The Economics of Solar

A friend of mine recently posted to facebook a great article about the issue of centralized large-scale solar generation versus broadly distributed small-scale units (such as roof-top units on our homes). But what about a middle road that combines both of the above as well as a niche between the two? And what about the hangups we have about each of these solutions. In the end, the debate won't be about whether or not to go solar, but how.

Thanks to technological improvements and improved production, we've already cleared most perceived hurdles of large scale solar--and we may be well along the way for smaller models too. The issue of intermittent power is mitigated both by built-in system redundancy using legacy generation equipment and the fact that solar cells generate throughout peak daytime power usage (and throughout the night via other related technologies). Likewise, transmission lines are already being improved--although we have to ask ourselves how many more power lines are acceptable across the landscape in order to appropriately bolster the grid. The biggest tech hurdle, according to some sources, is cheap battery storage, which would make most of the other issues moot.

The primary concern still comes down to simple economics. This is why power company APS recently announced intermittent generating stations using natural gas rather than solar--they could get a quicker return on their investment. Similarly, most homeowners opt not to install solar panels because they wouldn't dare make an investment in their homes that offers no immediate benefit and takes as many as ten years to pay for itself. We just aren't concerned enough to put that kind of money on the line. And yet, the utilities are making big investments on solar all of a sudden (including APS). I'd argue that it's entirely due to recent federal and state policy changes that affect the economics of large-scale solar.

The federal tax incentives apply to individuals and to corporations alike, offering a 30% tax credit for any qualified investment in renewable energy. So why are corporations and well-backed speculators the only ones going after these dollars? It's because they just hit payday, given a solid investment model that allows them to amortize their expenses by up to 30 years with little operational costs, obtain inexpensive financing, and then get an immediate bump to their first-year revenues with the help of a tax credit. The financial model is great for them, but not necessarily for individual homeowners looking to offset their electric bills.

To put the small-scale model in perspective, if I want to completely offset my electric bill, which averages about $100 per month, I would have to install a minimum 400 square foot system on my home in Phoenix, at a cost of about $33,000. With the available tax credits and rebates, it would be about $8,000 total (from this vendor). In order to bring the monthly expenses to a point where such an investment is attractive to me as the homeowner, I would need to finance that remaining $8,000 over the course of 8 years at 6% interest (or maybe less, if I assume that my monthly bills would otherwise increase due to inflation). Considering that the average American relocates every five to seven years, why would any such person want to take on that expense, except out of the goodness of their hearts or after settling down in a fully owned home?

If I am doing it because I feel green all of a sudden, I could opt instead to partner with a company that will pay for my solar panels and then either lease them back or sell the electricity to me (such as SolarCity or SunRun). This seems like a much more practical solution for that purpose, in my opinion; but again, it's a company that reaps the financial reward rather than me. Thus, I arrive at a stale mate between the two options and end up paralyzed in the decision process.

So then, where's the sweet spot for the rest of us? I would argue that it's somewhere between the capital-intensive mega projects and the individual ones. For my money, I would rather be in the middle of the transaction, offering customers the right to be green and offering patient investors a steady, reliable cash flow, by financing the installation of solar panels. But while I admit that SolarCity seems to be on the right track in this regard, I think the company that truly gets it is SunEdison. Rather than try to convince individual consumers to go green, SunEdison focuses its efforts on bigger consumers (like Whole Foods Market), who can leverage the publicity of adopting solar solutions rather than focusing solely on the cost savings. What a great deal for both parties involved!

So my prediction for the near future is that we will see huge utility-scale systems proliferate (due to economies of scale), as well as the smaller commercial applications. The only factor that could come into play to change my mind is if there's another policy change to incentivize consumers. I'd say that you could get me on board if you reduce my pay-back period to less than five years. Perhaps the scientists and industrialists will beat our policy-makers to reaching that goal. That would be a cause for celebration.

As a final thought, the one kink that I see in the large solar industry's armor is, ironically, the potential environmental cost. As we ponder the new found interest in developing massive solar fields throughout southwestern deserts, I can't help but wonder about habitat destruction and whether it has entered into the debate. Thankfully, it has in southern California. Will these environmental activists' claims be considered? Possibly, although we still don't have a firm grasp on how fragile semi-arid ecosystems actually are. So in California, it may be worth a betting that further research will be needed before approving such massive undertakings, which could slow the rapid growth of solar energy production. Or not.