Solar-Powered Welfare

In the “House & Home” section of yesterday’s New York Times, reporter Gregory Dicum tells what’s obviously intended to be a feel-good story about the rapid growth of roof-top solar energy systems in California homes. Ah-nold, you see, has decreed that 3,000 megawatts of the stuff be installed in California over the next decade — a 20-fold increase over the amount of solar power installed at present — and, gosh darn it, those Golden Staters are apparently on pace to do the governor proud. Interviews with enthusiastic manufacturers, installers, and homeowners follow, and not one discouraging word finds its way into a happy, by-golly feature piece that might as well have been written by Ned Flanders.

But there are plenty of facts that wander out of the mouths of these enthusiasts, and they should have given the reporter a reason to pause. For instance, a Mr. Nicky Gonzalez Yuen tells us that he spent $16,000 on his “modest, 3 kilowatt” solar energy system, but that it would have been $26,000 without a generous federal tax credit and state rebate check. A Dr. William Leininger tells the reporter that he spent $39,000 on a solar energy system for his 2,400 square foot home, but that it would have cost $63,000 without those federal and state rebates and tax credits. And then there’s a Mr. Robert Fenton, who tells the reporter that he spent $225,000 on a solar energy system to cut back on his $2,500 a month (!) electricity bills, but that federal and state taxpayer generously pitched in to relieve Mr. Fenton of the extra $134,000 that his system would have cost without government help.

Now, I have nothing against solar power or photovoltaic panels. But if they are such a great investment, why do we need to subsidize them? 

The decision a homeowner is asked to make when considering a residential solar energy system is a very common one in the business world; to whit, whether to invest an initial sum of money in a project that reduces annual costs over a long period of time. Take Mr. Fenton’s case, for example. He could invest $225,000 in a solar energy system that reduces his electricity costs (now at a staggering $2,500 a month) for the next 30 years, or he could invest the $225,000 somewhere else and use the principal and returns on that money over the same time period to pay his monthly electricity bills. 

Which is the better decision in strict financial terms? The amount of money he would need to invest now to pay electricity bills at the rate of $30,000 a year for the next 30 years is $434,571 [a calculation that assumes investment in a mixture of securities and bonds that earned 7% per year, but 5.53% after federal taxes (15%) and California state taxes (9%, reduced to 6% after the federal deduction for state tax payments)]. To achieve the same result through a residential solar energy system, Mr. Fenton only has to invest $359,000, of which taxpayers pay $134,000. Thus, the solar system makes financial sense for Mr. Fenton without the subsidies. The $134,000 subsidy is simply a gift from taxpayers to the obviously very wealthy Mr. Fenton.

Mr. Fenton’s result should not surprise. He noted in the article that because California has a tired rate system that charges large users more, his rates are triple the rates for modest residential use. If electricity rates are high enough and they reflect the real costs rather than a tax on large users to subsidize small users, then fine — alternatives to conventional sources of electricity might well make perfect economic sense.

In the case of Dr. Leininger, a more typical residential user, the economic case for the solar investment is doubtful even with the subsidy. His system, remember, cost $39,000 with the subsidy and $63,000 without. He is quoted in the article as saying it would “pay for itself in a dozen years.” I interpret that to mean a savings in electricity costs of $3,250 a year for 12 years. Again, what sum of money would someone have to invest today to yield $3,250 a year for the next 12 years? At an after-tax return of 5.53% (calculated as before), someone would need to invest just under $28,000. Because this is less than the alternative way of achieving the same result (investing $39,000 in a solar system), the solar investment doesn’t make strict financial sense even with the subsidy … and certainly doesn’t without.

If people want to spend their money foolishly — or, put another way, spend their money on environmental status symbols — then fine. But they don’t have a right to force other people to underwrite their extravagant indulgences. While I’m not aware of any data telling us what the average household income is for buyers of this stuff, I’ll bet you a roof-top solar energy system that it’s a heck of a lot more than the household income of the average or mean taxpayer. Simply put, federal and state solar energy subsidies amount to little more than welfare for the trendy well-to-do.

Of course, rich and trendy Californians have a million reasons for why some shmoe at Wal-Mart ought to be underwriting their killer solar energy panels. Mr. Felton, for instance, tells us that “solar is certainly a way to get off foreign oil,” a claim echoed by Dr. Leininger. But only about 3 percent of all the oil used in the United States goes toward generating electricity, heating homes, or what-not. And most of that consumption occurs in the Northeast, not the Pacific coast. So even if every house in America was plastered over with photovoltaic panels, foreign oil imports would continue to increase pretty much as they would under a business-as-usual scenario. Residential solar energy systems will displace domestic coal, natural gas, hydroelectric power, or nuclear energy — but not oil (foreign or otherwise).

But aren’t we reducing our “carbon footprint” and thus saving the planet from global warming? Maybe, maybe not. Manufacturing photovoltaic panels is a very energy intensive process and the materials necessary to put these things together are likewise products of heavy industry. Absent a comprehensive life-cycle analysis of the carbon energy involved, we can’t say for sure. I’m not aware of any such study in the literature.

What we can say for sure, however, is that there are far more cost-effective ways to go about reducing greenhouse gas emissions than putting solar panels on rooftops. If global warming is worth addressing, put a tax on carbon and let consumers decide for themselves how best to live under that regime. Having the government tell us exactly how to go about reducing greenhouse gas emissions is a bad idea.

This brings us back to the article. Did it ever occur to the reporter to ask whether taxpayers should foot the bill to light up, heat, and cool Mr. Fenton’s sprawling, high-tech mansion (the NYT’s picture of his house is really something to behold)? Or to double-check all of the wild claims made about how cost-effective these systems are? Or to double-check the ridiculous claim that solar energy will have any significant impact on foreign oil imports? Did it ever occur to Mr. Fenton’s editor? OK, this was a “House & Home” piece — not a place one might expect rigorous journalism — but the New York Times has a habit of parking stories about solar energy, energy efficiency, and related matters in that section. They deserve to be a cut above something out of People magazine.