The Economics of Solar Homes in California

Developing clean, abundant solar power resources in California can benefit all those who live and work in the state – reducing air pollution, protecting consumers from volatile electricity prices, and reducing the need for expensive upgrades to electric transmission and distribution systems.

By providing incentives in the near term for installing solar photovoltaic systems on residences, the state can reap these public benefits while helping the bottom line of solar homeowners.

Including solar photovoltaic (PV) systems in new housing in California can result in significant public benefits. Societal benefits of solar power development – in the form of reduced electric system costs, mitigation against price volatility, environmental benefits and encouragement of new business opportunities – rarely are assigned an economic
value. Nevertheless, studies suggest that the value of this power to Californians is significant:

• Reduced electric system costs: To meet rising demand for electricity in California, utilities (and in turn, ratepayers) will either need to invest in expensive transmission upgrades, improve energy efficiency, or develop local resources. Solar PV delivers power during peak demand times when it is most needed. Studies have shown that it is cost effective for utilities to invest as much as $2,200 to $4,500 for every kilowatt of solar power developed in lieu of other capital investments.

• Mitigation against price volatility: California now depends on natural gas to supply nearly half of the state’s electricity needs. This dependence on natural gas leaves Californians vulnerable to volatile prices and steadily increasing fuel costs – natural gas prices have doubled between 1995 and the present. Increased use of solar PV can reduce future demand for natural gas and provide a hedge against future price fluctuations.

• Environmental benefits: PV systems reduce air pollution emissions that result from fossil fuel power generation – particularly global warming gases (carbon dioxide) and smog-forming emissions (nitrogen oxides).

A study conducted for the Sacramento Municipal Utility District found the benefits of averting these emissions could range from $38 to $1,048 per kilowatt of capacity.

Installing solar PV systems on new housing has the potential to maximize these benefits by reducing the costs of solar PV installations. Builders of new homes are often able to achieve bulk discounts for PV module purchases while saving on installation costs. A buy-down grant of $2,800 per kilowatt of installed solar capacity in 2006 would enable solar PV to generate economic benefits for many buyers of new homes in California while compensating homebuyers for the societal benefits resulting from their decision.

Based on outputs from an economic model developed for the National Renewable Energy Laboratory, the installation of a 2.5 kW DC (2.14 kW AC) solar PV system priced at $6.00 per Watt can be expected to generate net eco-nomic benefits for new homebuyers in nine of California’s fastest-growing municipalities with a buydown grant of $2,800 per kW (AC). (See Table ES-1.)

• On average, residents of one of the nine communities listed above could expect to save $4,500 over the lifetime of their solar investment, with savings of $68 in the first year (if the system is financed as part of a 30-year mortgage). The net present value of that investment (which measures the benefits of the project versus the costs, both discounted back to the present) would average approximately $1,500.

• The amount of benefits a homeowner can expect from solar PV varies from place to place based on several factors – most importantly, the price of electricity. In cities such as San Jose, where utility rate structures are favorable to PV, solar PV could potentially be cost effective with incentives as low as $1,300 per kW, assuming savings from installing the systems during home construction.

These results – coupled with published estimates of the societal benefits of solar power – suggest that an aggressive state solar PV buydown program coupled with other incentives and standards for the inclusion of solar power in new homes, could benefit residential homebuyers, utility ratepayers and the state as a whole.