Pricing Solar Power
When we see solar panels on a roof, we are inclined to think well of an owner "doing the right thing." On further reflection, we may think about tax incentives inspiring constructive change. But it's nowhere near that simple.
Solar panels generate power in daylight -- but this generation does not necessarily track a family's power needs. Darkness or a spike in power usage can force the homeowner to buy supplemental power from the public utility. And during the day, solar panels might create some surplus that can be "exported" back to the electric utility, which can resell it to its customers. Typically, a homeowner's solar "exports" can offset the energy consumed on his or her utility bill, and beyond that, any excess power can be sold to the utility. The arrangement is called "net metering."
The capital cost of the solar panels and associated electronics can be substantial and require financing. To help with the initial cost, both state and federal tax regulations award credits to homeowners who install solar-power systems. For a solar project to make economic sense from the homeowner's perspective, the costs he or she incurs should be less than the benefits received from generating solar electricity and selling some back to the utility. But what is the value of electricity?
In some cases, state regulators allow net-metering homeowners to receive a price for their excess power at or near the price that the public utility charges its own retail customers. That may look like a "fair trade," but it's not. The more relevant price for net metering is the amount of money the electric utility saves by using the excess solar energy instead of producing its own energy, or what is referred as the avoided cost.
The avoided cost is normally much smaller than the tariffed, retail price, but it is a better estimate of the utility's actual benefit. When a utility gets solar power from a homeowner, it doesn't have to generate that electricity itself, so it saves the cost of doing so. However, the extra power doesn't affect other consumers' power usage, and thus doesn't affect the utility's total sales. Thus the retail price of the electricity is irrelevant. When the homeowner's solar power is valued above the utility's avoided cost, the homeowner is being overpaid.
Why should we care about the price that the utility pays for a homeowner's extra solar energy? Because any subsidy paid by the utility to the net metering homeowner will put other utility customers on the hook to pay. Is that fair?
A study of net metering done for the California Public Utility Commission found that the avoided cost of power exported to the utilities was $0.12 per kilowatt hour (kWh), yet the bill savings for the solar homeowner was $0.25 per kWh. The study estimated that by 2020, solar exports will cost utility customers in the state $370 million per year, or about 1 percent of the utility’s revenues. If the utility's losses from homeowners' using their own solar electricity are included, the estimate roughly triples.
In states like California, net-metering prices are too generous for solar generators, and they cause electricity prices that are unfairly high for other utility customers. Making matters worse, the study found "the median income of our population of [solar generator] customers is about 68% greater than the median California household income." This means that the utility is being required to subsidize the wealthy at the expense of the less well-off.
The upshot is that state and federal tax credits flow to richer families and net-metering subsidies burden those who can least afford it. Net-metering policies need to get the prices better aligned with avoided costs. Otherwise, the subsidy is essentially welfare for the rich.
That cannot be what consumers want.
Alan Daley is a retired businessman who writes for the American Consumer Institute Center for Citizen Research