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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.

brickNote: 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.

truckNote: 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.

wiresNote: 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.pngNote: 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.

glow.jpgNote: I like seeing my neighbor happy, but they shouldn’t get all the green glow. Source here.

Suggested citation: Davis, Lucas. “Why Am I Paying $65/year for Your Solar Panels?” Energy Institute Blog, UC Berkeley, March 26, 2018, https://energyathaas.wordpress.com/2018/03/26/why-am-i-paying-65-year-for-your-solar-panels/

Lucas Davis View All

Lucas Davis is the Jeffrey A. Jacobs Distinguished Professor in Business and Technology at the Haas School of Business at the University of California, Berkeley. He is Faculty Director of the Energy Institute at Haas, a coeditor at the American Economic Journal: Economic Policy, and a Faculty Research Fellow at the National Bureau of Economic Research. He received a BA from Amherst College and a PhD in Economics from the University of Wisconsin. Prior to joining Haas in 2009, he was an assistant professor of Economics at the University of Michigan. 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.

156 thoughts on “Why Am I Paying $65/year for Your Solar Panels? Leave a comment

  1. Nice article. While subsidies can often be justified to ‘jump start’ a new product or industry, a policy question relative to your article is – shouldn’t the subsidies be limited to the purchase and installation and not the operation? Separating purchase from operation would allow net metering rates to better reflect the accountability missing with existing policy.

    Second, try focusing your next article on the subsidies for electric vehicles. I’m certain you’ll find the state and federal tax credits for purchases, the avoided contribution to road usage (avoided gas taxes), subsidized charging stations, and now regulator promoted 2-years of free electricity for charging put the solar subsidies to shame. Don’t forget to account for the local distribution system upgrades to handle the individual and collective load impacts of EV charging. Strange that EV tax and other credits only benefit those upper income customers who could almost certainly pay their own way.

    • There are, you know, laws and Executive Orders to comply with, like the Massachusetts Global Warming Solutions Act and Gov Baker’s E O. 569? Or would you prefer instead everything you say and assess all fossil fuel-related income in Massachusetts their proportionate share of reimbursement for climate change-related damages to citizens and Commonwealth?

  2. You stated “You are ignoring the fact that prosumers have no upper limit imposed on the rate of return they can earn on their invested capital; investor-owned utilities do.”

    I make the assumption that the definition of “prosumer” is, in general, someone with rooftop solar.

    This would be a decided advantage for prosumers, if there were a free market to sell electric energy. Prosumers are only allowed to sell to one customer and that customer sets the price. That customer buys retail energy at wholesale and sells at retail. By this I mean, the customer, has no transmission nor distribution charges associated with the sale. (well, maybe the shared depreciation on the connector on the distribution transformer)

    • @OldSurferDude,

      Prosumers are only allowed to sell to one customer and that customer sets the price.

      Some of us and some companies (e.g., Ikea) are working to change that in some jurisdictions, e.g., Massachusetts.

    • True, there is only one buyer the solar customer can sell to. But under PURPA the buyer must pay to the solar customer prices reflecting the utility’s avoided costs.

      Furthermore, the solar customer makes money not just from his (her) net exports to the utility but on each and every kWh generated, including those consumed on site. The study I did that examined rooftop solar on the SCE system revealed that the typical solar customer earned about a 17 percent after-tax rate of return on the solar facility investment with a payback period of about 7 years! Can you think of any low-risk investment in the stock market that is so lucrative? I can’t.

      In stating that that the utility “…buys retail energy at wholesale and sells at retail….” you make the same mistake that many other solar advocates make including some who have Ph.D. degrees in economics thus must know better. While it is true that the purchased solar energy is sold at retail prices, those sales do not produce any additional retail revenues; they only allow the utility to avoid purchasing an equivalent amount of energy (i.e., adjusted upward for distribution losses) from the wholesale market. So what is really happening is that the utility is effectively paying the wholesale market price for the solar energy and avoiding the purchase of an equivalent amount of energy at the wholesale market price. It’s a “wash sale,” (unless, or course, you believe that retail demand for electric energy is 100 percent covariant with rooftop solar production). There may be some positive covariance between rooftop solar production and local air condition load – but to argue that it is a kWh-for-kWh relationship is far fetched.

      • “…but to argue that it is a kWh-for-kWh relationship is far fetched.”

        In the case of most of the rooftop solar today, and I’m not saying “not in the future”, but today, on each distribution transformer is a mix of pro- and con- ‘sumers. And, again, today, that mix is such that there is energy going into the transformer from the distribution network. That is, the sum the pro- and con- will be consumption. there is indeed a kWh-for-kWh relationship. Here is the proof: https://drive.google.com/open?id=1s0uLXdQLjhN7ICmjJfYLC8l8mQ6W8lz6AeodmxgQ67E.

        Think of it like this, Look at it from the perspective of a distribution transformer. It gets energy from the distribution line. How much energy it gets is dependent on its load. If the net energy is consuming, then the only conclusion to which one must come is that the energy from the rooftop solar is going to the consumers on the same distribution transformer. The energy never gets to the primary side of the transformer.

        I encourage the idea that everyone has to pay for the grid. The proportion should be the percentage of the peak power (not energy) or panel size, for that is how all of The Grid is sized. After that, the prosumers should be allowed to sell their excess energy as dictated by Adam Smith.

        • OldSurferDude,

          The kWh-for-kWh relationship I was debunking was the notion that each kWh of solar generation creates a kWh of additional consumption of retail energy. It does not. Obviously there is roughly a kWh-for-kWh equivalence between what a rooftop solar facility produces and what the utility does not have to buy from the wholesale market. That’s what I meant when I said it is a wash sale for the utility; the utility pays the solar producer the wholesale rate for net energy injected into the distribution system and avoids paying that same rate for the energy it does not have to buy from the wholesale market as a result of the energy injection.

          I briefly looked at the link you provided. The analysis is simplistic because it analyzes a DC circuit rather than an AC circuit. In particular, it ignores reactive power, which gives rise to lines losses that the DC analysis ignores. There is another subtle point missed, i.e., that the impact on load flows in the transmission system can exacerbate constraint management and cause wholesale power prices to increase even though the utility is withdrawing less energy from the wholesale market.

          It has been proven mathematically that relieving a constraint in a linear programming problem can increase the cost minimizing objective function. (Unfortunately, I saw that proof over 20 years ago and can’t remember the source.)

          • You are right that it is aDC example and that reactive loads cause additional energy management challenges. When I worked for the utility there was a surcharge for adding capacitance to those facilities that added reactive load. I point this out because your argument is that everyone must pay their fair share, on which I agree, and those running a reactive load should pay a surcharge for it.

            The reason for the proof is that rooftop solar produces retail power, that is, that not only is the utility relieved of paying the wholesale price for the electricity but this also relieved of paying line loss costs.

            Again, it is my contention, that everyone pay their fair share of the infrastructure cost and after that is paid they would pay for the energy they use which would be the wholesale price plus a small markup.

            Also, prosumers should be allowed to compete in the energy Market. And if there is overproduction, they should have to pay for that overproduction. Thus, when there is an overproduction prosumers will want to shut off their solar.

  3. Your calculations are seriously flawed and uninformed, particularly for someone who claims to research energy markets.

    The CPUC has approved and the utilities have implemented a grid charge. On my bill is “Breakdown of Electric Charges” which notes transmission and distribution charges. These amount to nearly 80% of my $25.

    Here is a link to a proof (not a back-of-envelope calculation) that rooftop solar generates Retail Energy. https://docs.google.com/document/d/1s0uLXdQLjhN7ICmjJfYLC8l8mQ6W8lz6AeodmxgQ67E/edit?usp=drivesdk.

    I really don’t understand why you and your ilk have such a thing against solar energy. People that put up solar on their roofs are only following the dictates of Adam Smith and at the same time doing something socially conscionable. They are installing infrastructure that the utilities refuse to install.

    Barring the tariffs and excluding subsidies, solar panels solar are more economic than fossil fuel and without the environmental problems. ( recently a company that installs solar underbid a fossil fuel plant project in Mexico)

    Please, this is not a rhetorical question. I would like to understand why you hold your position?

    • I read the Pingback: Solar cost shifting fight flares up – The Quad Report.

      This added nothing to the discussion, particularly as it references this discussion.

  4. Jim Lazar,

    Your comment regarding subsidizing “infant industries” is well taken. However, it is debatable whether the solar PV industry is still an infant. Costs have fallen to the point where large-scale solar is approaching parity with fossil generation, at least during the daylight hours when the value of energy is high.

    Your following comments contain some serious flaws.

    Firstly, you compare the contract cost of large-scale solar with (presumably the levelized) cost of coal-fired and natural gas-fired plants. This is an invalid comparison because fossil-fueled plants can produce energy on a 24/7 basis, whereas intermittent resources (e.g., solar and wind) cannot. The appropriate comparison is between the intermittent resource plus sufficient storage to support the sustained delivery of base load energy. Given today’s high cost of storage intermittent resources are not economically viable sources of base load energy. Moving to 100 percent renewable energy is not economically attractive today or in the foreseeable future.

    Your second error – and it’s a biggie – is your claim that depressing wholesale market prices by flooding the market with subsidized solar energy produces a societal benefit. Any competent (and honest) economist will tell you that this is not true. If you believe that depressing market prices through subsidies is good idea then you must also believe that subsidizing nuclear power is also a good idea as it would produce similar price reductions.

    DRIPE (Demand Response Induced Price Effect), is a terrible idea, as I discussed in The Electricity Journal (“Paying for Demand-Side Response at the Wholesale Level: The Small Consumers’ Perspective”). What DRIPE conveniently ignores is that price reductions simply transfer wealth from producers to consumers. Robbing Peter to pay Paul is not a societal benefit.
    If suppliers cannot recover their long-run marginal costs of production they will retire their assets. Those assets will not be replaced until market prices rise to at least equal the long-run costs of new entry. Thus, the benefits consumers enjoy are only temporary and will end once new capacity is needed. Furthermore, if the subsidies continue after new capacity is needed consumers will be forced to fully bear the cost of those subsidies. What will it take to convince people that DRIPE is a bogus argument?

    You appropriately raise the question of whether large-scale solar is truly cheaper than residential solar. However, given that the capital cost of residential solar is about twice that of large-scale solar, residential solar has a huge disadvantage to overcome. My calculations suggest that the avoidance of distribution losses and distribution investments do not come anywhere close to eliminating that disadvantage.

    Lastly, I agree that we should consider more than lost utility margin when evaluating the practice of net metering. I did this in two studies. One is a detailed analysis of residential solar in the SCE service area while the another examines the total subsidies that flowed to residential solar in 15 different states, starting in 2015. See:

    http://www.edisonfoundation.net/iei/publications/Documents/IEI_NEM_Subsidy_Issues_FINAL.pdf

    http://consumerenergyalliance.org/cms/wp-content/uploads/2016/09/Solar-incentive-report-FINAL.pdf.

    Both studies found that net metering is an inefficient way to compensate customers for the solar energy they produce because it almost never reflects the costs that energy allows the utility to avoid.

    Incidentally, what is generally not appreciated is that a number of states provide substantial subsidies for residential solar that eclipse that provided by the 30 percent federal tax credit – so much so that the total subsidies the customers will receive over the lives of their solar facilities often exceed what they invested in those facilities. Talk about gravy trains!

    • This is an invalid comparison because fossil-fueled plants can produce energy on a 24/7 basis, whereas intermittent resources (e.g., solar and wind) cannot. The appropriate comparison is between the intermittent resource plus sufficient storage to support the sustained delivery of base load energy.

      Some wind resources, at scale, are not intermittent.

      Who or what backs up a big nuclear power station when it goes offline, as they sometimes do? Peaking gas plants. Why is okay for a big, single-point “baseload” plant to be intermittent and need an answer but not a comparable number of wind turbines, say 800 of them? Sure, some of them will see variable generation, but not all.

      • Obviously, every generating plant, regardless of the underlying technology, involves the risk of suffering a forced outage at any arbitrary point in time. It is all a matter of how much risk. Nuclear plants typically have capacity value approaching 90 percent of their installed capacities. In contrast, the capacity value of solar facilities rarely exceed 40 percent, and that applies to those that are optimally located in sunny regions like Tucson Arizona. Nuclear or fossil plants have never been considered to be intermittent resources for good reason.

        • You are comparing point capacity factors of large central plants with capacity factors of much smaller ones: Apples and oranges. Compare the average capacity factor of a comparable amount of solar and wind generation. Oh, and unlike nuclear capital costs of solar and wind are so low in contrast to nuclear that they can be overbuilt to offset low capacity factors: If capacity factor f build 1/f as much wind generation, for instance. This works because generation can be arranged to be spatially decorrelated.

  5. Here is a few dollars in rooftop solar benefits you forgot to include in your calculation:

    By Frank Andorka, Senior Correspondent

    What Happened:Thanks in part to solar penetration in Pacific Gas & Electric (PG&E) and San Diego Gas & Electric (SDG&E) territories, the California Independent System Operator (CAISO) proposed canceling $2.6 billion in transmission projects.

    The 39 cancelled projects in the two utilities’ service areas include transmission projects rendered unnecessary in part because of solar’s increased penetration in those areas.

    • Obviously solar facilities can allow a utility to defer transmission projects. But this depends on each specific situation and require detailed load flow studies to make those determinations. However, this benefit is not limited to residential rooftop solar; large-scale solar can produce identical benefits.

      • While there are tradeoffs large scale solar vs residential PV does not use existing surface area nor leverage otherwise inaccessible private capital to put kW generation out there.

      • Robert,
        No, the point of the CAISO study is that it was the deferred utility-scale solar projects that led to the cancellation of many of these transmission projects in the first place. So utility-scale solar that uses transmission cannot provide the transmission-avoidance benefits of rooftop solar.

  6. Fact is you’re not paying for your neighbor’s solar panels. You are paying for your inability to leverage capital and use the discretion of choice to afford a competitive framework on the electrons delivered to you. Why should your neighbor pay for an overburdensome regulated framework that you subscribe to?

    • Say what?

      Your comment reminds me of an owner of a small consulting firm. When I pointed out to him that he was unfairly exploiting his employees his response was something like, “any person that allows me to exploit him deserves to be exploited!” Such a mensch!

  7. Lucas, thanks to you, Severin Borenstein, Catherine Wolfram, and others at Haas for putting hard, objective numbers to what should be obvious (though as Galileo found out, in the face of religious opposition it doesn’t always help). You write

    “Why should I be paying more for their rooftop solar, particularly given that grid-scale renewables are so much cheaper?”

    What many Californians are saying:

    “Why should we be paying for new grid-scale renewables when keeping Diablo Canyon Power Plant in service would be so much cheaper?”

    The assumption here is that Diablo Canyon will be replaced by grid-scale renewables, when there’s no commitment whatsoever by CPUC to make it happen. In a 2015 analysis of the closure of San Onofre Nuclear Generating Station (SONGS), you foretold what we face instead – higher electricity prices, 9MT of additional CO2 emissions, and a green light for corruption:

    “Using a novel econometric approach, we show that the lost generation from SONGS was met largely by increased in-state natural gas generation. In the twelve months following the closure, natural gas generation costs increased by $350 million. The closure also created binding transmission constraints, causing short-run inefficiencies and potentially making it more profitable for certain plants to act non-competitively.”

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