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.