Pricing solar so it doesn’t raise everyone’s energy rates — Richard Schmalensee

MIT Sloan Professor Richard Schmalensee

MIT Sloan Professor Richard Schmalensee

From The Boston Globe

Despite its recent growth, solar power remains an expensive energy alternative and accounts for only a small percentage of electricity generation in Massachusetts. If the state is going to make sharp reductions in carbon emissions as well as enjoy healthy economic growth, solar generation will have to be greatly expanded. But given the already high cost of electricity in Massachusetts, it is critical to obtain solar power as cost-effectively as possible to ensure that all consumers benefit.

In a recent study, an MIT team that I led presented a set of policy changes to make solar more affordable. The study shows that because of current policies, we are paying a good deal more for solar electricity than we need to. Residential solar systems are significantly more expensive per unit of capacity than utility-scale systems — about 70 percent more expensive on a levelized-cost basis. In addition, high levels of residential solar penetration often require substantial investments in distribution systems.

Residential solar continues to grow robustly, nonetheless, in large part because it is more heavily subsidized than utility-scale solar. The main federal subsidy, the investment tax credit, has just been extended for an additional five years. Since the amount of the tax credit is directly proportional to system cost, residential systems, which are more expensive on a per-unit of capacity basis, receive larger tax credits per unit of capacity than megawatt-scale, utility systems. This translates into a higher subsidy per kilowatt-hour of residential solar electricity, paid by taxpayers.

Massachusetts’ net metering policies provide another extra subsidy to qualifying solar. Retail rates, which residential generators receive, are higher than the wholesale rates that utility-scale generators earn. The difference is a per-kilowatt-hour distribution charge that was designed to cover the largely fixed costs of the grid itself — the wires and related equipment. As more residential solar comes on line, the distribution charge must be increased to cover those costs, and the burden of covering them is shifted to all customers without solar. Not only is this spending subsidy dollars wastefully, but the cost shift it entails has already produced an antisolar backlash in some states. Subsidizing the high-cost path to solar power more than lower-cost solar alternatives simply makes no economic or policy sense.

Read the full post at The Boston Globe.

Richard Schmalensee is the Howard W. Johnson Professor of Management Emeritus, Professor of Economics and Dean Emeritus. 

Leave a Reply

Your email address will not be published. Required fields are marked *