California’s Energy Commission unanimously approved a mandate on Wednesday, May 9th, that will require all newly built homes to have solar panels. The rationale for the mandate is that the solar panels will help reduce electricity consumption from fossil-fuels, thus reducing greenhouse gas emissions and other pollution. Advocates further claim that the panels will pay for themselves by saving homeowners money on electricity bills. Despite these claims, such a policy does not reckon with the economics of the proposal—and the economic impact is roundly bad. This policy will likely be an extremely costly experiment for Californians, particularly for future homebuilders who effectively will be required to subsidize everyone else’s electricity consumption.
The sale of electricity might seem simple for consumers—we pay for what we use—but a complex market undergirds the final purchase of power. In markets such as California, wholesale electricity prices for retailers are determined based on locational supply and demand in real time: hour-to-hour, minute-to-minute, and forecast only a day prior. Fail to match supply and demand at any point, and a blackout ensues.
So how would a big increase in residential solar production affect those wholesale electricity prices? The new supply would lower electricity prices during the times when the solar panels are productive—not a bad thing in and of itself. These lower market prices for electricity, however, mean that the utilities that provide electricity the rest of the time would have a reduced market share. If the capital costs to maintain those power plants and transmission lines are still relatively unchanged, then these electricity producers will have to increase the price they charge for electricity in their remaining market share (at night, for example) to recover those costs—offsetting much of the savings from solar.
To illustrate this dynamic, consider that California already has the most solar power of any state, accounting for around 16 percent of its electricity. Yet California has among the highest electricity prices in the contiguous United States at over 18 cents per kilowatt hour for residents, almost 50 percent higher than the national average of 12.9 cents. And California’s residential electricity costs have been steadily climbing each year at a faster rate than the national average, despite a plethora of subsidies for renewable energy and energy efficiency mandates. Why would we expect this mandate to deliver a better outcome than all the ones preceding it?
Beyond the complex effects on electricity pricing, mandating consumption of rooftop solar panels is horribly inefficient economically as an environmental policy. Residential solar is among the most expensive sources of electricity per watthour. As far as capacity costs go, the Department of Energy estimates residential capacity prices to be around $3.10 per watt, while utility-scale solar is only $2.20 per watt. That picture may even be too rosy, as the Energy Information Administration’s estimated overnight capital costs for utility solar are around $2.60 per watt, and wind power is around $1.80 per watt. When you further consider that rooftop solar is less productive per watt than utility-scale solar or wind, that cost-effectiveness is even worse.
When it comes to building efficient electricity infrastructure, bigger scale equals cheaper electricity—and solar panels on homes are the definition of small scale. Even worse, homes that are not at optimal angles or locations, or that have tree-cover, make rooftop-solar mandates even less efficient.
What’s more, this policy only makes sense if you assume people can’t make their own choices on rooftop solar. This point is not merely polemical—it points to the underlying economic flaw. If it is true that there is so much money to be saved from rooftop solar, why aren’t residents making that choice? And why aren’t mortgage lenders offering to pay for energy improvements to homes if it offsets mortgage risk? As it happens, they already are. Numerous private lenders offer loans for rooftop solar. The private sector has already recognized these opportunities, and people are free to determine whether it makes sense to install rooftop solar.
This mandate short circuits the calculations that homeowners, especially in sunny California, likely are already making. It instead tells homeowners, “We don’t trust you to make the choice on your own, so we’re making it for you.” But the mandate does not automatically make the policy economical.
And ironically, this policy could stifle innovation in the solar industry. Solar is expensive, but its costs are dropping. California’s mandate, though, will funnel customers to solar panel producers, reducing competition and producers’ incentives to reduce costs. Slowing the pace of falling prices for renewable energy will be an unintended side effect of the mandate.
This policy manifestly isn’t cost effective, but a big reason these facts aren’t swaying policy is because those that the mandate harms are currently invisible. The victims are future new homeowners, most of whom don’t know they are going to build a house yet. Since the policy is implicitly forcing these future homebuilders and owners to subsidize everyone else’s electricity consumption, this policy is an easy one to pass. But just because the constituency doesn’t exist yet doesn’t mean the consequences aren’t real.
Finally, let’s consider how much this policy will reduce greenhouse gas emissions. An expensive policy can be worthwhile if it yields major benefits. Yet even here, this policy is unlikely to have the intended effect. It is estimated that the mandate could increase annual solar capacity by 240 megawatts, which is a lot, but is only about half a percent compared to the 42,300 megawatts of fossil fuel capacity in the state. Californians may not find this worth the $9,500 the mandate will add to new home prices.
Some advocates of California’s solar-panel mandate may suggest that doing something—however inefficient—is better than inaction. Yet consideration of a policy’s cost-effectiveness is critical because resources spent on one endeavor ultimately diminish resources available for others, from housing affordability to public health and anti-poverty efforts. In short, while well-intentioned, California’s new environmental policy is likely to end up causing more harm than good.
Philip Rossetti is the director of energy policy at the American Action Forum.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.
