by Planning Engineer (Russ Schussler)
In Part 1, we showed how wind and solar’s low costs over 80% of the time are overwhelmed by expenses at peak times such that they offer no cost advantages to the generation mix. Residential solar follows a similar pattern: it seems affordable for homeowners, but raises system costs through rate structures that over-incentivize adoption. Generous subsidies, like retail-rate net metering, drive excessive solar growth, risking grid stability and shifting costs to non-solar customers that are often less affluent. Less generous rates for residential solar slow adoption, but better align solar adoption with grid needs, ensuring fairness and sustainability.
The Economic Problem: Cost-Shifting Through Rate Structures
It’s hard to understand why many don’t see the unfairness in rate structures, as similar arrangements would seem absurd in other industries. Imagine hotels required to keep rooms ready for all customers (at standard rates) just in case they “might” want them. Worse, during low occupancy, hotels must send guests to customers’ Airbnb properties whenever there are excess rooms. Or consider pizza chains forced to buy excess pizzas from restaurants during slow hours while supplying low-cost pizzas during peak hours and covering all pickup and delivery costs. In all of these cases, the major problem is that large infrastructure investment is required that will sit idle most of the time and receive inadequate compensation from the beneficiaries.
How Residential Solar Rate Structures Work
Residential solar systems, typically tied to net metering, let homeowners generate and sell power in ways that appear cost-effective:
- Serving own needs: Solar panels produce during sunny, low-demand periods (e.g., midday spring), letting homeowners avoid utility charges. These charges are usually a flat rate based on average costs. (Note: The utility backs them up when panels don’t produce enough electricity.)
- Selling excess power: Surplus power goes to the grid, with net metering crediting it at rates varying by state. Typically, these payments exceed the energy’s value to the utility during low-demand periods.
- Hard Times: At night, on cloudy days, or during peak demand (e.g., summer evenings), panels produce little. Homeowners buy grid power at flat rates, which don’t reflect the high costs of peaking plants.
Rate structures today vary to the degree to which they subsidize residential solar. Below are general categories of rate structures, ordered by levels of subsidies, from high to low.
- Retail-Rate Net Metering: Credits residential solar at full retail rates (~$0.20–$0.42/kWh, e.g., Hawaii, Massachusetts, New York, New Jersey, Rhode Island). Yields high returns for residential solar (20–50% ROI) and encourages rapid adoption (e.g., Hawaii’s 30% penetration, ~200,000 homes).
- Partial Retail/Hybrid Net Billing: Credits at 50–80% of retail (~$0.10–$0.20/kWh, e.g., Connecticut, Vermont, Maryland, Minnesota) support moderate adoption of residential solar (e.g., Vermont’s 8% penetration, ~15,000 homes) with less cost-shifting.
- Net Billing at Avoided Cost: Lower credits (~$0.05–$0.08/kWh, e.g., California’s NEM 3.0, Arizona, Arkansas) slow growth.
- Wholesale/Avoided Cost Rates: Minimal credits (~$0.03–$0.07/kWh, e.g., Alabama, South Dakota, Tennessee, Idaho, Kentucky) yield low penetration (0.02–1.2%, ~270–10,000 homes), reducing subsidies and
Initially, solar power rate structures used retail-rate net metering. Lower subsidies could not attract sufficient participation. Since participation was low initially, the small subsidies from the overwhelmingly large group of non-participants were not significant. As more customers adopt solar, the economics change. California’s experience highlights the unsustainability of this approach. California now on version 3.0 of its net metering approach, which pays only for avoided costs for new customers. Retail-rate net metering became unsustainable as participation levels increased.
This chart shows the relationship between higher credits and the resulting penetration of residential solar for a sampling of states.
Of course, higher subsidies correlate with greater participation. California NEM 3.0 looks like an outlier, but it must be understood this participation rate was built not on the NEM 3.0 rate structure. The big base they have of residential solar was built on legacy policies, and viability today is supported by the area’s high retail rates and grandfathering of existing residential solar customers under the old tariffs.
In a 2015 post, I discussed various approaches to cost sharing for residential solar. It’s worth reviewing at this time as it provides additional coverage on the topic at hand. In that piece I noted that the models with the least subsidies still only required residential solar users to pay the incremental costs they incur, not shared system costs. Should residential solar customers help with basic system costs? The answer becomes increasingly important with high levels of residential solar. Responsibility for the basic system costs becomes attributable to fewer and fewer customers. Unfortunately, those footing the bill are disproportionately less affluent consumers who are most burdened by increasing energy costs.
The economic toll of overly generous rates:
- Lost Revenue: Utilities need steady charges to cover fixed costs (grid lines, backup power). Solar homeowners avoid these during low-demand periods, reducing revenue.
- Overpaid Purchases: High credits for low-value power strain utility budgets.
- Fat Tail Costs: Peak periods drive high costs (peaking plants and transmission and distribution expansion). Non-solar customers face 1-2% rate hikes in high-solar areas, per National Renewable Energy Laboratory studies.
Generous rate structures, like retail-rate net metering, fuel excessive solar adoption, raising costs and inequity. Less supportive rates, like California’s NEM 3.0 or South Dakota’s wholesale rates, reduce uptake, which is proper when solar outpaces system needs.
Early net metering aimed to boost solar, but its costs—shifted expenses and grid risks—are now evident. Regulators, prioritizing green energy, often mandated generous rates, as in California’s NEM 1.0/2.0, which achieved 25% penetration before NEM 3.0’s lower rates slowed growth. Fair pricing proposals are often labeled as anti-renewable, stifling reform.
A common justification is that subsidizing residential solar will lower prices and increase affordability. What goes unrecognized is that the cheaper residential solar becomes, it exacerbates unsustainable rate designs as fewer non-solar customers remain to support the system.
A Path Forward
Residential solar programs rely on structures that overpay for power and undercharge for grid use. Better designs would reduce incentives and align adoption with grid economics. Potential options for improving solar tariffs include:
- Time-of-Use Rates: Credit solar at market value less during the mid-day and charge more for peak power. This slows adoption, as seen in California’s NEM 3.0 (80% installation drop).
- Pay Avoided Costs: unlike time-of-use rates, avoided costs could be set at average rates to avoid costly metering and complexity.
- Grid Access Fees: Fixed fees ensure solar homeowners pay for reliability.
- Peak Demand Charges: Bills based on peak usage reflect true costs.
These options promote equity, reducing subsidies from non-solar customers to wealthier adopters. The key is recognizing cost differentials between what solar customers receive and what they provide. Fewer incentives mean less solar, which is proper when it drives costs, as in states like Alabama (0.7% penetration). Political pressure to support solar will resist such efforts.
Wrapping Up
Poor rate designs hide solar’s true costs, making it seem affordable while raising electricity rates for all. Retail-rate net metering drives excessive adoption of solar, shifting costs to non-solar customers. Less supportive rates, like avoided costs or California’s NEM 3.0, slow solar growth, aligning it with grid needs. This ensures fairness and avoids cost spirals. A sustainable energy supply requires pricing that reflects true costs, ensuring affordability for all.
Future posts will focus on utility economics, discuss problems with energy markets and delve into many of the often-ignored unaccounted costs associated with wind and solar. For example, many assume the grid is easier to operate when part of the load base meets its own needs. In reality, residential solar burdens system operators, increasing complexity and costs of stabilization efforts. In Australia, a renewables leader, operators see a need to switch off rooftop solar during stressful periods to maintain system stability. Look for follow-up posts in the coming weeks.
Yeah, but free energy from the sun!
That’s sarcasm, btw
Fish are free, too. It’s catching them and transporting them to the people who want to eat them that gets expensive.
Great humor, but the same should (always) be said about coal, gas, and oil, and gold and diamonds, for that matter.
Same for oil, gas and coal.
And coal!
But but but, whaddabout “saving the planet”?
https://principia-scientific.com/peer-reviewed-study-confirms-wind-solar-far-costlier-than-fossil-fuels/
“For example, producing solar power in Germany, with its northern latitude and frequent cloudiness, is three times more expensive than producing solar power in the southern latitude and general sunniness of western Texas.
Indeed, Texas is about as favorable an environment as there is for wind and solar power. For western Texas in particular, the southern latitude, predominant sunshine, and persistent windiness make for extremely favorable conditions for wind and solar power.
However, even in Texas, however, the Energy study shows wind and solar power are prohibitively expensive.
The peer-reviewed study shows solar power produced in Texas is
more than triple the cost of nuclear power,
more than quadruple the cost of coal power and
more than 10 times the cost of natural gas power.”…
You have to look at the costs on a mine-to-graveyard basis.
All else is bull excrement.
Net-zero by 2050 to-reduce CO2 is a super-expensive suicide pact, to increase command/control by governments, and enable the moneyed elites to get richer, at the expense of all others, by using the foghorn of the government-subsidized/controlled Corporate Media to spread scare-mongering slogans and brainwash people.
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Ignore CO2, because greater CO2 ppm in atmosphere is an absolutely essential ingredient for: 1) increased green flora to increase fauna all over the world, and 2) increased crop yields to feed 8 billion people.
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Norwegian-Owned Empire Wind, 810 MW; turnkey capital cost $5 Billion; Bank loans $3 Billion; Investors stake $2 Billion; Cost/kW = $5 Billion/810 MW = $6170/kW
https://www.windtaskforce.org/profiles/blogs/empire-wind-810-mw-turnkey-capital-cost-5-billion-bank-loans-3
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New York State Utilities will be paid foreign Owners 15.5 c/kWh for 20 to 25 years
New York State Utilities will mark this up before averaging it into their cost of purchased electricity.
Ratepayers and taxpayers ARE BEING SO SCREWED
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Per various laws, the federal government and NY State government will pay enough subsidies so the foreign Owners can sell for 15.5 c/kWh, for 20 to 25 years, instead of 30 c/kWh, without any subsidies, such as:
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1) Federal and state tax credits, up to 50% (Community tax credit of up to 10% – Federal tax credit of 30% – State tax credit and other incentives of up to 10%);
2) 5-y Accelerated Depreciation write off of the entire project;
3) Loan interest deduction to reduce any taxable profits from whatever source.
Subsidies shift costs from project Owners to ratepayers, taxpayers, government debt
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Utilities pay at least 15 c/kWh, wholesale, after 50% subsidies, for electricity from fixed offshore wind systems
Utilities pay at least 18 c/kWh, wholesale, after 50% subsidies, for electricity from floating offshore wind
Utilities pay at least 12 c/kWh, wholesale, after 50% subsidies, for electricity from larger solar systems
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Excluded costs, at a future 30% W/S annual penetration on the grid, based on UK and German experience:
– Onshore grid expansion/reinforcement to connect distributed W/S systems, about 2 c/kWh
– A fleet of traditional power plants to quickly counteract W/S variable output, on a less than minute-by-minute basis, 24/7/365, which leads to more Btu/kWh, more CO2/kWh, more cost of about 2 c/kWh
– A fleet of traditional power plants to provide electricity during 1) low-wind periods, 2) high-wind periods, when rotors are locked in place, and 3) low solar periods during mornings, evenings, at night, snow/ice on panels, which leads to more Btu/kWh, more CO2/kWh, more cost of about 2 c/kWh
– Pay W/S system Owners for electricity they could have produced, if not curtailed, about 1 c/kWh
– Importing electricity at high prices, when W/S output is low, 1 c/kWh
– Exporting electricity at low prices, when W/S output is high, 1 c/kWh
– Disassembly on land and at sea, reprocessing and storing at hazardous waste sites, about 2 c/kWh
Some of these values exponentially increase as more W/S systems are added to the grid
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The economic/financial insanity and environmental damage of it all is off the charts.
No wonder Europe’s near-zero, real-growth economy is in de-growth mode.
That economy has been tied into knots by inane people.
YOUR tax dollars are building these projects so YOU will have much higher electric bills.
Remove YOUR tax dollars using your vote, and none of these projects would be built, and YOUR electric bills would be lower.
+10
This is more of Von Mises opinions on socialism, that “administered” prices remove any real cost/price signal from the system.
With the result that in socialist systems, one can have low “prices” for products that are scarce to the point of unavailability. The old USSR was a “pull” economy, not a money economy. Money was nominal, political pull was real, if one actually wanted some item.
There was a common phrase in the Soviet Union which translates to English as “They pretend to pay us, so we pretend to work”.
The setup could be that whenever your rooftop solar array output is less than your household consumption requires, what you draw from the grid is charged at a special loading “inadequacy” rate that applies until your solar is again giving you all you need.
How about solar operators paying for disposal of their unneeded energy?
That actually happens for large producers when the spot prices go negative and there are times that wind and solar operators are told to curtail some of their output. For the operators getting tax credits or other subsidies, the subsidies more than make up for the negative prices. The solution is cutting out subsidies.
When the solar panels ruin your roof who covers that expense? My niece had to have the panels removed and roof repaired. She is not keen on solar anymore. She lives in Florida.
Could be worse. Fires on hospital rooves have become a frequent side effect. Yesterday’s fire below.
Just to make matters worse, those flat roofs are usually covered in some tarry waterproof stuff that is highly flamable.
Roof replaced.
House solar in my neck of the woods just pays for itself after about 20 years if there are no maintenance charges. Add storage if you want the panels to work during blackouts and that adds years. Inverters seem to be a weak spot and they are expensive. Utility companies are slowly reducing payback for excess electricity returned to the grid and local governments are adding taxes to make up for the tax shortfall. You still have to pay for your hookup to the grid and various distribution and special taxes like wildfire here (among others). High electricity users seem to make it pay to have solar.
Around here, we frequently walk by usually-huge, expensive houses plastered with solar panels, and as we do we say “You’re welcome. Not!”.
IIRC, home solar panels don’t have enough umph to start or run air conditioning compressors. Is that correct? How about heat pumps?
Electric motors generally require more watts to start than they use while running, and heat pumps are little different in the running mode for either heating or cooling. However, your climate might require a higher power unit when heating than when cooling,, so that might give you unnecessary higher power air conditioning in the summer. In all cases, neither will work when it’s dark or cloudy unless you have a whole lot of batteries.
There are “slow start” devices for AC units which reduce that initial starting surge. Softstart is one such device. They are frequently advertised to supplement whole house generators, which may not be able to supply the necessary starting umph as you put it (or inrush current, or Locked Rotor Amps) for standard AC compressors.
A 3-ton single phase 220VAC compressor requires 75-80 amps inrush current (for about 1/2 cycle, IIRC). This can be reduced to around 25 amps with a soft start device. Steady run current is 11-16 amps. I suspect a battery would be required as part of a rooftop solar installation to reliably start home AC units when not connected to the grid.
Heat pumps are just AC units that can work in reverse; starting umph requirements are the same.
There is a social cost of solar. The cost of the grid that backs it up. Solar should be paying the grid.
Here in the Northern Rockies in the forest there are weekend cabins without any connection
to the grid. One of that I know the owner has a propane generator and a couple of medium
sized solar panels and a group of lead acid batteries. For the purpose of keeping the batteries
charged it works pretty good except in the winter when the panels are covered with snow. Without
the genset it wouldn’t work. He has lights on weekends, heats with a wood stove and has a spring
for water. The hunting is pretty good.
The snow sledding is world class as it the backcountry skiing. That’s about the
best use of solar panels I’ve seen along with camper trailers with kinda of the same deal.
He won’t use the panels on his place in town only at his cabin.
As a solar engineer I recognized immediately that roof-top solar was not economically viable without subsidies. But with 12 cents/kWh net metering subsidies, a 30% federal tax credit, and a 10% state tax credit, it made economic sense for me. In 2010, with a $6/Watt installed cost (before subsides) it computed to a 9 year simple pay back period, which in fact it met. For twelve years I had negative electric bills and even now they average around only $20/month.
More importantly, I realized that the people who did not install solar would pay for those that did. Using that argument alone, I was able to convince six other households to install solar for which I received referrals totaling about a third of my net installed cost.
Solar has been very very good to me.
As for the rest of the utility customers, not so much, for the very reasons pointed out in this article.
Good for you. Maggot.
Jealousy is not a good look.
If that’s what you need to tell yourself. Maggot.
When your government offers a good deal, don’t blame the people who take advantage of it, vote to get rid of it.
The appropriate response was to wish that his subsidies get cut off and that the utility switches to time of day metering and power credits based on wholesale prices at that time.
The sooner we can phase out subsidies, the better.
Very nice. A couple points. Products or services that need to be subsidized are not cheaper. The cost has simply been shifted. Products and services that can only exist due to mandates are not desirable. Remove subsidies and mandates and solar and wind go away tomorrow.
Except for economically viable NICHE applications.
I want to install solar panels just to reduce the amount of electricity I have to pay for. I don’t care about selling to the utility.
Gregg, you want the grid to keep operating continuously, but only want to pay when your solar supply is insufficient. This means that the operator has to recover the costs of continuous operation from fewer people, eventually increasing my electricity costs to subsidise people with solar panels who are connected to the grid.
If you can spend less by getting other people to pay more, that’s a rational plan. Everybody loves a Government subsidy – I certainly do! Governments are slowly realising that they are paying for somebody else’s free lunch with taxpayers’ money. Pity.
Go for it.
But selling your excess to the utility is how you “reduce the amount of electricity I have to pay for.”
The average two person household on a suburban block anywhere on mainland Australia can get close to free energy if they have 6kW of solar panels and 10kWh of battery providing they stay connected to the grid. The service fee is an insurance policy against cloudy days. Cost ends up around AUD30 per month, excluding opportunity cost.
To go off grid requires 9kW of solar panels, 30kWh battery and small auto electric start diesel. Roughly 3 times the capital outlay to avoid the service fee. Obviously AUD30/month is not going to pay the difference.
It is only a matter of time before the service fee is increased for solar households to reflect the true burden they impose on the grid. The cost of owning and running a coal fired power station has little relationship to its output. It is almost fixed cost. So just running them on cloudy days means very little output to recover the cost of owning and maintaining the generator.
Texas has made the right move in requiring all connected generators to be dispatchable.
The solar cross subsidies in Australia have been highly regressive. Those who own a roof and can fit solar panels can insulate themselves from the high cost of electricity. Those who do not own a roof carry the burden of those who do and have installed solar panels.
Fundamental problem with intermittents is the requirement for a 100% replacement generation system, available near-instantly.
In other words, you cannot go with the lowest cost, cleanest baseload (nuclear and hydro), you have to use at least some gas peakers to compensate for the high fluctuation in intermittent sources.
Thus, from a capital cost (and often a generation cost), intermittent sources are always cost adders, never cost replacers.
When you look at domestic solar from the point of view of the individual household you might find that metering imports and exports separately produces significant gross flows in both directions. Individual household demands can be very peaky
Of course, with some stochastic averaging across a number of households who switch on kettles at different times you get a more even flow of demand, but even if you are home it is likely that most of your solar output will be exported, and you will be importing to meet peaky demands. These effects impose additional burdens on local distribution grids.
Grossed up the solar duck curve from domestic rooftops can produce a large surplus that not only means that dispatchable generation gets turned down, but also utility scale renewables because they can be curtailed whereas most domestic solar is not remotely controllable. Some of that is voluntary when there is negative pricing: it depends on the subsidy curve enjoyed by generators. Those on the most lavish subsidies will try to avoid curtailment. For those on lower subsidies, their revenues may be better by curtailing and being paid for it than by taking the negative market price and their smaller (or sometimes zero) subsidy. In fact, this how negative prices tend to be set: pick off the cheapest to curtail until the required turndown is met.
In the UK we started with a FiT system that paid for every kWh generated at a fixed rate, with an assumption that 50% of generation was exported, and paid a top-up for the export, with metering of solar output and grid import. As solar looked to be reaching its sensible limits those subsidies were scaled back and ultimately withdrawn, replaced by export/import metering and a low export price: you got own use power for “free”, saving the high grid tariff. Domestic solar installations almost ground to a complete halt. However, the energy crisis and continuing rapid rise in prices due to net zero costs has seen a big surge in domestic installations.
It has been even more marked in several European countries where the subsidy regimes have remained more generous. The Dutch have continued with net metering, but the solar problem has been huge, with enormous strains on the grid as a result, and most dispatchable generation is faced with needing to shut down in the middle of the day. The coal fired MPP3 that used to power the BritNed interconnector now shuts down in spring and summer because it cannot handle the ramping. Net metering will be withdrawn, and households will be charged for grid connection for export. That may produce some increase in domestic battery installation, but Dutch homes are not well suited to having those: very few have separate garages to reduce fire risk.
Belgium has similar problems, and we have seen in Spain and Portugal that the weakening of the grid for inertia and voltage stability and reactive power have produced blackouts culminating in the Gran Apagon on 28th April. Germany also suffers from the same problem: there are now wide swathes of the CEE grid that are inherently very weak during sunny midday periods. The possibility of a much wider blackout than the Iberian one is rising fast.
Solar panels also heat up roofs on chalet bungalows and makes bedrooms hot in the Summer.
Changing from large hub and spoke grid to spaghetti and meatballs grid costs big time too-
AEMO flags rethink of transmission plan as costs soar and social licence bites | RenewEconomy
aside from trying to integrate the voltage and frequency of so many different generators.
Social licence is a fancy term for power consumers being pissed off with all the unsightly coverage of Nature that such dilute fickle energy generation and distribution necessitates.
The scale of AEMO’s ambition is ridiculous