On the Economic Viability of Solar Power
I have been reading and thinking a lot about the economic viability of solar panel. This post contains some background on the industry and my thoughts on where I believe events are leading us.
Background: The cost of solar power has fallen and its use has risen in some areas of the world.
Germany remains the leader in the use of solar power where around 7 percent of electricity is obtained from solar units.
By contrast, in the United States solar power accounts for roughly 0.46% of all electricity use.
There is great variability across states solar power capacity in the United States. Data on total per capita solar capacity for 26 U.S. states sorted by per capita capacity was presented in line below
Arizona led the list with per capita capacity of 166.9. Hawaii was second at 136.5
Florida, Texas and Georgia states where solar power should be viable based on climate had per capita capacity of 5.8, 5.3 and 2.3 respectively.
Issues related to the use of solar power in Hawaii were highlighted in a recent New York Times article.
A substantial portion of the solar power generated in Hawaii is from homeowner who have added panels to the roofs of their homes and who sell excess energy to the utility. Solar adversely impacts utilities in two ways – (1) by reducing revenue and (2) by increasing costs associated with reclaiming power. Utilities in Hawaii stopped accepting energy from new homes with solar panels. The state regulator recently ordered the utility to accept all customers. Utilities are also pressing for fees applied to residences with solar panels to pay for the infrastructure needed to accept the new energy
Comments on Factors Impacting the
Growth of Solar Power
Comment One: Utilities claim they should be able to charge homeowners for the costs associated with accepting power generated from solar panels on roofs. Utilities also want to be able to refuse to accept this power. Tesla appears to be very close to the announcement of a new battery that will effectively store energy and allow many homeowners with solar power to leave the grid.
Comment Two: Energy storage costs could be further reduced if homeowners share the costs of the battery purchase. An independent firm that owned a battery storage unit could store excess energy for a group of homeowners for a fee. Alternatively, it may make economic sense for homeowner in adjoining houses to share the cost of the battery purchase.
Comment Three: One way to fund battery storage projects would be through the PACE program. The PACE program allows companies to fund environmental projects by issuing bonds that are backed by assessments on homeowners. Under this program a community could fund the purchase of batteries that stored excess energy from all solar panels in the industry. Unfortunately (from my perspective) the Federal Housing Finance Administration ruled that mortgages issued in communities with PACE loans would not be eligible for Fannie Mae or Freddie Mac loan guarantees. This ruling killed the PACE program given the dominance of Freddie Mac and Fannie Mae in the mortgage market.
My thoughts on the FHFA decision on the PACE program are presented below.
Comment Four: It is apparent that the cost of solar power generated from roof top panels has fallen. However, I am not sure that a properly done cost benefit analysis would motivate me to purchase a solar system at this time. The primary reason for my caution is uncertainty about costs of keeping the system in working order and the likely usable life of the system. Maintenance costs could overwhelm the potential savings from the system if say hail breaks panels. Also forecasted savings might not be realized if the usable life of the system is shorter than expected.
Comment Five: Gains from the sale of solar systems could be very large if the homeowner with the solar panel also owned an electric vehicle or was able to charge EV car owners for electricity generated from the Solar panel.
Comment Six: One way to take advantage of solar power without incurring the costs of putting solar panels on your roof is through solar sharing program. Under a solar sharing program, people buy a share in a company that builds a solar generation unit in exchange for a reduction in their utility bill. See details of Solar sharing programs below.
Utilities would still lose revenue from the growth of solar sharing programs. However, solar sharing does not force utilities to purchase excess energy.
Comment Seven: A number of factors influence the state supply of solar generation including – 1) weather, 2) rules governing right of homeowner with solar power to sell energy back to the grid, 3) cost of electric utility bills, and 4) state-level subsidies.
The high level of solar use in Hawaii is due to two factors the weather and the high utility costs.
Solar energy has received preferential regulatory and tax treatment in some northeastern states like New Jersey and New York but the use of solar panel in these states is limited due to weather and strong utilities.
Based on weather you would expect strong solar sales in Texas, North Carolina, Georgia and Florida. Sales of solar in these states have been reduced by other factors including resistance by utilities.
Comment Eight: A 30 percent federal tax credit for solar projects on commercial or residential projects currently exists. The residential tax credit is scheduled to retire in 2016. The commercial tax credit is scheduled to fall to 10 percent in 2016.
Tax issues are often arcane.
Not all fuel reduction equipment qualifies for credits so people have to check that equipment is certified.
Many of the people who receive the residential tax credit pay the alternative minimum tax and will lose a portion of the tax credit. The impact of the AMT on the value of credits can be substantial.
In some cases, the commercial organization that builds the solar project does not have taxable income to take advantage of the credit. A separate investor might be able to fund the project and utilize the credit.
Comment Nine: Some companies have created demand side management programs (DSM), which provide a financial incentive to move electricity consumption from peak hours when it is very expensive to off-peak hours when it is cheap. Solar power, since it is plentiful during the hot periods of the day, also serves to reduce peak demand. Solar power with battery storage would reduce both peak demand and off-peak demand. See the following article on demand side management programs.
A quick search on the web revealed several dated articles on DSM program. It appears as though utility enthusiasm for these programs varies greatly.
Improvements in technology are increasing the viability of solar energy but there is a lot of opposition from utilities. In the United States, political support for solar power varies across states and the political environment appears correlated with the growth of solar power.
Elon Musk may have a large impact on solar through two channels. The Tesla battery may allow homeowners with solar to leave the grid. The electric vehicle will stimulate demand for solar panels on home by fueling cars at no additional cost.
The growth of cooperative groups that share energy from a common solar grid or share the costs of energy storage would stimulate the sale of solar power, especially in situations where utilities are not purchasing excess power or are imposing additional fees.