Gets Them”.
Using data on PG&E households that installed solar from 2007 to 2013 (and for some data, into early 2014), I examine the collection of incentives that were available, whether the system was bought by the homeowner or owned by a solar company, known as third-party owners (TPOs). TPOs can lease the panels to the homeowner or agree to sell the electricity the panels generate under a power purchase agreement that specifies the price per kilowatt-hour (kWh), usually for 20 years. I then put all these incentives together with reported prices of the systems to calculate the net benefits.
The incentives include direct rebates and tax credits, as well as indirect incentives from the structure of retail tariffs and the credit for electricity grid injections from the panels under “net metering” policies, as I’ve discussed in an earlier blog.
To start with the easiest ones, the California Solar Initiative was offering $2.50 per watt rebates back at the beginning of this period – when the full systems cost around $10 per watt on average. The CSI rebate stepped down over time, eventually hitting $0.20/watt in 2013 just before it disappeared. In the first half of 2014, the average full system price was down to around $4.50/watt.
If you bought the system, you got the CSI rebate. With a TPO, the company that owns the system got the rebate and — I hope — you got a lower price reflecting at least part of that savings. In either type of transaction, how much the price adjusted to pass through the savings to the homeowner, or how much the installer captured, is a point of strong dispute. Different analyses have estimated 17%, 45% and 99% passthrough rates to homeowners. Unfortunately, my study can’t unpack that even in the simple case of system purchases, let alone with much more complex lease or power purchase agreements. I estimate the incentive the homeowner and seller jointly received, not how they divided it up.
At the same time as California had the CSI, the federal government was giving a 30% tax credit for solar, but only up to $2000 for the entire system if a homeowner bought it in 2007 or 2008. TPOs got the full credit from the start. Since 2009, homeowners have also had no cap on the tax credit.
If you think figuring out federal tax credits could get a bit tedious, imagine the thrill of analyzing the economics of accelerated depreciation. I’ll spare you the details here (a phrase that may have been more welcome a couple paragraphs earlier), but the bottom line is that accelerated depreciation — which only TPOs can utilize — amounted to an additional 12%-15% incentive, about half the size of the 30% federal tax credit, and larger than the CSI since 2010. The figure below shows my estimates of the size of these incentives, all per kW of installed capacity, from 2007-2013.
That brings us to the incentive from residential rates. During the period I studied, the 5 tiers of PG&E’s rate structure averaged $0.13, $0.15, $0.28, $0.37, and $0.40 per kilowatt-hour (kWh). The solar PV on your rooftop crowds out the most expensive kWh first by reducing the total kWh for which you get billed. Over these years, the systems installed were on average displacing kWhs that would have cost the customer an average of about 26 cents. Importantly, that is much higher than the 19 cents per kWh they would have saved if PG&E charged a single flat rate for electricity (that raised the same revenue). If PV adopters expected the tiered prices to stay at those levels (adjusted for inflation), I show that PG&E’s tiering of rates created nearly as much additional incentive to install solar as did the 30% federal tax credit.
The savings are so large in part because of net energy metering (NEM), which means the household only pays for the net consumption — that is, total consumption minus the electricity the panels produce — even if some of the panel production gets injected into the grid (which happens any time that the household consumption is lower than production). An alternative approach, used in other parts of the world, is to pay the household a lower price for grid injections than the retail price the household pays for receiving electricity. Surprisingly — at least to me — moving from NEM to that alternative approach, but keeping the same tiered rates, would reduce the incentive for solar by only about half as much as moving from tiered to a flat electricity rate. The steep tiers create a much larger incentive than NEM, though the combination creates a still larger incentive.
Important note: those steep tiers created strong incentives only if they were expected to last. Maybe they were, but they didn’t. Already, in 2015, the lowest tier prices have risen and the highest have fallen so much that the highest tier price is now about twice the lowest rather than three times. Proposals now before the California Public Utilities Commission would change the spread to just 20% or 66% depending on which proposal is adopted. This will further lower the average price of electricity that the solar panels replace, and lower the incentive for large users to install PV.
Beyond the size of these incentives, I also wondered who was going solar, particularly how much the recipients of incentives tilt towards high-income households. Using very granular census data, I estimated household incomes for each PG&E customer who installed solar. Not surprisingly, they are heavily skewed to the wealthy with 35%-40% of systems going to households in the top 20% of earners. But that has been changing since 2011, with the measure of inequality among adopters declining by nearly one-fifth from 2010 to 2014. In the first few months of 2014, households in the highest of the five income brackets were still 82% more likely to adopt solar than households in the middle bracket, but that’s down from 116% in 2010.
Estimating incomes of solar adopters also give some insight into how the private benefits vary among those who do install PV systems. As you would expect, the lower income adopters tend to consume less electricity and put in smaller systems, but they actually put in larger systems relative to their consumption. That means they start lower down on the tiered rate structure and they crowd out a larger share of kWh, which are kWh that wouldn’t have cost that much anyway. Systems on the roofs of the highest income bracket households crowded out electricity that would have cost them 27 cents per kWh on average, while the systems on middle income households displaced 25 cent power, and the households in the lowest bracket displaced 21 cent electricity on average. Among those who installed solar in 2007-14, the wealthiest customers were likely to get the largest savings.
As I wrote a few weeks ago, we need a careful analysis of the societal costs and benefits of deploying renewable power at grid scale versus distributed generation. At the same time, we also need a careful analysis of the incentives that have been created for generating energy from all sources. Regardless of one’s views on solar, distributed generation, or renewables generally, understanding the size of the financial incentives from direct and indirect factors is critical to evaluating which programs are likely to have the greatest effect on adoption and which customers are likely to get the greatest benefits.
Severin Borenstein is E.T. Grether Professor of Business Administration and Public Policy at the Haas School of Business and Faculty Director of the Energy Institute at Haas. 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. He chaired the California Energy Commission's Petroleum Market Advisory Committee from 2015 until its completion in 2017. Currently, he is a member of the Bay Area Air Quality Management District's Advisory Council and a member of the Board of Governors of the California Independent System Operator.