Are solar incentives a subsidy for the rich?
The following is a guest essay by Tom Konrad, a financial analyst specializing in renewable energy and energy efficiency companies, a freelance writer, and a contributor to AltEnergyStocks.com.
One of the most common arguments against incentives to help people buy solar panels for their homes is that they are a subsidy for the rich, paid for by everyone. The argument is that only the rich can buy a photovoltaic system, which, even with subsidies, costs thousands of dollars. Why should everyone chip in to help rich people buy new toys?
On the surface, this argument is persuasive. Why should everyone pay if only the rich get the benefit?
Basic fairness dictates that society should only subsidize activities which create societal (rather than individual) benefit. On closer examination, however, we see that the bulk of the benefit for solar goes to society rather than the homeowner/installer.
Let’s look at the benefits of a photovoltaic system. Numbers are for a 4-kW system, installed for $8 per peak watt with the rebates currently available in to me in Colorado, plus the federal tax credit.
The owner gets …
- Electricity for free. (This amounts to approximately 7,000 kWh/year, worth $630 annually at current prices, but rising in value with inflation. Production is subject to 1 percent per year annual degradation.)
- Cost of $12,000 after rebate and tax credit.
- An increase in property value, depending on the market. I’ll assume half the net cost of the system — I’ve seen estimates as high as the full cost of the system (from solar installers) and as low as zero or even negative for unsightly installations. So I’ll say this is worth about $6,000, but only if the home is sold.
- Maintenance costs, which I’ll assume to be 0.5 percent per year of the installation cost after the first year. (At the very least, the inverter needs to be replaced after 10 to 15 years, and the panels need to be kept clean.)
- A positive net cash flow, assuming no maintenance. If the homeowner sells the home in 10 years, electricity prices go up 10 percent per year, and the cost of funds is 7 percent, then the present value of the panels is $8,457, which includes the present value of the $6,000 property value increase. Many people do this calculation assuming no maintenance. I consider that unrealistic, but for the sake of argument, the net present value of these cash flows would be $9,431 if there were no maintenance costs.
- The feel-good factor and bragging rights. For the homeowner to break even on the deal, these bragging rights and feel-good factor would have to be worth over $3,500.
Society gets …
- Lower peak electricity demand, allowing delayed construction of new power plants. Solar typically produces well on sunny summer days, which is precisely when the power is needed most to run air conditioning.
- Reduced need to build new transmission and distribution.
- Local industry and job growth, because the money is spent locally. The value of this will depend on how much of the system is manufactured locally, but installation (about 50 percent of the cost) is almost certain to be local.
- Advances in PV manufacture, lowering future prices for everyone else.
- Less water use in power generation. Natural gas-fired generation uses up to 180 gal/MWh of generation, with coal generation using 300 to 500 gal/MWh, and nuclear using between 400 and 720 gal/MWh, according to EPRI [PDF]. Using 400 gal/MWh, our sample system will save 2,600 gallons of water per year (assuming 200 gallons are used for cleaning).
- Lower emissions of global warming pollution — about 4.2 tons of CO2 per year, worth about $2,000 with prices at $20/ton, a 10 percent annual price inflation, and a 7 percent discount rate for the life of the system.
- Lower conventional pollution, including reduced SOx, NOx, mercury, and particulates.
- Lower fossil fuel prices due to lower demand for electricity generation (a tiny incremental change, but spread over everyone’s fuel purchases). I estimate this to be approximately one-third of the saved fuel costs, as it was for the New York Energy $mart Program, or a present value of $2,100 over the system life, using the same assumptions as above, except that society retains the benefits so long as the system is producing.
- A household becoming more aware of how they use energy.
- A bill for $20,000.
The calculations for the net benefit to society are much more difficult than the net benefit to the system owner. But as you can see, the system owner is not getting a bargain.
The question for society is not “Is the system owner living it up at our expense?” Paying $3,500 for bragging rights and feel-good factor seems far from a bargain to me (but then I like bragging about how much money I save, not how much I spend). The question we need to ask ourselves regarding these sorts of subsidies is, are we getting $20,000 worth of value for our part of the bargain?
The $20,000 cost is spread over large numbers of people, as are the benefits. I used to think that the $20,000 price tag for society wasn’t worth it. While all the factors listed are worth something, I found it hard to believe that they were worth $20,000, especially if that $20,000 could have been used to subsidize energy efficiency measures which could easily save 10 times as much energy as the PV system, and hence produce 10 times the environmental benefit.
That was before I understood the implications of Societal Benefit No. 9: a greater awareness of energy. Unfortunately, most energy efficiency measures lack the visceral impact to get people excited about energy (although real-time, indoor smart meters have the potential to do so.) I personally became interested in energy when my stepfather installed a (subsidized) solar hot water system on our house in the early ’80s. Now my job is advancing the cause of clean energy by increasing the knowledge of investors.
With cost-effective energy efficiency measures, a subsidy can easily be justified based on societal benefits. For solar PV, environmental and economic benefits may or may not be sufficient justification. But people who generate their own electricity become much more aware of how they use it. Awareness of how we use energy is the first step to using (and helping others to use) energy wisely. Better yet, the rich are more influential than the poor in our political process, which means that raising the awareness of the rich can have a multiplier effect through political impact.
Photovoltaics may not yet be a great investment for homeowners, but homeowners’ awareness of how they use energy is a great investment for the rest of us.