# Solar Subsidies

We are installing over 30 solar panels on our roof. The City of Austin currently offers a rebate up to \$15,000 for 60 per cent of the cost, and the federal government gives a 30 per cent credit on the remainder. With those subsidies, the rate of return on our own investment is 17 percent — making this is a superb deal for us.

A neighbor in the Netherlands has 4 solar panels on his roof, a strangely small number.  I asked why.  His answer:  The Dutch government pays up to €1500 if you install a solar installation.  Each solar panel costs him €450, with a fixed cost of about €200 for the installation. Thus his average rate of return on his 4 panels is about 25 percent, a great investment.  He would get no subsidy for a 5th panel, so the marginal rate of return on it would only be 4 percent for him. Small wonder that my neighbor has his unusual solar installation.

Both my Dutch neighbor and I benefit from the subsidies–but should our governments be using taxpayers’ money for this, especially since I bet that most of the beneficiaries are well into the upper part of the income distribution?

1. Francis says:

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• WebMonk says:

The reduction in fuel consumption is absolutely miniscule compared to the cost to taxpayers. Let’s check the numbers to see.

Let’s say the solar panels provide half his power, and he consumes \$250/month in electricity in his home. That’s a savings of \$125 per month, which comes to \$1500 per year. Taxpayers paid \$18,000.

The cost of fuel (coal being the largest fuel for electricity production in the USA) is around 18% of the total cost of the electricity.

That means the fuel savings is \$270 per year. Taxpayers just paid \$18,000 so that \$270 less coal is used each year. That’s a PHENOMENALLY bad deal. Let’s say taxpayers pay 2% interest on the bonds used to pay that \$18,000. Each year, the interest alone is \$360 to pay for \$270 less coal. The numbers are very, very much not in favor of this sort of subsidy being a good idea.

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• James says:

“Let’s say the solar panels provide half his power, and he consumes \$250/month in electricity in his home.”

I think I begin to see your problem. \$250/month? Mine’s usually under \$50.

On the question of subsidies in general, we might think a little about the massive government-funded (and still mostly government-run) hydroelectric power development that started around the beginning of the 20th century, and was greatly expanded in the 1930s as part of Roosevelt’s WPA &c. It’s certainly arguable that without the power from those plants the US would not have developed nuclear weapons or won WWII.

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• WebMonk says:

James, I was trying to give the most favorable construction. If the electricity usage is even less, then the problem is even more extreme.

Let’s use your \$50 electric bill as an example. Let’s say that the panels provide ALL of the power for your house. That’s \$50 savings per month, and \$600 per year. Taxpayers paid \$18,000 for that \$600 per year. 18% of that is actual fuel cost, so the \$18,000 spent is paying for \$108 less coal per year.

Perhaps one could say that the savings will just take longer to add up. No. Solar panels have definitely lifetimes – they need to be replaced over time just from use, to say nothing of damage. Twenty years is a commonly used lifetime for solar panels.

A smaller home, such as a townhouse or apartment which may only have a \$50 energy bill each month also has a smaller roof surface, and so even a home that only uses \$50 of power each month can’t be entirely supplied by rooftop panels. Still, even pretending rooftop solar panels could provide 100% of the energy for such a house, the numbers are still absolutely atrocious.

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• Owen says:

And if the solar panels last 20 years it’s a superb deal.

Of course, this analysis is also ignoring another simple economic rule; an increase in supply or a decrease in demand should lower prices. So every person that invests in solar power should be lowering prices for the rest of us consuming fossil fuels.

To be clear though, I’m not sure the electricity market works like this.

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• Mike says:

You’re leaving a FEW things out of your analysis. For example, you’re assuming that the cost of coal is static, when in fact it’s a commodity and so prices rise and fall quite regularly. In fact, US coal prices for electricity generators went up 2% from 2009 to 2010. Also for example, adding solar panels to a house slows the growth of marginal demand for power. This means two things: in the short run, power plants on the margin are used less frequently, lowering spot prices; in the long run, fewer additional power plants are needed, benefiting all ratepayers. In Texas, natural gas is on the margin so to speak, which means that if extra power is needed on a hot day in July (and in Texas, that’s a safe bet) somebody fires up a nat gas peaking plant. Peaking plants are ridiculously expensive to operate, even with gas so cheap you can’t give it away, and the solar production profile tends to lower demand on the days and times when these plants are most likely to operate. So you can’t just say that these solar panels would prevent \$270 worth of coal from being used and claim you got ripped off.

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• Mike says:

I’m sorry, but you really need to dig into your numbers a little more, and maybe try to understand how power is generated / used. This is just a little high-level hand-waving to which you’ve added a few numbers, a unit of measurement or two and one sweeping conclusion.

It helps to know a few things about utilities and power generation. The OP is in Austin. I’ve lived there, and used to buy my power from Austin Energy. AE is a municipal power company, so they operate some of their own plants and purchase some of their energy on the spot market. To the extent they can lower the number of power plants they buy and the cost of the power they purchase on the spot market, AE ratepayers benefit. So some numbers are probably in order. In August 2011 there was a heat wave in Texas (there’s ALWAYS a heat wave in Texas in August, FYI). Market power prices fluctuated between ~\$50 and ~3000 per MWH. So 5 to 300 cents per KWH. Guess what? \$3.00 is the afternoon price, from 2 PM to about 6PM, right when the OP’s panels are hitting their stride. Keep in mind these are market clearing prices, so at 5PM on August 5, 2011 AE is buying power at \$3.00 and turning around and selling it to ratepayers at \$0.031, a rather large discount (AE fuel charges to ratepayers run about 3.1 cents per kwh). Only they’re not selling it to the OP, because his solar panels are operating at full capacity. Once the sun goes down, power demand plummets and the price goes to 5 cents, the OP’s panels cease generating and he starts buying power from AE again. Every day the power price hits \$3,000, the OP’s panels save AE’s ratepayers \$30.00.

We’re dealing with one specific case here, but on “average” August 2011 prices were \$.188 per kwh. Every time the spot price goes over \$.031 and AE has to buy on the market, AE’s ratepayers get a little dividend on their investment in the OP’s solar panels. And it’s going to be an increasing dividend: Texas power markets currently cap prices at \$3,000, but they keep hitting those caps (5 times in 2011, rolling blackouts ensued), so they’re already talking about raising the cap to \$6,000.

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• Trace says:

Exactly which subsidies are you referring to? Energy companies recieve tax preferences, mainly in the form of tax breaks. Unless you use the accounting method mentioned in the “Tax Deductions or Tax Expenditures” article, these are not subsidies. For FY2011 there were \$20.5 billion worth of tax preferences in the energy sector. Of this, only \$2.5 billion went to fossil fuels. While fossil fuels generate around 77% of our energy, only about 15% of the tax preferences go to these companies. Renewable energy received a whopping 68% of the tax preferences, some of which were actual subsidies. I have no problem with people promoting renewable energy. I do think it’s a shame when people act as though the federal government is propping up the oil and gas industry. It’s the other way around. Without subsidies, the renewable energy sector would have much more trouble surviving. The above mentioned numbers come from the CBO.

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How about the nearly \$5 billion/year in subsidies given to the oil & gas industry?

http://cen.acs.org/articles/89/i51/Long-History-US-Energy-Subsidies.html

Frankly I don’t think that even comes close to the combined benefits of subsidies and special tax breaks for the oil & gas industry. And it does not even include the externalities involved in oil & gas exploration, collection, processing, and consumption which are not insignificant. Not to mention the benefits these companies enjoy from lax oversight and the implicit insurance policy that we foot the bill for cleaning up their messes.

Ignoring difficult to quantify costs of the oil & gas industry will of course skew things in their favor, but that’s just intellectual laziness, and worse, bad economics.

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

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• Owen says:

Also, as this article mentions, a vast amount of the solar ‘subsidies’ were loan guarantees. This is a much better deal for government and the public than tax breaks.

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• Owen says:

Also, from the very beginning of that article:

“Only four major tax preferences are permanent,
three of which are directed toward fossil fuels and one of
which is directed toward nuclear energy”

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• ryan says:

Reducing at all costs I guess? While it might be a guess that higher income people are benefiting I would say it’s an educated guess worthy of a hypothesis.

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2. Frank Warta says:

Given that larger homes and higher income earners tend to use more energy, incentives to offset energy use even if it generally benefits those who “need” less benefit may not be bad. The thing it makes me wonder though is if lowering the absolute cost of high energy consumption activities may lead to worse behavior and higher total consumption. If someone with a large home realizes a measurable decrease in their total monthly expenses will they be likely to run their A/C more often or less likely to worry about turning off lights and other devices? Do we accidentally reduce a disincentive of bad behavior? I guess part of the answer would lie in why we make the consumption choices we do regardless of income, but for people with greater sustained wealth the psychology of this kind of decision making could be very telling.

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3. Allen says:

You’re welcome. Instead of sending my kids to college, I’m paying for your solar panels. Or, more accurately, my kids are paying for your solar panels, since they will inherit the deficit.

With respect to the other comments about “huge subsidies of oil and gas companies” and “energy independence”, bull hockey. Oil and gas companies pay a billion times more (literally) in taxes than do solar. You can argue they should pay more, but there’s no subsidy. More importantly, energy independence built on a transfer of wealth from middle-class to upper-class Americans is not energy independence at all. It is perverse.

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• kilroy says:

I dont want to sound like a filthy hippie here, but isn’t at least SOME of the cost of everything we do in the Middle East an indirect oil and gas subsidy when you get down to it.

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• James says:

Hummm… So your kids aren’t getting grants, subsidized student loans, maybe taxpayers funding of a large part of the operating cost of a state university? They won’t (if in the sciences/engineering) be getting a job as a research assistant in a lab funded by government research grants?

I think what you’re saying translates to “Hey, subsidies are great – as long as you’re subsidizing the stuff I like.”

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• Jen says:

Also, his kids will spend less overall on trying to clean up the air (that may end up causing all sorts of lung problems in his grandchildren) if we can decrease the amount of burning needed for electricity.

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4. Sam Devol says:

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5. Rick says:

Since the public benefits from home solar installation, it does not seem unreasonable that the public (government) encourage their use. Solar panels on a house reduce the load on the electric infrastructure, reduce demand for coal and gas energy sources (lowering their cost to the public that does use them), don’t release pollution into the envronment (that would be a public health hazard) of the forms of CO2, NOx, mercury, arsenic, lead, etc.

Hot debate. What do you think? 25  23
6. WebMonk says:

So, there were about \$18,000 worth of taxpayer money going toward the project. I don’t know your specific house’s power needs, but let’s say you have a pretty good sized house (which might fit with 30 panels being able to fit, depending on the size of the panels)

If you normally consume \$250/month of energy, and the panels can cut your outside power consumption by 50%, then that’s \$125 of energy per month (\$1500 per year). Taxes paid \$18,000 to save \$1500 per year.

That takes 12 years to recoup costs. More if you consider that time cost of the \$18,000 – at a 3% interest rate they pay on the bonds covering the solar panel subsidies. If that is taken into account, then the panels take just over 16 years to repay the taxpayer cost.

But, it gets more complicated still. The taxpayers don’t exactly recoup costs – power companies will need to produce less power, the individual solar panel owner pays for less power, but the taxpayers in the community never actually recoup costs, at least not directly. It’s possible that power companies might receive less in subsidies from taxpayers, but that’s a very uncertain and diminished savings.

Frankly, the taxpayers are getting screwed, based on the taxpayer directly recouping costs.

The argument FOR such subsidies is that the ancillary savings to the community are worth the \$18,000: reduced CO2 emissions and reduced consumption of scarce resources like coal/oil/natgas. (I’ll mention, but not pursue the environmental costs of solar panels – rare earth metals are notorious pollutants at every stage of development from mining to manufacturing to disposal.)

The CO2 emissions savings are phenomenally miniscule, so I’m going to drop them from consideration. That leaves the reduced consumption of scarce resources. Given current prices and projected prices of said resources, I have a very, very hard time imagining that the reduced consumption of a household is worth \$18,000 to society. The cost of the coal (the largest single source of power in the USA) for a plant is only 18% of the total cost of the energy.

Of the \$1500 per year in reduced (coal) power consumption, only 18% (\$270) is reduced fuel consumption.

So, that \$18,000 of taxpayer money is gaining the taxpayers around \$270 per year of reduced fuel consumption.

NOT EVEN CLOSE TO BEING WORTH IT!

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• Mike says:

Your comparison is flawed. The amount the taxpayers benefit in this case is the difference between the price of power on the spot market in ERCOT and the fuel charge Austin Energy directs at it’s ratepayers. This price is based on supply and demand, not based on the average fuel cost to run a coal-fired power plant. This works out to far more than \$270 annually. Your time cost of money argument is also flawed because you are ignoring the 2-3% annual increase in the cost of fuel.

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7. Mark West says:

The short answer? No……the subsidies only go to those wealthy enough to pay for a solar installation.

This is Obamanomics at its worst. If the government was not handing over other taxpayers money you would not be getting your “great investments” and you would not be buying the panels. The money has to come from somewhere. But then you already know that.

More power to you for being able to exploit this loophole but don’t look for forgiveness on your blog.

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• Mike Barone says:

You may disagree with the policy, but to call it a “loophole” is a little disingenuous. It’s a direct subsidy for a specific item.

And while I agree it’s not directly cost effective policy, it’s also a minuscule expense, relatively speaking. Anything to get people thinking about alternative energy is a positive in my book. Plus, the easiest way to get the alternative energy industry to a financially sustainable place is to spur investment so more research can happen.

I always felt that one of the government’s most important functions is to incubate unprofitable industries that may benefit humanity into profitable ones because there’s little incentive for private industry to do so. Sometimes it works, sometimes it doesn’t.

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• Travis says:

Calling it “Obamanomics” is pretty blatantly inflammatory, don’t you think? And if Obama’s policy is to give tax benefits to the wealthy upper middle class, wouldn’t that just be a form of Reaganomics, more than anything else?

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• James says:

Actually they’re probably Bushonomics, since most of the current energy subsidies were enacted under his administration.

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8. J1 says:

No.

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