You may walk past your neighbor’s house and see some new solar panels quietly absorbing sunlight and turning it into electricity. Your neighbor is smiling because solar is now the least expensive electricity in history. So, your neighbor is almost certainly saving a lot of money. This will be better if you live in a sunny part of the country – but even every resident of cold and cloudy Michigan would save money with solar rather than buying it from the grid. Most of that electricity of the solar panels will be used to power your neighbor’s house. But some of the value of the solar will actually make its way to you and cut your electricity costs.
Grid-tied Solar
How does that work? Most solar houses are grid-tied in the U.S., which means some solar electricity will be fed back to the grid – especially at noon on a sunny day.
Although there is a wide array of types of rate structures in the U.S., most of them disincentivize feeding too much power back to the grid so most residential solar systems are sized to produce exactly what the annual load is likely to be. In the not so distant past, this was all based on what is called “net metering” and was the law across the U.S. What this meant is that if electricity cost your neighbors 10 cents/kWhr that is what your neighbors was supposed to be credited for (10 cents/kWhr) when they fed electricity back to the grid. As solar costs came down, and electricity costs for utilities went up, the savings for solar customers skyrocketed. Unfortunately, many utilities treated their customers like a financial threat and made their own rules that do not give solar generators net metering compensation. So they might pay your neighbor 5 cents/kWhr for solar energy but charge 20 cents/kWh for grid electricity. Analysis across the U.S. showed most investor owned utilities do not in practice provide retail compensation for excess generation, even when advertised. This, means of course, your solar neighbor is subsidizing the electric company. Afterall they completely finance and take care of the maintenance and operation of a generation station (their solar rooftop) for which the utility benefits. This may seem unfair, but it is actually much bigger subsidy for the utility than the simple difference in cost your neighbors see on their electric bills. In the end when all of the value of solar is considered – grid-tied solar owners are actually subsidizing their non-solar neighbors.
How much does residential solar subsidize the grid?
To figure out what a solar electricity is worth the best method is to use the “Value of Solar” or VOS. Performing a complete VOS calculation, however, is challenging because it is complicated. Although it is much more complicated than a single rate, lots of scientists and engineers have already worked out the numbers for us. All it really takes is simple math addition after you have the base numbers.
In a recent study the VOS literature was reviewed, and a generalized model was developed taking realistic future avoided costs and liabilities into account from the literature. The approach starts from the existing formula to calculate the levelized cost of electricity from solar photovoltaic technology and updates the formula by adding the avoided and opportunity costs and the effect of different externalities. The costs the authors considered in the study are:
- avoided plant operation and maintenance (O&M) fixed cost;
- avoided O&M variable cost;
- avoided fuel cost;
- avoided generation capacity cost,
- avoided reserve capacity cost,
- avoided transmission capacity cost,
- avoided distribution capacity cost,
- avoided environmental cost, and the
- avoided health liability cost.
Thus they skipped the newer co-benefits but there turned out to be a lot of savings. Some utilities have claimed that solar customers cost them money and they have even published some white papers on it. What all the utility studies have in common is they do not consider all of the avoided costs that solar provides. They do not even bother counting up all the costs that are included in their bottom line directly (costs 1-7). The last two costs can be quite different depending on where you live and what your utility uses for most of the electricity generation. If it is coal or gas then the numbers can be larger than the value of the electricity.
This effect is caused by “externalities” where unintended costs of electricity production fall on third parties not involved in the transaction, leading to market failures. What that means in practice is that electricity companies that burn coal and cause air pollution do not currently pay for the costs so the market cannot help incentivize a reduction in pollution. This can actually be quite serious. For example, centralized fossil fuel power is responsible for killing more than 50,000 Americans per year from air pollution alone. Exactly how many premature deaths from fossil fuel electricity production is difficult to estimate and that is now going to be harder because the EPA just stopped counting deaths of Americans caused by pollution and summing up pollution-related health care costs. This is going to make doing the calculations challenging going forward for the utilities. In the meantime, we already have enough evidence that generating your own electricity normally makes economic sense. The more solar you use the better – so consider a high-efficiency heat pump for heating/cooling and even an EV, so you get the biggest bang for your solar buck if you decide to join your solar neighbors.
Thank your solar neighbor
Your neighbors that put solar on their roofs are being great citizens for you and for your local utility. When they put solar up they are essentially investing in the grid itself. Customers with solar distributed generation are making it so your utility company does not have to make as many infrastructure investments, while at the same time solar shaves down peak demands when electricity is the most expensive. The result is it saves money for everyone – even if you do not have solar….yet.
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