Thought Piece

California’s new solar mandate will cost much more than anyone was told, writes Steven Sexton.

Essentially, the public sector, including well-funded politically active environmental groups, have decided that renewable energy, electric cars, and large scale storage batteries are the best investments for the future of California energy, economic development and environmentalism.

Unfortunately, this Wall Street Journal’s Op-Ed revealed the flawed accounting methodology for California’s state expenditure of solar energy and its return on investment will likely weaken the credibility for other CA initiatives.

First, it seems the public sector is awash in funding for renewables dedicated to the California’s environment and emission reductions. Consequently, the damage to these solar efforts casts a long shadow over the entire clean energy industry.

At a minimum, there should be full disclosure of all public funding and results, with independent verification. This is especially important when these funds and grants are received and expended on behalf of California.

In a world flooded with dubious environmental and economic claims, the credibility of all reported facts is crucial to state government, CA voters, and of course investors.

No matter what.

The Phony Numbers Behind California’s Solar Mandate

A state-hired consultant lowballed the costs and assumed massive subsidies in estimating benefits.

California’s energy regulators effectively cooked the books to justify their recent command that all homes built in the Golden State after 2020 be equipped with solar panels. Far from a boon to homeowners, the costs to builders and home buyers will likely far exceed the benefits to the state.

The California Energy Commission, which approved the rule as part of new energy-efficiency regulations, didn’t conduct an objective, independent investigation of the policy’s effects. Instead it relied on economic analysis from the consultancy that proposed the policy, Energy and Environmental Economics Inc. Its study concluded that home buyers get a 100% investment return—paying $40 more in monthly mortgage costs but saving $80 a month on electricity. If it’s such a good deal, why aren’t home buyers clamoring for more panels already? Most new homes aren’t built with solar panels today, even though the state is saturated by solar marketing.

The Energy Commission is too optimistic about the cost of panels. It assumes the cost was $2.93 a watt in 2016 and will decline 17% by 2020. Yet comprehensive analysis of panel costs by the Lawrence Berkeley National Laboratory estimated the average cost of installed panels to be $4.50 a watt for the 2- to 4-kilowatt systems the policy mandates. That is $4,000 more than regulators claim for a 2.6-kilowatt model system in the central part of the state, where 20% of new homes are expected to be built. Berkeley Lab further estimates that costs fell a mere 1% between 2015 and 2016, far short of the 4% average annual decline the regulators predict.

Now consider the alleged savings on energy bills. The commission’s analysis assumes California will maintain its net energy-metering policy, which effectively subsidizes electricity produced by a rooftop solar panel. Residential solar generators are paid as much as eight times what wholesale generators receive, according to a grid operator’s analysis of publicly available data. Dozens of states are rethinking these generous subsidies, paid by ratepayers, because they shift the costs of maintaining the electric grid to relatively poor nonsolar households. The California Public Utilities Commission is set to revisit this regressive policy in 2019—before the solar mandate takes effect.

If the subsidies are removed, solar adopters would be in the red. This is why the electricity generated by the solar mandate should be valued at the cost of its replacement from the grid—not at the subsidized rate households receive. In a presentation at the National Bureau of Economic Research earlier this year, I estimated the value of rooftop generation for each of California’s ZIP Codes using one year of price data from the grid operator. The average electricity value of the solar mandate’s model system is $12.50 a month, far less than the $80 benefit the regulators claim.

Moreover, using statistics to estimate which power plants would respond to additional solar generation, my colleagues and I also estimated the total value of the pollution avoided by the mandate’s model system to be only $6 a month. Even accepting the Energy Commission’s optimism about solar panel costs, the policy’s public benefits are only half as large.

Were state regulators interested in science-based policy to increase solar generation, they would acknowledge that economies of scale allow large-scale solar farms to generate twice the electricity of the solar mandate at the same cost. Inefficient but subsidized rooftop solar limits the market for utility-scale solar by depressing the wholesale electricity prices big generators receive. Even community arrays atop schools and parking lots would be less costly than the commission’s mandate.

Regulators should tailor policy to reflect routine variation in the value of solar generation across the state’s congested electricity grid. Solar panels are most effective when installed where transmission constraints make supply relatively scarce—not on every roof in California.

Though the solar mandate is unlikely to deliver huge savings to consumers, it certainly will raise the price of new and old homes. This couldn’t come at a worse time: Rising housing costs are putting the dream of homeownership further out of reach of low- and middle-income Californians. Sacramento politicians accuse the Trump administration of ignoring science and forgoing expert, independent review in pursuing its environmental and energy agenda. They should look in the mirror.

Mr. Sexton is an assistant professor of public policy and economics at Duke University.