Do Residential Solar Power Subsidies Mainly Benefit the 1%?

The NY Times tells a story  about a “green death spiral” for the subset of electric utilities who pay solar households retail rates per unit of power the solar households sell back to the grid.    The utilities are concerned that as more households sign up for solar panels and generate their own power and then sell their surplus power back to the grid at retail prices that  there are fewer non-solar households who will pay for the fixed cost of the the grid and basic transmission infrastructure and for the total cost of the solar subsidies.  This means that the non-solar households will be charged more for power (average fixed cost rises). So, solar power offers social benefits of 0 GHG emissions but it is also transferring money from households who live in multifamily buildings (i.e renters) to home owners who opt to have solar panels installed.

Who are the solar households who have taken advantage of government incentives to “go green”?    In my 2012 paper using data from the City of San Diego,  we documented that more educated households were more likely to have residential solar panels.  We also document political differences between who installs solar panels.  Can you guess which political party member has a higher probability of installing them?    It would interest me if in other states such as Arizona whether this finding also holds.  Are there other sunny places where a more representative slice of America installs the panels?  As the upfront costs of installing panels declines thanks to market competition, and new financing models such as leasing the panels, hopefully this will be the case but this is an empirical question.  Right now, this policy appears to be reducing our GHG emissions and raising energy prices for the poor and middle class.

Author: Matthew E. Kahn

Professor of Economics at UCLA.

29 thoughts on “Do Residential Solar Power Subsidies Mainly Benefit the 1%?”

  1. I have two friends in the UK who gone green, one with solar panels and one with a wind turbine. Both are well-off, both got a generous subsidy and will hit their break point of full return on investment quickly.

    This is paid for by a 6% tax on everyone else who uses old line electricity, so it’s reducing greenhouses gasses at the price of promoting economic inequality.

  2. Matthew, I’m interested in your observation, and I’m very interested to see whether it’s a nationwide pattern, but I’m puzzled by your last sentence, specifically the introductory clause: “As the upfront costs of installing panels declines thanks to leasing options and new financing models,…”

    Yes, those financing considerations may show marginal improvement. But the big factor in any emerging technology is that the cost drops dramatically as the product gains wider markets. Automobiles a century ago, TVs two generations ago, cell phones a generation ago, … the pattern is always the same. Dramatic drop in cost feeds the demand function much more than better financing options.

    Now, having said that, I’m still concerned about your main observation on the relationship between the sell-back rule and the resulting impact on utility prices. It would be particularly ironic if a big expansion of solar-at-the-house leads to a big expansion in the sell-back of excess generation-at-the-house, which in turn leads to a big hike in the price the power company has to charge its other customers.

    At this point, I haven’t the faintest notion what other market and/or political forces might come into play, but I’m sure the question(s) once again illustrate a fundamental rule: the “real world” is a mighty complicated place.

    1. If the technologies are given a fair test, the ones that work will in due time prevail, and the politics will sort out. It helps that the technologies are being deployed in many countries with different tax, subsidy and regulatory schemes; misbegotten government policy in one place is unlikely to derail a promising technology. It is likely, of course, that there are technological developments just over the horizon that will moot out at least parts of today’s debates. The current policy issues are certainly important and worthy of attention — real money is at stake — but they need to be kept in context.

    2. “Yes, those financing considerations may show marginal improvement. But the big factor in any emerging technology is that the cost drops dramatically as the product gains wider markets. Automobiles a century ago, TVs two generations ago, cell phones a generation ago, … the pattern is always the same. Dramatic drop in cost feeds the demand function much more than better financing options.”

      I don’t know if Matthew specifically made this argument, but it’s certainly a common right-wing argument, that the rich elites Job Producers subsidize the rest of us on new tech by selflessly buying it when it’s new, limited and expensive.

  4. The class correlation does not apparently apply in Australia. The same source reports that the mean income of solar households in the US is now $57,000.

    In any case the rapid fall in solar costs and the emergence of solar leasing are rapidly democratising this industry. And republicanising it too, as in the famed Georgia Tea Party revolt against the monopoly utility.

    Early adopters of anything are bound to be culturally different and predominantly well off. It is true that non-adopters are increasingly disadvantaged, as has happened with automobiles and telephones. However, the cost of electricity is low enough, and its availability sufficiently near universal, for this inequality to count very little in the overall Gini picture. This omelette must be made.

    1. I am sceptical James — there is no reason why the UK needs to finance the subsidies through a 6% tax on the electricity of everyone who can’t afford the start-up costs of the technology. It could come out of a common pot into which everyone pays (including those wealthy enough to install).

      1. Funding renewable FITs through general taxation got Spain into its current energy policy mess. Funding them through a visible surcharge on all grid consumers (including the solar households and firms who don’t cover all their own consumption, i.e. all of them) has proved politically and financially sustainable in Germany, and now in Britain. That’s apart from the German exemptions for “heavy, export-dependent” industry, now including several municipal tram companies. You can deal with energy poverty by more targeted measures.

      2. Think of it as a sin tax. Users of conventional electricity are benefiting from a wide range of externalities.

    2. ” The same source reports that the mean income of solar households in the US is now $57,000.”

      That’s very low; media should be somewhere around $50,000, and the mean is skewed up by the long upper tail.

  5. PS: “The utilities are concerned that as more households sign up for solar panels and generate their own power and then sell their surplus power back to the grid at retail prices that there are fewer non-solar households who will pay for the fixed cost of the the grid and basic transmission infrastructure and for the total cost of the solar subsidies.”

    No they are not. What they are concerned about in facing distributed competition is losing control of the grid and stranding their obsolete generating assets. The social talking point is a stalking horse, aimed to kill net metering. The social issue is one for public policy. It would be entirely feasible to subsidize the electricity consumption of low-income renters; funny how their pain has just been discovered.

    Paying for grid integration is another legitimate concern. It is very difficult to assess the value of distributed solar fairly, including benefits (reduced transmission, better match to the diurnal load curve, diversity and security of supply) as well as costs (weather-driven fluctuations, backup for nights and rainy days, grid complexity). We can be certain that the generating utilities are not the people to do it.

  6. This is kind of a ‘no duh!’ issue: even with subsidies, going solar on a single-family dwelling requires a) you own the single-family dwelling in the first place, and be) have either the cash on hand or the income to support a loan to make it happen, on top of whatever loan you have on the house.

    Poorer households cannot come up with the requisite capital to fund this.

    This is what’s happening in Arizona:

    http://www.azfamily.com/news/APS-seeks-to-charge-new-solar-customers-more-215759191.html

    Of course, this is going before a Corporation Commission dominated by Republicans who hate the dirty smelly hippies and their dirty smelly solar power. (seriously. There are members who want to declare nuclear power as ‘renewable’)

    This, of course a nonsensical price, because non-solar customers come nowhere near meeting that cost after purchasing the energy from the utility.

    If the utility wants to do this, they should break out their charges into energy costs and grid maintenance, and charge everyone connected to the grid the same grid maintenance charges, which would lower the costs a great deal.

    This $50-$100/month charge is punitively designed to reduce the number of people installing household solar in the hopes of retaining more profits by the utility.

    1. Very much the same story in Spain, where the government, pushed by the utilities, has proposed a punitive “backup fee” on self-consumed solar electricity of over 6€c a kwh.

      This is turning into a bare-knuckle fight in many places. Nothing the utilities say about home solar should be taken at face value.

    2. “There are members who want to declare nuclear power as ‘renewable’”

      Quite reasonably so, given that the identified terrestrial sources of fuel would last longer than our species has existed, and fissile elements are extractable from seawater with a decent EROI, and replenished as fast as we could extract them by weathering into rivers. Which isn’t going to stop until plate tectonics do.

      So, about as renewable as you could ask. Even solar goes bye-bye when the Sun goes dark.

      What’s absurd is that some want to declare nuclear NOT “low carbon”.

        1. OTEC isn’t renewable; it’s mining the low temperature of water at the bottom of the ocean. And of all the scary things to do, dramatically increasing convection from the ocean surface to the ocean depths is pretty high up there for me. My understanding is that we really don’t understand what drives ocean circulatory patterns and at least some people believe them to be metastable. Accidentally stopping the gulf stream would be bad news on the scale of global sea level rise.

  7. To expand on what James said: Money is fungible.

    If a solar feed-in tariff is good environmental policy - I’m skeptical, but it might be justified based for the first few years based on learning-curve arguments - and if it also has undesirable distributive effects, then do something else that redistributes in the right direction as an offset.

    I’m always half-amused and half-outraged when people who oppose aggressive income equalization when the argument is about marginal income tax rates or Food Stamps suddenly get religion on the distribution question when the can label a feed-in tariff or an alcohol tax increase as “regressive.” What matters is the distributional outcome of all tax, transfer, service, and regulatory policies combined, not whether some piddly program with an epsilon effect on the Gini coefficient happens to have an effect of +ϵ or -ϵ.

  8. BTW, the answer to Matt’s question in the post title is “No”.

    At the end of 2012, there were 271,000 solar installations in the USA, almost all (by number) residential. By now it must be over 300,000. The total number of households was 117 million in 2010, and grows slowly. So it’s impossible for the top 1% of households by income or wealth to have more than around 40% of the installations. [Update: mistake from not counting zeroes right] [Update: for the top 1% to have a solid majority - say 60% - of the installations, or 180,000, they would need to have a propensity to instal of 15%, against 1% for everybody else; 15 times higher. But this is incredible.] Do that many of the mansions in the Hamptons or Beverly Hills really have solar? So its a priori nearly impossible for residential solar subsidies to flow mainly to the 1%.

    This argument does not apply to the PTCs for utility-scale solar and wind. Like all such tax breaks, it is a subsidy to those in the highest tax brackets. Privileged access to such higher-yield investments is another reason why rich greens might well bypass solar roof panels, a lot of bother for a lower yield in financial and carbon terms.

    1. Do Residential Solar Power Subsidies Mainly Benefit the 1%?

      The question was never intended as anything other than concern trolling.

  9. I’ve got a solar spread in Lawn Guyland. They charge me a bit over ten bucks a month for the privilege of net metering. See? The grid sustainability problem is easy to solve!

    There is a very similar issue in the land of banking. “Free” checking accounts pay for a system that has a complex mixture of fixed and variable costs. Unfortunately, banks-unlike distribution utilities-actually compete. Therefore, the pricing system that supports this cost structure is absolutely insane, with ghastly distributional consequences.

  10. The who pays for solar question is an important one-although it should be kept in mind that we are all paying for the very slow rollout of roof top solar in pollution and other costs of the legacy generation and distribution system.

    The interest of the power monopoly is different from that of power users (surprize!).

    Los Angele’s 2009 Proposition B is instructive. http://ballotpedia.org/wiki/index.php/City_of_Los_Angeles_Solar_Panels,_Proposition_B_%28March_2009%29 In that Prop the DWP unions tried to make it illegal for anyone other than their members to install or work on solar installations. In other words, no independents or outsiders or even homeowners putting in panels on their own roofs. They, in an amazing display of clout, even got the Sierra Club to support the Prop. Fortunately, the measure was defeated by the voters-as was the DWP union candidate (Gruel) in the recent election for mayor.

    The whole protect the distribution network is very similar to the old AT&T’s long fight (before it was broken up thirty odd years ago) to “protect” the telephone network from the “harm” which use of non AT&T equipment by requiring that “protective” (and very costly) couplers be used whenever outside equipment was used. This made it impractical and very costly to say, buy your own ‘phones or answering machines. Instead, the consumer was forced to use inferior AT&T equipment at high profits to the monopoly.

    Gotta wonder what’s going to happen when, in the near future, cheap power storage is available onsite for homeowner to save up their home generated solar for night time use.

  11. Objection to the word “subsidy” in the headline.

    Net metering is not a subsidy, it’s a fair price for electricity that is produced on my roof (or would be, if I could finance the $50K installation). There’s no justification for the utility to buy my kwh wholesale in the morning, and sell it back to me at retail the same evening. They haven’t added any value. Just the opposite: I’ve given them a kilowatt-hour during peak hours, and they’ve given it back during off-peak hours when it’s less valuable. Furthermore, if enough of us generate our own power, the power company saves money by avoiding the expense of new power plant construction—which savings, I cynically imagine, are NOT going to be passed on to the non-solar customers.

    1. I agree with Don here. I pay SDG&E a fixed fee every month to be connected to the grid (though I have no idea how it compares to the cost that is implicit in regular rates) plus the credit that I receive for my excess kwh is a VERY small percentage of the regular rates (I can’t recall off the top of my head but when I looked at my bills when I first installed my panels, I recall being surprised at how much less the rate was compared to what I would be paying if I were to buy the same units of electricity). And that it ignoring the fact that I am ‘selling’ my excess back to the utility during peak hours. I find it hard to believe that this model is a loser for the utility.

    2. FITs too are not necessarily subsidized, as Mark implied. The German residential FIT for solar is two-thirds of the retail consumption rate; the FIT for onshore wind is near wholesale. The long-term price guarantee is of course an incentive the private market can´t match - like the low cost of government borrowing, but we don´t call that a subsidy.

  12. I actually have had a solar array on my roof for about 4.5 years. Here are some things I’ve seen:
    1) The utility bills power a three distinct tariffs, one of which is a connection charge (not solar specific) so I get hit with a fixed fee of about $12 per month even if I buy no power. The second tariff is transmission cost that varies with usage and finally the rate for the power production. Two of those tariffs are use based and all tariffs are regulated.
    2) Despite the “headline” drop in solar panel costs, a residential user pays a total project cost; any reduced costs are going into the installer pockets.
    3) Solar RECs values have dropped off a cliff.
    4) I could drive 5 miles one way, and 20 more miles and confront two completely different sets of rules and subsidies in the same state.
    5) Solar panels don’t particularly like very hot weather. Power production at 60 or 70 degrees F drops by about 20-30 percent as temperatures head northward. So there’s a trade-off for the extra sun time, if a lot of months are hotter than hell. Also, the very hot locations face higher cooling costs. ( In Arizona, if one has the water, a swamp cooler is cheaper than AC).
    6) As to the one percent being over-represented, no surprise. In a lot of locales, a solar project is still a fairly complex undertaking, and in my experience, the buyer has to absorb the upfront costs, and wait out the months and perhaps years to get the initial subsidies.

  13. Obviously folks who install PV arrays are going to skew wealthier than average. Homeowners skew wealthier than average. People with, say, $10k lying around with which to fund the system are wealthier than average.

    Our PV array is 1 year old. We paid 42% of the gross cost (more than that out of pocket, but we got the federal tax credit back later) of the system. It’s a big system (9.7kW), so that 42% is still a lot of money. The system was designed to produce ~100% of our power over the course of the year. So far, it’s nearly done that (7/29/12 to 7/29/13: 10,332 kWh produced, 10,988 kWh consumed. That’s 94%). Breakeven looks to be 10-11 years (9-10 from now). I obviously don’t know yet if this past year is/will be typical, or if there was enough wacky weather to throw things off (seems to me our dry, sunny April and cloudy July probably cancelled each other out).

    We pay CL&P a grid connection fee of $16/month.

  14. All this reminds me of a cartoon that appeared a few years ago in The New Yorker. This really affluent couple is sitting in a high-class restaurant and the wife says to the husband, “Frankly, they’ve been perfectly insufferable since they went solar.”

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