Many people are attracted to the idea of placing solar panels on the roofs of houses to generate electricity. This post by Matt Yglesias is typical. However the idea makes no economic sense.
Yglesias claims there are no economies to scale when generating electricity with solar panels. This is obviously false. Imagine millions of solar panels lined up in rows in desert areas of Arizona (or Nevada or California). Compare this to a few solar panels on the roofs of millions of houses. Which arrangement will be easier and cheaper to build and maintain? The answer is obvious. Furthermore the desert panels will generate more electricity as few houses get as much sun as the southwest desert.
So given that utilities are not generating electricity from solar panel farms in the desert how do you create the illusion that generating electricity from less efficient roof top installations is sensible. The answer is massive subsidies. Some of these subsidies like tax credits and low interest loans are obvious. Another is less so.
It arises from the way the residential electricity consumption is currently billed. Typically there is a small fixed charge and a per kwh charge based on usage which accounts for the bulk of the bill. However in reality most of the cost of providing electrical service to a typical residence is fixed consisting of the costs of constructing and maintaining the power generation and distribution system. In most cases the marginal cost of actually generating the kwh is not the bulk of the cost of service. The effect of the difference between the actual costs and how electrical service is billed is that large users tend to subsidize small users.
So what does this mean for rooftop solar panels. It means the reduction in your bill from generating some of your own power overstates the savings to the utility. The difference will have to be made up by the other customers which represents a subsidy to you (since you are not disconnecting from the utility entirely and still expect utility power to be available whenever you want it). The subsidy is even greater if you are allowed to sell excess power to the utility at the retail rate (run your meter backwards). By pricing rooftop electricity at the retail rate it may appear to be a better deal than electricity from solar farms in the desert priced at the wholesale rate but this is an illusion. It would in fact be cheaper and thus better for society if it was generated in bulk in large installations.
Installing roof top solar panels is a symbolic way of demonstrating concern for the environment. Too bad they don't actually make any sense.
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