High retail electricity prices, not economic value, are driving U.S. investments in rooftop solar.
If you were starting from scratch and could install the United States’ 22,500 MW of rooftop solar anywhere in the country, where would you put it?
One approach would be to put it in sunny states. Using this criterion, Arizona, Nevada, and New Mexico would be particularly good candidates.
Another approach would be to put rooftop solar in places where it offsets coal. Using this criterion, Midwestern states like North Dakota, Minnesota, and Wisconsin would be the most attractive.
So which is it? Mostly in sunny states? Mostly in coal states? A combination of the two?
The answer is none-of-the-above. Sun matters, but it is not the primary factor driving solar installations, and it certainly isn’t coal.
What drives rooftop solar in the United States is retail electricity prices. When you look at where solar is installed, it is all in the places with high retail electricity prices. But those high retail prices do not reflect high avoided costs for the system, or for society, as Severin Borenstein and Jim Bushnell show in a recent paper.
Where is the Solar?
The map below shows rooftop solar capacity by state as of November 2019. This includes all “small-scale” (<1MW) solar installations, including both residential and non-residential, and to make these numbers comparable, I put everything in terms of capacity per capita.
As of 2019, the 22,500 MW of U.S. rooftop solar equates to 0.07 kW per capita. But the variation across states is large – from almost 0.50 kW per capita in Hawaii to less than 0.01 kW throughout most of the Southeast.
By this metric, the top ten states are:
- New Jersey
- Rhode Island
On a per capita basis, Hawaii has twice as much rooftop solar as any other U.S. state. Hawaii is on the bleeding edge of renewables integration, with a goal of 100% renewables by 2045, not to mention great sun.
More surprising is the Northeastern states. Did you really expect Massachusetts to edge out California? I didn’t. Yet six out of the top ten are in the Northeast. These states rank near the bottom of all U.S. states for solar resources, and rely less on coal than most Midwestern states.
But, of course, it is easier to be green when it saves you money. The map below plots average retail electricity prices by state for November 2019. These prices are for all retail customers including residential and non-residential.
Look familiar? The pattern actually looks a lot like the pattern for rooftop solar. Prices don’t explain all of the variation in rooftop solar, but they explain a lot.
Hawaii is again number #1. Most of Hawaii’s electricity comes from oil, so Hawaii has by far the highest retail electricity prices of any U.S. state. It is not a coincidence that the state with the highest prices also has the most rooftop solar.
California? High prices and high levels of solar. Massachusetts? High prices and high levels of solar. Vermont? High prices and high levels of solar. You get the point.
Sometimes Correlation is Causation
I know, I know, correlation is not causation.
This pattern could also reflect “green” policies or tastes. New Jersey (#6), for example, offers 0% sales tax and other state-level incentives for rooftop solar.
Or it could reflect barriers to solar in less green states. For example, Florida and eight other states have restrictions against third-party power purchase agreements, which discourage solar leasing.
But come on! Isn’t it easier to convince yourself to do something good for the planet when it is also good for your bank account?
Too Much Incentive to Go Behind the Meter
This wouldn’t be a problem if retail prices reflected societal costs. But they don’t. In states like California and Massachusetts, the price consumers pay for electricity is much higher than social marginal cost.
This creates too much incentive for rooftop solar. In these states solar is a great private investment — it just is not a great social investment.
Can you really have “too much” rooftop solar? Yes! We’d all like to reduce carbon dioxide emissions, but these resources would go a lot farther if they were instead used for grid-scale renewables.
In these states with high electricity rates, one way to lower the per-kWh price would be to increase monthly fixed charges. This type of rate reform is not a panacea, but it would lower the overpayment for rooftop solar, reduce cost shifting onto non-solar customers, and encourage electrification.
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Suggested citation: Davis, Lucas. “Putting Solar in the All the Wrong Places” Energy Institute Blog, UC Berkeley, February 3, 2020, https://energyathaas.wordpress.com/2020/02/03/putting-solar-in-all-the-wrong-places/
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 a Faculty Affiliate at 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.