Rooftop solar is no match for crony capitalism

The New York Times ran an article over the weekend about efforts by utility companies to fight the spread of rooftop-solar power:
Rooftop solar panel growth has come to a shuddering stop this year, with a projected decline in new installations of 2 percent. Since 2013, Hawaii, Nevada, Arizona, Maine and Indiana have decided to phase out programs that spurred explosive growth in the rooftop solar market. Many more states are considering new or higher fees on solar customers.
The article chronicles how utility companies have engaged in an extensive lobbying campaign against rooftop solar at the federal and state level. These companies are big campaign donors with deep political influence. They have also been receiving assistance from the American Legislative Exchange Council and the Institute for Energy Research, two think tanks funded by the Koch family, whose sprawling company Koch Industries makes much of its money from fossil-fuel energy. With that kind of political clout, the fledgling rooftop-solar
industry looks overmatched.
The clobbering of rooftop solar should cause dismay not just among environmentalists worried about global warming, but also among economists, policy makers and anyone who cares about economic efficiency. This is a case of an incumbent industry using the power of government to suppress a revolutionary new technology. That’s not good for anyone except the incumbent.
There is actually an economic case to be made against the main policy the utilities want to get rid of, which is called net metering. Net metering forces utility companies to buy surplus electricity from rooftop solar owners at the retail price. So if I have a house with solar panels that generate electricity only during the day, net metering means I can sell the electricity to the power company while the sun is shining and buy gas- or coal-generated electricity back for the same price at night. Basically, this solves the intermittency problem for solar customers — it effectively forces utility companies to act as free energy storage for rooftop solar customers.
Here’s where a problem crops up. Suppose that I’m a rooftop solar owner, and I want to use 15 kilowatt-hours of electricity during the day and another 15 kWh at night. My house generates 30 kWh a day. I use half of that, and thanks to net metering, I sell the other half to the power company at the retail price — say, 12 cents per kWh. At night, I buy that 15 kWh back from the power company at that same price. I end up paying nothing at all, on net, for the day’s electricity. But the utility company had to pay to build and maintain the grid that I’m using to smooth out my power consumption. So net metering is allowing me to get more out of the system than I pay for it.
It therefore makes economic sense to charge rooftop solar owners extra to maintain the electrical grid — without the grid, after all, a person using only rooftop solar wouldn’t have any electricity at night. It also makes sense to charge solar homes an extra fee to cover the costs utilities pay to increase and decrease the amount of power their plants generate over the course of
the day.
What’s less clear, though, is whether states should force rooftop-solar owners to pay for the creation and maintenance of gas- and coal-fired power plants. It’s hard to know how much of the fees that utilities are imposing on rooftop-solar users around the country go toward power plant maintenance and construction, but it seems likely that many of the fees are for more than just grid maintenance. Utility companies, of course, would love to make rooftop solar users pay for fossil-fuel plants, because it would ensure that the big investments they made in the past would be guaranteed to pay off in the future. Guaranteed profit margins with zero risk are a corporate executive’s dream.
Utility companies are an interesting case, because they’re a highly regulated natural monopoly. Since it doesn’t make economic sense for multiple competing utilities to build redundant power grids in the same area, one power company will tend to become a local monopoly. To prevent customers from being gouged, governments typically limit the amount of profit utilities are allowed to make. To compensate the companies for this loss of upside, governments limit their risk, by always allowing utilities enough profit to recoup their fixed costs. This regulated monopoly model attempts to give consumers approximately the same price and service they would get in a free, competitive market.
But when technology changes rapidly, this model can hold back progress. Solar is such a case. Costs are plunging. In a free market, that kind of technological change will naturally damage the business models of companies that made big investments in older tech.
If government acts to make
utilities invulnerable to that
disruption, then the market
for electricity will be very
inefficient in the long run.
It’s possible that rooftop solar is the future. Instead of generating power, the utilities of the future might simply build and maintain power grids and store excess energy in giant batteries or water reservoirs. Or rooftop solar might turn out to simply be much less efficient than utility-scale solar, in which case the utility business model might survive basically unaffected.
But whatever happens, governments shouldn’t kill rooftop solar simply to keep utilities afloat in their present, fossil-fuel-powered form. Fees for grid maintenance and variable power generation are fine, but fees shouldn’t be used to ensure that utilities never take a loss on their fossil-fuel investments. And measures to ban third-party ownership of rooftop solar are crony capitalism, plain and simple.
In the long run, the heavy hand of government almost certainly won’t kill the solar industry. Eventually, solar power will be so cheap that it makes sense to install rooftop panels even without net metering, and utilities will start switching from power plants to solar farms. But if utility lobbyists manage to delay the inevitable, the day when the economy benefits from cheap solar power will be pushed further into the future.

— Bloomberg

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion