Judging from responses to my earlier post, not everyone is happy about incentives for installing solar power. One person said the government shouldn’t encourage projects that don’t make financial sense on their own. Another complained that I'm a “freeloader” taking advantage of the grid to keep the lights on at night without paying my rightful share of its costs. I think these are fair points and deserve closer examination.
Without subsidies, the only solar cells you’d ever see would be on calculators. Electricity from fossil fuels costs $40 to $70 per megawatt-hour (MW-hr). Some renewable sources, notably wind, are already competitive. But photovoltaics are still way behind. If my solar system lasts 30 years and works for four hours a day on average, I need to install 23 watts of capacity to generate 1 MW-hr. If the panels and auxiliary equipment cost $8 a watt, that’s $180 per MW-hr, about three times more expensive than fossil fuels.
To square the financial circle, my home state of New Jersey, like other states, provides up-front rebates for installing panels as well as credits for generating power from them. The credits are somewhat complicated. The state has set a target for generating 30 percent of its power from renewable sources by 2020. To meet it, electric utilities must either build their own solar or wind plants or buy power from someone else who has, such as a Scientific American editor. For each 1 MW-hr of solar energy, the state issues the homeowner a solar renewable energy certificate (SREC) that he or she can then sell to the utility. The price oscillates, but typically runs $200 to $400 per MW-hr.
The system may seem needlessly baroque, but it gives utilities some flexibility in meeting the mandate. To ensure that the program doesn’t bankrupt them, the state provides a “safety valve.” If the cost of generating 1 MW-hr exceeds $700, the utility can simply pay that amount to the state and wash its hands of the whole business. It’s one of the most aggressive programs in the world and New Jersey’s new claim to fame, now that The Sopranos is over.
For homeowners like me, the bottom line is that the SRECs roughly cover the higher cost of solar, and the up-front rebate ensures I don’t need to wait 30 years to break even. Now, the question is: why should the taxpayer and ratepayer take on these costs?
One answer is that the price of fossil-fuel power doesn’t include the cost of the damage and disease it causes. Other environmental regulations already recoup some of these external costs, but not those caused by carbon emissions. That’s what solar and wind are supposed to do. Even so, is solar worth it? Online exchanges will sell you an offset for 1 ton of carbon-dioxide emissions for $20 to $30, and on the European Trading System, the current price is roughly $15 per ton. By comparison, an SREC price of $400 per MW-hr amounts to about $600 per ton of carbon dioxide. It seems like poor value for money.
A better answer is that government incentives jumpstart the solar industry. By creating demand, they encourage innovation that bring down the cost. And they’re working. A report last month by a team at Lawrence Berkeley National Laboratory found that the price of solar panels fell by about 25 percent from 1998 to 2007 partly because of government subsides. States and countries with aggressive solar programs produce power more cheaply. Most of the savings came not from the solar cells themselves but from all the auxiliary equipment.
Another report, released last summer by the McKinsey consulting group, itemized the market failures that block investment in energy efficiency and renewables. For instance, few homeowners shell out for improvements that might be worthwhile in the long run. The words “long run” aren’t in most people’s vocabulary and even the most far-sighted homeowners can’t be sure they’ll really reap the benefits. What if they move houses? Will buyers really pay extra for solar? Such market failures call for Uncle Sam to step up.
Every energy source and indeed every nascent industry of any sort has needed government handouts to get going. Economists generally find that such policies work best when they are limited in time rather than becoming an open-ended invitation to leech off of the taxpayer. Solar subsidies meet this criterion. State subsidies are already less generous that they were a few years ago and the Federal tax credit is due to expire in 2016, by which point advocates claim solar will be competitive on its own.
On the other hand, detractors still have a case. If the goal is to reduce emissions, then the government should limit emissions, period. It should let the market decide how to come in under that limit. Other measures, such as energy conservation, might well get more bang for the buck. A spiffy chart in this month’s National Geographic, adapted from the McKinsey report, bears this out. That said, the same report argues that picking all the low-hanging fruit gets you only a quarter of the way to stabilizing the climate. Renewables, though pricier, are probably still going to be needed.
As for the criticism that solar homeowners are “freeloaders” for relying on the grid to provide power when it’s dark outside, I’m not a freeloader—yet. Once my panels are installed, I’ll pay for whatever power I receive from the grid. I won’t impose any additional costs on my fellow ratepayers, since the grid will have no trouble soaking up the power I produce by day and returning the favor by night. Utilities already have to adjust their power output for fluctuating demand, equipment failures, and so on, and they’ll barely notice my little trickle. But as ever more people line their roofs with panels, load-balancing won’t come for free anymore. We’ll need massive energy storage systems, such as compressed air.
I’d be interested in what others have to say. You can find out what my friend (and public-policy expert) Greg Feldberg thinks about the situation in Maryland and what another science writer, Osha Gray Davidson, has to say about Arizona’s programs. One common factor is that none of us could go solar on our own. To make solar a reality takes support from local and Federal subsidies to help pay for the systems and from the power grid to match electricity supply and demand.
A solar house (not George's), courtesy of Cameron Christensen