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. jonathan says:

    A comment more on style than substance: everything isn’t a bubble and all markets face difficulties. Why must so many pieces be dressed up with ideas like “crash” as though utter failure and disaster lurks. Name an industry which hasn’t had problems. Some industries struggle through long consolidations as scale triumphs over innovation and difference. Others develop massive over-capacity – as with RAM, a shift that saw Intel move more into microprocessors. Everything is always in flux, but the presentation is as though there is a better way and a stable result which would only exist if. And that if often means, ith dark implications, “if there were no regulatory distortion.” This tends to nonsense. Every business faces changing circumstances. And every business faces significant challenges.

    Well-loved. Like or Dislike: Thumb up 10 Thumb down 1
  2. Owen says:

    I don’t trust these numbers. I’ll just argue with one of them, your assumption on how long solar panels last.

    The solar panels being produced today are much different than those being produced 20-25 years ago. Are we supposed to assume that we know solar panels being installed today will only last 20-25 years? There’s a lot of evidence they last longer. Plus, they don’t stop producing power after 25 years. The 25 year lifespan suggest they will be at 80%. If they continue to give power back to the grid over another 10 years that’s a huge change in the economics, even if the production decreases continuously.

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    • Enter your name... says:

      Lifespan changes sometimes work the other way around, of course. I have two baking sheets that I inherited from two different grandmothers. They’re just normal old aluminum pans, nothing fancy, heavy, or expensive, probably picked up at the dime store. One was probably made in the 1940s and the other in the 1950s. They have a few dings and scratches but they still work just fine.

      By contrast, the average lifespan of a similarly inexpensive new cookie sheet from K-mart or Wal-mart these days is just a couple of years. The tinned steel ones rust. The non-stick ones peel or flake and rust. Newer is not always better.

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      • Jerry critter says:

        Comparing solar panels to cookie sheets makes no sense at all. One is a rapidly developing technology and the other is not…unless you are trying to generate electricity with your cookie sheets or cooking cookies on your solar panels.

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  3. WordPress Guru says:

    As I understand Electricity companies and PSC agreed upon to bear own cost for power generation.
    http://MeetKamranOnline.com

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  4. Joel says:

    The 5 cent/kilowatt charge might be about the right price. I think we can definitely say that charging the total fixed costs to solar panel users would be too much, which I think the article priced at around $.12/KW. Those fixed costs are covering way more infrastructure than someone with a few panels mounted on their roof is using.
    If they charged the full fixed infrastructure cost, it’d be like making me pay for the interstate highway when all I’m doing is going down the sidewalk on my skateboard.

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    • Enter your name... says:

      The idea of paying full fixed infrastructure costs seems appealing—it costs a certain amount of money just to have a connection, even if I don’t use any electricity at all—but I think it would hurt conservation efforts.

      Our local water bills are pretty close to a full fixed infrastructure cost. The result is that I pay about $5 a month for water, and $60 a month for having the water delivered. Then the water agency runs ads saying, “Fix your leaking toilets to save money!” And I think, if a leaking toilet accounts for fully half of my water use, then it will take at least three years to pay off even a quick visit by a plumber. If I had a leaking toilet, I might fix it because waste is evil and drought happens, but not because it will save me any money.

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  5. GHung says:

    Mountains out of molehills. California’s Total Electricity System Power http://energyalmanac.ca.gov/electricity/total_system_power.htm …. 0.3% solar, of which only a fraction falls into the category being discussed? Huge problem, HUGE!

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  6. James says:

    If we must discuss subsidies for power generation, what of hydroelectric power? Look at all the dams that were built for power generation between about 1930-1970, most if not all of which were built by the government, and are still run by quasi-governmental entities such as the TVA and BPA.

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    • Mike D says:

      Hydro generation is generally a very efficient method of producing electricity. Even if the government built it.

      Why shouldn’t a government build critical infrastructure?

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  7. Mike D says:

    I don’t think it’s correct to say the electricity is “stored”. Its not. There is no technology currently available to store energy on a grid wide basis that is remotely reasonable in cost or efficiency. It is simply a matter of the companies making less power, rather then capturing that energy and storing it. Regardless of the truth of your main point, we all know the word “STORE” is used to imply some additional step is required, using some magic technology to “store” the energy, when in fact this is not the case at all, and its disappointing to see you using the term.

    I would point out that the major high usage times in California is during the day in the summer when everyone turns on their air conditioners. This means the solar panels will be creating energy at the time most needed and not, in fact, being “stored”.

    In British Columbia, the electricity provider pays a lower rate to consumers who install alternative energy systems at home. A rate based on electricity cost minus grid maintenance. They also have to have an electrician install it and pay a BC Hydro employee to certify the system. If you are a corporation and build a mini or micro plant, they are paid above average the consumer or even higher business rate for electricity.

    In other words, consumers and businesses in BC are subsidizing the mini and micro corporate power generation companies.

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  8. michael kenedy says:

    I power my whole household with solar panels and a wind turbine.
    I’m selling the excess electricity back to the grid compensating the grid electricity used when there are cloudy days with no wind. I’m even earning money from this system. The money came back after 1 year of usage, which pretty much surprised me, especially how much my electric company was paying me for the electricity I sold. Check my review on http://reviewoffice.blogspot.com/ , you might be surprised too.

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