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Are We Paying Too Much for Residential Solar?
Many Voters Unaware of Costs
Two years ago, while having lunch with a former Stanford Graduate School of Business classmate, I mentioned how expensive residential rooftop solar was in California. I also stated that residential customers without solar were largely paying for it through their higher electric bills. He stopped me in mid-sentence and blurted out, "Are you telling me that solar energy costs more than conventional energy? How can that be - the sun is free!"
Now, my friend is an educated professional. The fact that he was unaware of how much rooftop solar is costing the state's electricity consumers suggests that the average Californian doesn't have a clue.
Incentives in California
I was doing some research to estimate the incentives produced by the thirty percent federal tax credit when combined with California's net energy metering incentive (NEM). The estimates were for a typical residential customer living in Southern California.
I defined the NEM incentive as the present value of the customer's electric bill savings, less the present value of the costs the utility avoids due to the customer's solar energy production, over the twenty-five-year economic life of the rooftop solar facility.
The results were astounding. They revealed that at the start of 2014 the typical solar customer in Southern California could expect to fully recover the entire investment in about seven years. After which, the solar facility would provide essentially free electricity for at least eighteen more years. This represents an after-tax return on investment of about seventeen percent, with very little risk. I can't think of any low risk investment offering such a lucrative return.
If this sounds too good to be true, it is. Those generous returns are paid for by federal taxpayers through the thirty percent federal tax credit and also by California residential customers that lack rooftop solar but are forced to pay for the NEM incentive through higher electricity prices.
Incentives in Other States
Recently, I did a similar analysis of fourteen other states across the country that incentivized residential rooftop solar in various ways. Again, the results were astounding. They revealed a crazy quilt of state-supported incentive programs, layered one upon another, that produce wildly different levels of total incentives among the states. These state incentives are in addition to the federal tax credit and the NEM incentive.
Figure 1 presents the state-by-state results, displaying the individual component incentives and their totals as a percentage of the homeowner's initial investment of about twenty-one thousand dollars for a typical 6 kW rooftop solar PV facility.
See Figure 1.
As Figure 1 shows, the federal tax credit is $6300 across all states. In sharp contrast, the state incentives, including the NEM incentive, vary substantially.
In 2015 California