Is There a Rooftop Solar Bubble? And Is It About to Burst?

Rooftop solar in California. (Photo: 4johnny5)

Government efforts to boost affordability and expectations of unsustainably high investment returns generated a booming market that’s destined to crash.

I’m talking, of course, about the market for rooftop solar, which has grown exponentially in recent years.

Most people are aware of the government subsidies that offset 30 percent or more of commercial and residential rooftop solar — more than $10,000 for a typical solar home in California. Less known is that those up-front savings, as big as they are, still aren’t enough to generate the double-digit investment returns that solar promoters promise. In fact, for residential solar panels to pay for themselves over their 20-25 year lifespan, households and businesses must receive a second, hidden subsidy for their solar electricity generation that is far too high to be justified by economic fundamentals, and that cannot be sustained in the long run. In California, some residential solar electricity fetches a price nearly four times its energy value.

Much as the recent housing boom was undone by the sudden stop of seemingly interminable home price appreciation; so, too, will the collapse of rooftop solar follow the fall of residential solar electricity prices to levels that can be justified by the value of energy and environmental benefits that residential generation provides.

The exorbitant prices for residential solar generation aren’t determined in an open market. Instead, they are typically the product of historical electricity rate structures set by regulators and net-metering laws enforced in at least 43 states that obligate utilities to buy residential solar electricity at the same rates they sell electricity to their customers. With net metering, solar households can essentially spin their electric meters backward, subtracting their electricity generation from their electricity consumption—getting paid retail rates for solar electricity they export to the grid.

This would make economic sense if the rates a utility charged its customers for electricity consumption were designed to cover the cost of electricity generation exclusively. But that’s not how it works. Instead, prevailing rates typically bundle charges to cover the costs of maintaining a reliable electric grid and other, regulator-imposed burdens, like energy efficiency investments. So solar customers get paid by the utility for supplying grid services that the utility, in fact, provides at considerable cost, and that they, in fact, consume.

What’s more, residential solar customers often rely on the electric grid more than non-generating customers. They use it as a virtual battery to store their solar electricity that is generated mostly during the day but demanded by the household mostly at night. If they offset their electricity imports from the grid at night with solar electricity exports to the grid during the day, then they pay nothing for the grid, instead shifting the costs to non-generating households generally of lesser means.

The cost shifting from the wealthy to the poor worsens as more people adopt solar technology. With fewer non-generating households across which to spread the fixed costs of the distribution network, electricity rates must rise, which means the subsidy paid for residential solar electricity grows larger.

Recognizing the unsustainability of a bundled rate structure, San Diego Gas and Electric, one of three investor-owned utilities in California, has petitioned state regulators to decouple charges for the network from charges for electricity consumption. With a revenue-neutral network-use charge, the utility proposes to assess a fee per unit of electricity transmitted across the grid either to import electricity from the grid, or export solar electricity to the grid. The network use charge would compel generating households to pay for the storage services they receive from the grid and would effectively lower the price at which the utility is obligated to buy solar electricity from its residential customers.

The utility’s request has gone largely unnoticed in the national press, even though it may mark the beginning of the end of the rooftop solar boom. The move is widely regarded by those in the utility’s greater-San Diego service area as fundamentally altering the economics of home solar installations, with one solar advocacy group claiming the average solar household’s bill would climb $347 per year.

Even with the proposed $0.05/kWh network use charge, residential generators would still receive a subsidy of $0.12/kWh, one and a half times the value of the electricity, according to the utility. And the cost of that subsidy would still be borne by non-generating households who are more likely to lack either the resources with which to purchase solar panels or the rooftops on which to install them.

Residential solar generation should be subsidized because it displaces generation from carbon-emitting sources. But even valuing carbon emission reductions generously at $100 per ton only justifies a $0.05/kWh subsidy for residential solar, not enough to generate a positive return even with the thousands of dollars of installation subsidies. (Distributed solar generation does not appreciably lower the costs of grid operations, adding only 1-2 percent of value to residential solar electricity, according to UC Berkeley energy economist Severin Borenstein). Regardless, the cost of those subsidies should be borne generally by taxpayers, not exclusively by those who don’t own solar homes.

Furthermore, as the high cost of storing energy generated by renewable systems remains one of the greatest challenges to their expansion, it is important that price signals drive investments in storage technologies. Under current rate structures that allow residential solar generators to export and import electricity for free, storage services on the grid are effectively priced at zero. As a consequence, the price signal that should be driving investments in new storage technologies is muted.

If others follow the lead of the utility in the sunniest part of the most solar-aggressive state in the country, then the euphoria over residential solar power may soon subside. But more rational investment in conservation technologies based on prices grounded in fundamental economics would ensue, and a perverse transfer of costs from rich to poor would cease.

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  1. Eliel says:

    My anecdotal understanding (which I would love someone to confirm or deny for me) is that part of the agreement between Public Service Commissions and electricity providers who allow “turning back” meters is that as the companies continue to drive down their own costs for power generation, they are allowed to not pass on those savings to consumers.

    If this is true, are they not being well compensated for allowing the (relatively) small number of solar installations to be over-valued?

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    • Falcon says:

      Solar roofs can help avoid only some generation costs for utilities, not all. Don’t forget that all utilities are obligated by law to provide for all energy needs for customers. For example, utilities still need to satisfy electricity demand for solar customers when we have a raining day, and the solar panels are not generating electricity. So even if many customers install solar roofs, it still does not mean utilities can avoid building new generation facilities.

      Also, the largest cost components for utilities are the distribution and transmission networks and facilities, which can not be avoided with solar roof installation.

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  2. James says:

    You’ve apparently missed (at least) one important point with most current net metering schemes: the “payment” for electricity generated and delivered to the grid is limited to offsetting the cost of electricity drawn from the grid. Thus if over 24 hours my solar panels (or wind turbine, etc) generates 2 KWh, but I only consume 1 KWh, I’ve given the power company a free KWh. Moreover, if my utility has time-of-use pricing, I’ve given them expensive daytime electricity in exchange for cheap nighttime electricity.

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    • Ed says:

      The net metering arrangements of which I’m aware provide that the utility pays for every kWh generated by the customer, so the customer is not giving free power to the utility. If a customer uses 1 kWh and generates 2 kWh, the customer realizes a profit equal to the utility’s rate for 1 kWh.

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      • SJS says:

        My net-metering agreement with SDG&E doesn’t allow for credit. If, at the end of the year, I’ve produced more energy than I’ve consumed, I write a small check to SDG&E (on the order of $5/month, IIRC).

        Under my current (year-old) agreement, I will not, ever, get a check from SDG&E for power produced, no matter how much power I put into the grid, and I can never get my obligation to $0.

        [WORDPRESS HASHCASH] The poster sent us ‘0 which is not a hashcash value.

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      • Falcon says:

        that is not true. AB 920 passed in 2009 says utilities pay customers for those excess generations on a net annual basis, and the $ / kWh rate is based on CAISO market price.

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    • Michael says:


      What you are refering to is “banking”. In very few instances of net metering are utilities not forced to “bank” kwh on a daily baisis. In fact, I don’t know of any (you suggest that is the case for you – but I don’t know who your utility is). In other words, on a daily basis, if you produce 2 kWh but only use one, well, you can use that one the next day. Some utilities with net metering do not allow banking at the end of the month. I.e., if you generate 600 kWh in January but only use 500, then the utility gets to keep the extra 100. I know of some “no-banking” net metering laws like that, but they are the exception not the rule. The point in no-banking is reasonable – it encourages customers to size facilities to meet their own needs – NOT to make them subsidized wholesale power suppliers.

      Regarding providing excess kWh during daylight hours when power is expensive and consuming it at night, well, that scenario is not real likely even with solar and definitely not happening with wind. Residential customer energy consumption is highest in the summer and typically after 4 PM. Solar provides the best capacity factor much earlier in the afternoon, and surprizingly, in the winter – because “heat” is not a friend to PVs. Still, your point about providing electricity when it is higher cost during the day is far more valid with solar than it is with wind. Wind blows the hardest at night and in the should months -when electricty has the least (and sometimes NEGATIVE) value.

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  3. Ritchie says:

    I think the objective of the subsidies was to spur production long enough for the industry to hit economies of scale, hopefully bringing cost down below purchase price and dissolving the need for subsidies.
    Whether this will happen before the funds run dry is the question.

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    • Falcon says:

      You actually missed the point. Even if solar panel production reaches economy of scale, the current system is still not sustainable. Do not forget all the distribution and generation and transmission facilities and networks that was already build, or is still needed to build to satisfy new demand (California is growing, after all). All these need to be covered by current and future electricity customers. The current rate structures in California allows solar roof owners to completely by-pass their obligation in paying for all these facilities, which means folks w/o solar roof must pay more to cover these costs, and thereby making electricity rates increase even further. These increase in rates would thereby making it more appealing for more customers to go solar roof, which means even more people stop paying for all the costs that they originally are obligated to pay as electricity customers. It will become a unsustainable death spiral.

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  4. Morten says:

    Storage? Then why is nighttime power cheaper than daytime? Are you mixing up wind mills and solar panels?
    Other than that, yeah totally.

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    • Todd Myers says:

      Nighttime demand is significantly lower than daytime. Demand goes down…so does price. Supply (i.e. storage in this case) isn’t the driving factor.

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    • Dave says:

      power generation is ideal if it is constant. the generator has to be able to handle the maximum load. we we grow, the load grows. the most energy consumption time is the heat of the day with AC running and offices and factories in full swing. since that is typically 30% greater than night, the power company has to build more plants or more capacity. thus, the most expensive power is peak day.
      at night, the generators sit almost idle. utilities already offer huge savings (half price or lower) is one puts in ice storage and makes ice at night, then cools with it in daytime.
      for you to put on solar, you stop using power in the peak, and then power your neighbors house. you take two houses off the max generation. this moves the time for a new plant out for years. you saved the utility hundreds of millions.

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      • Andrew says:

        This is the point exactly. In theory, utility companies are putting off building new, expensive, highly regulated and not 100% usable electric plants just to offset peak time usage. This way residents “build” their own plants, at their expense, that tie in to the grid easily and pump back PEAK power that the utlitity company can turn around and sell for the same if not more per kWh.

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      • Falcon says:

        no you do not. Since utilities by law need to satisfy all demand, new facilities will still be needed to cover electricity demand for when solar panels are not working (raining day, for example), and therefore solar roof actually does not allow utilities to avoid building new generation, distribution, and transmission. The only saving solar panels have for utilities are the fuel costs for those electricity the utilities does not have to generate at the time solar panels are working, and also any carbon credit/costs associated with burning those fuel to generate the electricity. It does not mean the generator can be avoided.

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      • BCC says:


        At least in my area (New England), the days with the very highest electrical demand, the ones that really define the amount of generation required, are uniformly hot and sunny. PV output on these days is consistently high. If it’s cloudy or rainy, it’s not a peak demand day. You can take that to the bank.

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      • Falcon says:


        You are confusing between the cost of generating electricity, and the cost of having the facilities to generate electricity, and transport said electricity to customers, and all the other supporting structures.

        There’s no denying solar roof allows utilities to save on the costs of generating electricity. However, Andrew is claiming that solar roof allows utilities to delay or avoid constructing new facilities, which is patently not true.

        To use an extreme example: say a new 10,000 house community sprung up in California, and every house has a 10 kW solar roof which in theory will provide more then enough electricity to a typical 4 people home, and have plenty to export to the utilities too. By law, whichever utility this new community situates in must build new wires, transformers, substations, whatever, to connect all 10,000 houses to the grid, plus they must budget for enough electricity for just in case these 10,000 houses might for some reason not generate enough electricity for self-use. However, the 10,000 houses won’t really be paying their fair share in costs of these new facilities, because current electric rate structure allows them to by-pass most if not all of these costs, forcing other people who does not have solar-roof to pick up the costs, and thereby driving the price of electricity up as a whole.

        That what is inherently unfair, and the core argument the above article is talking about. If you read SDG&E’s files (in one of the links above) Chapter 1 & 2, you will also see that what SDG&E want to remedy.

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      • Ivanise says:

        As some folks point out, it is not sunny all the time. So you’ll need to store some of the solar energy you eergnate during those sunny days. There are two ways to do this. First, you can install battery banks in your basement. You’ll need to buy a lot of batteries, so that if you get several days of overcast weather, you still have electricity. You get to be completely separate from the electric utility, but you need to purchase and maintain and periodically replace a whole bunch of batteries.Second, in some places, you can effectively “spin the meter backwards.” While this doesn’t actually store the electricity, the electric company will, in some places, credit you for any extra electricity that you produce, allowing you to use it at night and during cloudy days. You’ll not need to mess with the batteries, but you’ll still be connected to the utility. For more info on this, you should do a search on “net metering.”Unless you are very very committed to being off-grid, it is challenging (and expensive) to completely severe yourself from the electric company.

        [WORDPRESS HASHCASH] The poster sent us ‘0 which is not a hashcash value.

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      • fresh says:

        One thing that this article fails to mention and one point that works against Falcon’s argument is that all utilities have monthly fees that are charged every single month to customers. Here in Colorado it is about ~$8 per month, they are considering a “fair share” charge but that would apply to Solar Gardens where you are relying on the grid to provide your power and are offsetting your usage with off-site solar.

        The other concept that I think this article fails to mention is that the cost of power from utilities is inevitably bound to rise and was increasing before solar entered the market. The cost of power increases largely due to the fact that fossil fuels are a scarce, non-renewable and non-clean burning resource and the costs to extract them gets more expensive as they become more difficult to extract. The cost of power increases on average about 3-5% per year. By offsetting power now ideally we are delaying the inevitable point in time where we reach peak oil demand.

        I think it would be smart for utilities (and governments) to invest in battery storage and technologies that would allow for a consistent more reliable grid.

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  5. Steve Nations says:

    A revenue-neutral carbon tax would do so much to help jump start all sorts of industries in the U.S. If only. . . .

    Hot debate. What do you think? Thumb up 16 Thumb down 12
    • Dave says:

      no tax ever stays neutral

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      • James says:

        Maybe, maybe not. (Supporting evidence would be nice.) But currently we mostly tax productivity. It certainly seems that taxing waste & inefficiency instead would be an improvement.

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  6. John King says:

    Hidden due to low comment rating. Click here to see.

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  7. Travis says:

    This is an interesting article, but somehow it doesn’t make sense in that it coincides with what seems to be a predicted crash of Solar Energy startups.

    It seems the problems the solar industry is facing is actually a glut of supply. Which kind of conflicts with the assertion that solar’s cost will be too high. (See Todays Reuters Article:

    While the subsidizing of solar energy by non-solar users is an interesting thing to bring up. But while the solar user may “using” the infrastructure of the big energy company, they are also essentially giving them free electricity when it is expensive (during the day) in exchange for cheap energy when it is cheap (during the night). That seems like a good trade for the industrial generator.

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  8. James says:

    The situation is even more ridiculous (read subsidized) than the article states. I have a solar installation and a time of day – net meter so I sell electricity to the utility at high day rates and consume electricity at low night rates. Further, the utility faces a fine for not reaching some unobtainable level of renewable energy generation. So, I like most other owners of home solar planels, am licensed by the state as a “renewable energy source” and generate renewable energy credits (SRECs) (1 SREC = 1 MWH) which the power company then buys to meet their renewable energy quota. This is all after the Federal, state, and local governments paid for about 50% of the system to begin with.

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