Do you want to know how to beat the stock market? In 46 of America’s 50 largest cities, installing a fully financed, typical-sized, residential solar power system will do just that, according to a Department of Energy-backed study released earlier this year. In other words, by investing in solar panels, most homeowners will save more in electric costs over the next 25 years (the approximate life of the system) than they would earn from investing the same money in the stock market over that same time period. In fact, the study also found that, of the single-family households in the 50 largest American cities, 93 percent of them (or 21 million households) would pay less for solar power today than they currently pay to purchase power from their electric utility.
But here’s the thing: According to the U.S. Energy Information Administration, building and operating a large-scale solar power plant (which is cheaper to build and operate per unit of energy than a small-scale residential installation) costs twice as much as building and operating a conventional fossil-fuel power plant.
How can it be that solar power costs at least twice as much as conventional power but is still a lot cheaper in the vast majority of American cities?
The answer is simple: subsidies—and lots of them.
Every time you pay your taxes or your electric bill, you’re helping to pay for your neighbor’s solar panels or wind turbines. And in fact, while you might have chuckled at your hippie neighbors for installing those ugly solar panels on their roof last year, it turns out they’re the ones laughing—all the way to the bank. That’s because you helped pay for their new toy, and now they’re making money off your investment.
There are at least five hidden ways you might be paying to subsidize renewable power. Here they are, in no particular order.
Subsidy No. 1: Federal Taxes. This one isn’t surprising. If you pay federal taxes, a portion is going to subsidize renewable power plants, such as wind farms and solar arrays. And it’s not an insubstantial amount. The federal government gives away about $9 billion annually in tax benefits to renewable power facilities and has spent about $150 billion on solar energy and other renewable projects over the last five years. That adds up to about $100 per citizen per year.
Here’s how it generally works. If you buy solar panels for your house sometime before 2016, you get 30 percent of the total cost back as a federal tax credit. The typical residential solar system costs about $20,000, which means an instant tax credit of about $6,000. That’s a nice chunk of change, especially if you finance the solar system with no money down.
Subsidy No. 2: State and Local Taxes. Unfortunately, a 30 percent discount still doesn’t make solar cost-competitive. So many states and local governments have heaped on more tax credits and incentives. Twenty-three states have solar tax credit programs, as shown in the map below.
Many counties and cities also have their own incentive programs. For example, if a homeowner in Los Angeles installs a solar system, the city uses a complicated formula to write the homeowner a check, which typically amounts to an additional $1,500 to $2,000 per system.
Subsidy No. 3: Net Metering Costs. Utilities generally have what are called “fixed” and “variable” charges. Fixed charges are intended to cover the fixed costs of providing electricity service (e.g., the cost of wires, poles, etc.), and customers pay these charges every month, regardless of how much electricity they use. Variable charges are intended to cover variable costs (e.g., fuel), and these charges vary with how much electricity a customer uses (usually expressed as cents per kilowatt hour).
Historically, utilities have avoided recovering all fixed costs through the fixed charge. The reason? To keep customer bills low and to encourage efficiency. If all fixed costs were recovered through an unavoidable, monthly fixed charge, then customers’ bills wouldn’t go down as much if they used less electricity.
Accordingly, utilities have kept fixed charges low and recovered most of their fixed costs (and all of their variable costs) through variable charges. But now this historical format is causing regular customers to subsidize renewable customers.
The reason is something called net metering, which is available in 44 out of 50 states. When a solar or wind system is hooked up to the grid, the owner is allowed to sell power back to the utility, literally running their electric meter backwards. But remember—most utilities recover a portion of their fixed costs through the variable rate they charge to customers. So if a homeowner installs solar panels, he may end up paying very little (or no) variable charges to the utility. In such situations, the utility “under-recovers” its fixed costs. To make up the difference, the utility must increase the variable charges for all the other customers.
This is a big deal, especially in sunny states like California, New Mexico, and Arizona, and many utilities are starting to fight back to protect their regular customers by raising their fixed charges. But utilities usually can’t just raise their fixed charge; they have to get permission to do so from the state public utility commission. And when they ask, solar advocacy groups go bananas, calling the utilities “bullies” and saying they are trying to “quash solar.”
Just two weeks ago, Arizona Public Service Company—one of the utilities that has been on the forefront of the fixed versus variable fee debate—asked its regulators to increase the fixed fees on new solar system owners to $3 per kilowatt hour, which amounts to about $21 per month. By contrast, the utility calculates that these solar customers actually avoid paying about $67 per month in fixed costs. Without the $21 per month fee, the utility estimates that the shift to nonsolar customers will grow to $800 million over the next 20 years based on systems installed through mid-2017 alone.
“It’s an issue of fairness to all of our customers,” Thomas Loquvam, APS’s associate general counsel, told me in a conversation about the filing last week. “If we don’t do something about this cross-subsidy—and soon—the cost to our nonsolar customers will just keep going up as more solar panels are added to the grid.”
Subsidy No. 4: Renewable Mandates. More than half the states have something called a “Renewable Portfolio Standard.” In general, this requires that a certain portion of the electricity your utility provides to you—typically 10-25 percent—come from renewable sources. But renewable power sources are generally more expensive than conventional power sources, such as coal or natural gas. Your electric bills are therefore substantially higher than they would be without this mandate. This makes residential solar and wind power even more competitive because the higher your current electric bill, the more likely installing solar panels or wind turbines will save you money.
What’s more, electricity flows across state lines because electricity markets are regional. That means even if your state doesn’t have a Renewable Portfolio Standard, the mandates in neighboring states could still be driving up your electric costs.
Subsidy No. 5: Climate Regulation. Of course, -environmentalists argue that the prior four subsidies are necessary to even the playing field between fossil fuels and renewables. Fossil-fuel power plants cause harm to the climate, they argue, and the costs of that harm are not included in the price paid for the “dirty” fossil-fuel power. Subsidizing solar, therefore, just evens the playing field, right? Wrong.
In many states, the cost (if any) to the climate of operating a fossil-fuel power plant is already built into the cost of operating the plant. California and many of the New England states already have a greenhouse gas cap and trade program, yet they still provide huge subsidies to renewable power. What’s more, climate regulation is itself another form of renewable subsidy. Again, it drives up the price of using conventional fossil-fuel power plants, which makes renewables more competitive. And if President Obama gets his way, his proposed Clean Power Plan (which he is slated to finalize this summer) will impose climate regulations on every state’s power system, without significantly altering any of the existing renewable subsidies.
The bottom line is that if you accept the science behind man-made climate change, fossil-fuel power plants should have to pay their fair share for their impact on the climate. Virtually every economist will tell you, however, that subsidies are the least efficient way to do this. And that’s why many libertarians are now calling to abolish all these subsidies and impose a straight revenue-neutral carbon tax, which would end up saving everyone a lot of money.
But in this political climate, the chance that such a measure will be adopted is slim. We will likely be living with most of these subsidies for a while. Therefore, there’s only one logical thing to do in the meantime: Run out tomorrow and buy solar panels for your house—that way you can cash in on all the government subsidies yourself.