Are Solar Incentives a Subsidy for the Rich?

by Tom Konrad

One of the most common arguments against incentives to help people buy solar
panels for their homes are that they are a subsidy
for the rich, paid for by everyone. The argument goes: only the rich
can buy a photovoltaic system, which, even with subsidies, costs thousands of
dollars. Why should everyone chip in to help rich people buy new toys?

On the face of it, this argument is persuasive. Why should everyone
pay, if only the rich get the benefit?

Basic fairness dictates that society should only subsidize activities which
create societal (rather than individual benefit.) On closer reflection,
however, we see that the bulk of the benefit for solar goes to society, rather
than the homeowner-installer.

Let's look at the benefits of a photovoltaic system (numbers are for a 4kW
system, installed for $8 per peak watt, with the rebates
currently available in to me in Colorado, plus the Federal tax credit.

The owner gets:

1. Electricity for free (approximately 7,000 kWh/yr, worth $630 annually at
   current prices, but rising in value with inflation. Production is
   subject to 1% per year annual degradation.)
2. Cost of $12,000 after rebate and tax credit.
3. An increase in property value, depending on the market. I'll assume
   1/2 the net cost of the system (I've seen estimates
   as high as the full cost of the system (from solar installers) and as low
   as zero or even negative for unsightly installations. So I'll say
   this is worth about $6,000, but only if the home is sold.
4. Maintenance costs, which I'll assume to be 0.5% per year of the
   installation cost after the first year (at the very least the inverter needs
   to be replaced after 10-15 years, and the panels need to be kept clean.)
5. If the homeowner sells his home in 10 years, electricity prices go up 10%
   per year, the cost of funds is 7%, the present value of the panels is
   $8,457, which includes the present value of the $6,000 property value
   increase. Many people do this calculation assuming no
   maintenance. I consider that unrealistic, but for the sake of
   argument, the net present value of these cash flows would be $9,431 if there
   were no maintenance cost.
6. The feel-good factor, and bragging rights. For the homeowner to
   break even on the deal, these bragging rights and feel good factor would
   have to be worth over $3,500 to him.

Society gets:

1. Lower peak electricity demand, allowing delayed construction of new power
   plants. Solar typically produces well on sunny summer days, which is
   precisely when the power is needed most to run air conditioning.
2. Reduced need to build new transmission and distribution.
3. Local industry and job growth, because the money is spent locally.
   The value of this will depend on how much of the system is manufactured
   locally, but installation (about 50% of the cost) is almost certain to be
   local.
4. Advances in PV manufacture, lowering future prices for everyone else.
5. Less water use in power
   generation. Natural gas fired generation uses up to 180 g/MWh of
   generation, with coal generation using 300-500 gal/MWh, and Nuclear using
   between 400 and 720 gal/MWh (EPRI,
   .pdf). Using 400 gallons/MWh, our sample system will save 2,600
   gallons of water per year (assuming 200 gallons are used for cleaning.)
6. Lower emissions of global warming pollution (about 4.2 tons CO₂
   per year, worth about $2,000 at $20/ton, a 10% annual price inflation, and a
   7% discount rate for the life of the system.)
7. Lower conventional pollution: SOx, NOx, Mercury, and particulates.
8. Lower fossil fuel prices due to lower demand for electricity
   generation (a tiny incremental change, but spread over everyone's fuel
   purchases.) I estimate this to be approximately 1/3 of the saved fuel
   costs, as it was for the New
   York Energy $mart Program, or a present value of $2,100 over the system
   life, using the same assumptions as above, except that society retains the
   benefits so long as the system is producing.
9. A household becoming more aware of how they use energy.
10. A bill for $20,000.

The calculations for the net benefit to society are much more difficult than
the net benefit to the system owner. But as you can see, the system owner
is not getting a bargain.

The question for society is not "Is the system owner living it up at our
expense?" Paying $3,500 for bragging rights and feel-good factor
seems far from a bargain to me (but then I like bragging about how much money I save,
not how much I spend.) The question we need to ask ourselves regarding
these sorts of subsidies is, are we getting $20,000 worth of value for our part
of the bargain?

Solar Consciousness Raising

The $20,000 cost is spread over large numbers of people, as are the
benefits. I used to think that the $20,000 price tag for society wasn't
worth it. While all the factors listed are worth something, I found it
hard to believe that they were worth $20,000, especially if that $20,000 could
have been used to subsidize energy efficiency measures which could easily save
ten times as much energy as the PV system, and hence produce ten times the
environmental benefit.

That was before I understood the implications of societal benefit #9: a
greater awareness of energy. Unfortunately, most energy efficiency
measures lack the visceral impact to get people excited about energy (although
real-time, indoor smart
meters have the potential to do so.) I personally became interested in
energy when my stepfather installed a (subsidized) solar hot water system on our
house in the early 80s. Now, my job is advancing the cause of clean energy
by increasing the knowledge of investors.

With cost-effective energy efficiency measures, a subsidy can easily be
justified based on societal benefits. For solar PV, environmental and
economic benefits may or may not be sufficient justification. But people
who generate their own electricity become much more aware of how they use
it. Awareness of how we use energy is the first step to using it wisely,
and helping others to use energy wisely. Better yet, the rich are more
influential than the poor in our political process, which means that raising the
awareness of the rich can have a multiplier effect through political impact.

Photovoltaics may not yet be a great investment for homeowners, but
homeowners' awareness of how they use energy is a great investment for the rest
of us.