Soft Costs are Real Costs
Every energy source has soft costs, some more than others. That doesn’t make them unfair.
Here’s a fun party game next time you are hanging out with distributed generation folks. Ask why rooftop PV costs so much more than grid scale solar. Then watch how long it takes to hear the words “soft costs.” I bet it will come in under 30 seconds.
Every leader in distributed solar says soft costs are the ankle chains on their sales growth. The Solar Energy Industries Association defines soft costs as “the cost of installation labor, the cost of all relevant permits, and all overhead costs including the marketing, sales and administrative costs associated with the system.” Well sure. If all they had to do was buy the panels – the same panels used in grid solar farms – they wouldn’t be at a cost disadvantage. But if all I had to do was buy eggs and flour, I could run the finest and cheapest bakery in the Bay Area.
Soft costs are indeed a serious challenge for behind the meter solar, but not an unfair one if those costs are justified. Distributed PV installers are particularly rankled by permitting, inspection and grid connection costs.
Permitting and inspection, however, raise the cost of every home improvement project, from kitchen renovations to foundation repairs. The requirements are there because they help protect homeowners – and future buyers of those homes – from shoddy or dangerous work. I’m sure that some of the distributed PV regulations are excessive, but I’m also sure that some shoddy and dangerous installations still get done. The question is whether reducing or streamlining government oversight would lower installation cost more than it would raise losses caused by poor quality workmanship.
Grid connection charges cover the cost of the utility distribution company for both the physical infrastructure to safely accommodate solar behind the meter wherever the customer is and the ongoing administrative costs of the billing. PV installers complain that the utilities are slow and inefficient in setting up grid connections, which is surely true in many cases. But even if they were fast and efficient there would still be some grid connection costs. How much lower would they be? I haven’t seen a credible study, but I hope commenters will offer one.
Interestingly, at the same time industry leaders call for less red tape on installing their product, they call for more red tape on new home construction, i.e., mandates to install rooftop solar regardless of the location or design of the house, and regardless of the preferences of the owner. That reduces those pesky “customer acquisition” costs alright, just as it would for sellers of oats if we were all required to have oatmeal for breakfast every day.
Distributed solar advocates point to the much lower cost of residential rooftop PV in other countries, particularly Germany, as documented in this 2014 study. The study makes clear that it is not easy to attribute the difference to exact causes, but it suggests two of the largest drivers are labor costs and customer acquisition.
Still, what really chafes my, uh, behind the meter views is the idea that soft costs are unique to distributed solar. Any developer of grid scale wind or solar will tell you otherwise. Environmental Impact Reports, local zoning and regulation, lawsuits over viewsheds and impacts on property values, etc. As with distributed solar, a lot of these soft costs are sunk long before there is any assurance of a sale.
Next consider the soft costs of connecting those large renewable facilities to the grid. The maze of government entities that have to sign off on any new transmission line, and the exponentially more complex maze if the line crosses state borders. In fact, rooftop PV advocates often make their case against grid-scale renewables by pointing out how long it takes to build transmission for them. Yep, those are some pretty serious soft costs.
Add in the interconnection hassles a developer faces dealing with the transmission and distribution utilities and it’s clear soft costs are a big problem for grid renewables as well. Are they as large per MWh delivered as for rooftop solar? No. Just as with construction, there are economies of scale in soft costs.
And then there’s nuclear power. The same party game works with nuclear advocates. Except they don’t call them soft costs, but rather burdensome regulation. As in, “The reason that that multi-billion dollar plant in South Carolina was abandoned before completion – and that new one in Georgia will be a $30 billion boondoggle – is burdensome government regulation, not that we still don’t know how to build a cost-competitive nuclear power plant.”
The nuke backers then quickly pivot to talking about how safe the technology is, and quoting the impressive data on how few deaths per MWh are attributable to nuclear power compared to fossil energy. True, but isn’t there some connection between all that burdensome safety regulation and the impressive safety record? Just a coincidence?
And would now be a good time to bring up the Price-Anderson Act, the federal government regulation passed in 1957 to partially shield the infant nuclear power industry from liability for catastrophic failures. That not-too-burdensome government regulation is still in effect today, as are practices that shield some nuclear plant operators from decommissioning costs.
So here are the takeaways (as we in the MBA education biz say):
- All the technologies we need to get to zero carbon have soft costs. Just like with hard costs, we need to reduce them through efficiencies and innovation. But soft costs are real costs.
- Government regulation is neither necessarily too onerous, nor necessarily too lax. Done appropriately, it attempts to strike a balance between the costs it imposes and the benefits it generates. So, showing that regulation increases a product’s cost doesn’t make the case that the real cost of the product is lower. You have to demonstrate that reducing regulation would create more savings than costs for society.
- Educating and acquiring customers is part of selling anything, and a bigger part of selling anything in small, distributed units. Sure, these costs can always be reduced if the government forces customers to buy a product, but that authority should be used sparingly, because the government is not likely to really know what customers want. Governments tend toward one-size-fits-all product choices, which both ignore preference heterogeneity and stifle innovation.
- Don’t attend parties with Severin. The games he suggests just annoy the guests.
I still tweet mostly energy news/research/blogs @BorensteinS .
Keep up with Energy Institute blogs, research, and events on Twitter @energyathaas
Suggested citation: Borenstein, Severin. “Soft Costs are Real Costs” Energy Institute Blog, UC Berkeley, September 27, 2021, https://energyathaas.wordpress.com/2021/09/27/soft-costs-are-real-costs/
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Severin Borenstein View All
Severin Borenstein is Professor of the Graduate School in the Economic Analysis and Policy Group at the Haas School of Business and Faculty Director of the Energy Institute at Haas. He received his A.B. from U.C. Berkeley and Ph.D. in Economics from M.I.T. His research focuses on the economics of renewable energy, economic policies for reducing greenhouse gases, and alternative models of retail electricity pricing. Borenstein is also a research associate of the National Bureau of Economic Research in Cambridge, MA. He served on the Board of Governors of the California Power Exchange from 1997 to 2003. During 1999-2000, he was a member of the California Attorney General's Gasoline Price Task Force. In 2012-13, he served on the Emissions Market Assessment Committee, which advised the California Air Resources Board on the operation of California’s Cap and Trade market for greenhouse gases. In 2014, he was appointed to the California Energy Commission’s Petroleum Market Advisory Committee, which he chaired from 2015 until the Committee was dissolved in 2017. From 2015-2020, he served on the Advisory Council of the Bay Area Air Quality Management District. Since 2019, he has been a member of the Governing Board of the California Independent System Operator.
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In light of the political economy of regulation, soft costs are real but not entirely necessary.
The biggest soft cost for residential solar PV in the US is customer acquisition which is a function of the difficulty in selling solar in the US market due to the relatively low cost of grid power. The two most often cited examples of countries with low solar PV residential installation costs, Australia and Germany, also have very high grid power costs. Since selling solar is all about customer payback time, in places with a high cost of grid power, payback times are low, and consequently selling solar is easier. In the US, it is more involved – payback times are longer and so the choice of financing, availability of incentives, choice of technology, all influence the payback time calculation but also make it a more complicated sale. All this drives up customer acquisition costs. We therefore have the paradoxical situation of solar costing relatively more in places where people do want to go solar but the baseline economic incentives are not as attractive. If customers in the US paid for the true cost of grid electricity (with carbon priced in), residential solar would be an easier sell and soft costs would actually go down.
Germany continues to deliver residential solar at half the cost of comparable systems in the US. Over 1 $/kW of US residential installation costs are related to marketing. Finance rates for smaller scale solar installations are ridiculously high, often multiples of home mortgage rates. Your pedantic assertion that “soft costs are real costs” evades the core issue: residential solar is far more expensive than it needs to be. At the same time, you blithely decline to include the incremental costs and reduced system reliability associated with a massive buildout of transmission and distribution to support replacing GW-scale fossil fuel and nuclear plants with GW-scale renewables to aggregate energy before distributing it, with all of the associated complexity and efficiency losses.
Your disingenuous article feels like you just hate the idea of distributed solar, and will throw any excuse you can think of against the wall in hopes that something will stick, whether it makes sense or not. We’re going to need both.
One other point on utility scale “soft costs” is that they accumulate to very large amounts well before projects are de-risked. This difference in the risk of recouping these soft costs may indeed negate many of the scale economies of soft costs in the utility scale business. If you spend $15M on early stage “soft costs” for a 200MW plant that fails your portfolio of say 500MW of remaining projects in that same COD year basically has to support those dead deal costs. Once you’ve spread your dead deal costs across your other MWs they are likely even more comparable to BTM per MW than most people give them credit.
Hey Severin, who isn’t down for a weird new economics party game…but what’s the game? If someone doesn’t bring up “soft costs” in under 30 seconds you lose, but who wins?
“The nuke backers then quickly pivot to talking about how safe the technology is, and quoting the impressive data on how few deaths per MWh are attributable to nuclear power compared to fossil energy. True, but isn’t there some connection between all that burdensome safety regulation and the impressive safety record? Just a coincidence?”
There is indeed a direct connection between U.S. safety regulation and the stellar safety record of U.S. nuclear. No coincidence. I like to point out that Three Mile Island and Fukushima-Daiichi were nearly-identical Loss Of Coolant Accidents (LOCAs); the first instance involved an insignificant release of radiation, the second involved a widespread one. Why? The concrete dome containment structures you see around all U.S. reactors are required by NRC regulations. WIth walls of reinforced concrete 4 feet thick, they are specifically designed to withstand the hydrogen explosions that blew three units at Fukushima wide open.
Notice I didn’t approve of burdensome safety regulation – there’s a difference. In 1989 Shoreham Nuclear Power Plant in New York had been completed and was in final testing when Greenpeace anti-nukes, still trembling in the wake of the Chernobyl accident, came out from under their beds. With coaching from their attorneys and too much opportunity to be heard, they were permitted to read entire magazine articles, one after another, at public hearings. The purpose? By delaying final approval, they were able to drive up costs for Long Island Lighting Company by $1 million/day. Meanwhile, Mario Cuomo and other public figures recognized public fear of the plant could be exploited to win election to state government. As his son Andrew did, with Indian Point.
LILCO eventually gave up fighting Sierra Club, Greenpeace, and the State of New York. After $6 billion was billed to Long Island electricity customers, Shoreham was permanently closed without ever generating one kilowatthour of electricity to the grid.
Interesting historical note: LILCO CEO Anthony F. Earley went on to become CEO of PG&E in 2012. Four years later, with personal experience in attempting to go up against a governor elected on an anti-nuclear platform, he decided to pull the plug on Diablo Canyon.
Whether the best prospect for fighting climate change can triumph over irrational fear – and ambition – remains to be seen.
Good, I feel we’re making some progress here. Now Severin, please muse on the value of power at the fence of a vast solar array somewhere in the southwest desert. The costs of delivering it to mandarins on the coast are also real, particularly the various dangers involved, including fires.
Thanks Chris. I do agree that transmission costs are real costs. Though it is important to distinguish the transmission cost of a new line needed for a solar array from the usage of an existing line and right-of-way once it interconnects to the existing grid, for which the marginal cost might be very low. Isn’t most of the fire danger from a new solar array once it connects to the grid, not in the transmission out of the desert?
The fire danger arises from any electricity transmitted through the distribution system in fire hazard zones where lines are above ground, regardless of its source. The question then is whether having the ability to island load for extended periods can mitigate that risk?
And note that we spread the incremental costs of those desert solar projects into the averaged pancake transmission rates. The calculated incremental transmission costs are $40 to $90 per MWH. (I’ve done a broad calculation and Bill Powers did some for several specific projects.) So we’re hiding the true costs of utility scale solar.
I take your point but we have historically shipped power back and forth between great distances . I’ve seen small experimental trades shipping power from New York to the west coast. California utilities have owned lots of out of state coal plants specifically because the transmission costs were historically lower than the burdensome regulations in California. Again, I take your point but I think it applies more to new transmission than legacy transmission. Additionally, I think it’s safe to say legacy transmission associated with legacy coal plants in the Four Corners and the Pacific Northwest will eventually be opened up for RE projects.
There’s an additional solution to the problem you propose. Hydroelectric power has a tendency to be remote – i.e. Iceland, mountainous locations and other types of locations that are out in the boonies. Hydroelectric projects are generally associated with rivers which means you can often ship things by barges which is cheap. It’s interesting that big hydro projects have often been captive power plants for aluminum and/or iron smelting. If solar or wind got cheap enough I’d expect you’d see captive industrial facilities that produce all manner of things. These types of facilities wouldn’t face big transmission constraints. As an added bonus these types of facilities would pull load off the existing grid which would free up existing transmission. This idea is hypothetical but it’s based on historical examples.
Your suggestion of serving captive industrial facilities is interesting. But that’s a lot like the self generation cogen plants that proliferated 40 years ago with PURPA. It’s not clear why we need a utility to serve this customer–the customer can establish its own microgrid. The only problem is institutional.
We can hope that the retired coal plants can be converted to a different technology such as storage. I don’t know if these plants are in good locations for large solar arrays or wind farms.
Having completed a ground mounted BTM solar PV project at my home last year, I can safely say the soft costs look high, but my guess is that the lack of scale economies in residential retrofits would be the biggest cost driver. It would be interesting to see data on the cost difference between residential retrofits and residential PV installed during original construction. Both soft costs and scale economies should benefit.
Re Price-Anderson Act shielding the nuclear power industry from liability, could you explain more?
It appears to require the commercial nuclear power industry to cover the first $15 billion in costs for any nuclear event. Government could supplement this amount if more funds are needed, or Congress can retroactively increase utility contributions.
I read that carbon capture and storage people would like something similar, but environmentalists tainted the concept for fund raising purposes.
The Fukushima disaster cost an estimated $300 to $400 billion, which dwarfs the $15 billion contribution limit.
First, I suggest attending and following the Rule 21 proceedings on DER interconnections closely. One can see that “regulation” is not necessarily being used to make the situation safer, but rather to impede the progression of the technology by the entities who are both threatened by its expansion and in control of the process.
Second, any familiarity with economic literature on initial choices and nudges/sludges shows that consumers tend to go with the choice that they are presented with first. Inertia, even when wildly suboptimal, is powerful. That’s why we went with employees being placed in 401k plans with the option to opt-out rather than opting in. We have many other efficiency standards in place in housing because consumers simply don’t have the information or the time to delve into the data to make a decision that would lead to the overall societally beneficial choice. If you’re against rooftop solar mandates then you must also be against appliance efficiency standards.
The other difficulty in customer acquisition is facilitating collective buying. Utilities in the U.S. jealously guard their customer information even though they actually only have franchises to serve what is collection municipal customers. Cities, counties and special districts should have ready access to customer data that would allow them to quickly identify groups of customers who may want rooftop systems and allow third parties to market to those customers.
It’s not just Germany where soft costs are so much lower than the U.S. Australia has similar performance as Germany. https://energytransition.org/2013/11/lowering-the-soft-cost-of-solar-pv-1/ Yet, we don’t hear about significant problems in either country with safety or reliability of rooftop systems. If we’re going to impose significant costs on
“If you’re against rooftop solar mandates then you must also be against appliance efficiency standards.”
I’m against rooftop solar mandates, but support appliance efficiency standards (so much for that hypothesis). Here’s why:
“Appliance and equipment efficiency standards…implemented since 1987 saved American consumers $63 billion on their utility bills in 2015 alone, and have helped the United States avoid emissions of 2.6 billion tons of carbon dioxide (CO2), which is equivalent to the annual CO2 emissions from nearly 543 million automobiles.”
Click to access Appliance%20Standards%20Fact%20Sheet%201%2026%202016.pdf
“While fossil fuel prices have been declining and electricity demand has been relatively flat, electricity prices have increased by 56 percent between 2000 and 2018, with the largest increases coming from many of the states that promoted the establishment of wind and solar energy through state subsidies and mandates for their production.”
https://www.instituteforenergyresearch.org/renewable/wind-and-solar-tax-credits/
In any cost-benefit or social-equity comparison with appliance efficiency standards, rooftop solar has a whole lot of catching up to do.