Renewable forms of energy, especially solar, have shown strong growth in recent years in the U.S., and that is certainly a positive development. As policymakers across the country continue to encourage this growth, it is important that they take a close look at the policies in place that provide favorable incentives to the solar industry. Currently, Maine has an opportunity to be among a select group of leaders on this front, as the state’s regulators work toward refining policies around solar energy.
Specifically, the proposal put forth by the Maine Public Utility Commission to reform net energy billing and ultimately transition to a more market-based approach for pricing solar energy production is a great example of how we should be thinking about these policies. Here’s what our key consideration should be: What is the most effective and efficient way to grow renewable energy production?
One of the main answers here is that while distributed solar energy can benefit homeowners and communities, it is not nearly the most technically or economically efficient way to achieve the goal of reducing greenhouse gas emissions. Ultimately, large scale solar is much more effective, and it will do more to help keep Maine’s electricity rates among the lowest in the region.
I’ve looked deeply into this topic, and I led a team from the Massachusetts Institute of Technology in a study of solar energy policies that was published last year. In this report, we propose a number of policy changes that would make solar power more affordable and better able to reach its long-run potential. We showed that, as a result of policies currently in place, Americans are paying much more for solar energy than is necessary.
Why is this? The main issue is that residential solar systems are significantly more expensive than utility scale systems per unit of capacity — by about 70 percent on a levelized-cost basis. And that’s not the whole story, because when there is a great deal of residential solar penetration, major investments usually are needed to reinforce the affected distribution systems to allow for reverse power flows.
So why is residential solar growing so quickly? A key reason is that it gets more subsidies per unit of capacity than utility-scale solar. The federal investment tax credit for solar, for example, is directly proportional to the cost of a solar system. This provides more subsidy dollars — in the form of tax reductions — per unit of capacity for residential systems than for utility-scale systems because residential systems have higher per-unit costs. And, of course, taxpayers bear the burden of these higher subsidies.
Net metering policies, which are currently being re-evaluated in Maine, are the way that other reason that residential solar is being unduly subsidized as compared with utility-scale solar. Under net metering, the retail rate paid to residential solar customers who produce extra power is higher than the wholesale rate that utility-scale solar generators earn. The difference between the two is a per-kilowatt-hour distribution charge set to cover the grid’s fixed costs. Unfortunately, as the MIT report demonstrated, when residential solar expands and those with rooftop solar buy less electricity, the per-kilowatt-hour distribution charges must rise in order to continue to cover fixed costs. So customers without solar end up with higher rates, a cost shift that many think is simply unfair. Whatever one thinks about the fairness of this, it simply makes no economic sense to pay higher subsidies for electricity generation from more expensive solar facilities.
The bottom line is that Maine regulators should by all means encourage the expansion of solar energy in the state. But they should do so by crafting policies that are reasonable and efficient, and that do not provide extra incentives to build high-cost residential systems rather than utility-scale systems, which could actually increase our supply of solar power at a lower cost. The current proposal is a useful step in the right direction.
Richard Schmalensee is the Howard W. Johnson Professor of Management Emeritus and professor emeritus of economics at the Massachusetts Institute of Technology. He also is the former director of the MIT Center for Energy and Environmental Policy Research.