Monday, December 26, 2011

Pricking Freakonomics Rooftop Solar Bubble Call

How does "bubble" describe dot-com stocks or condos in Las Vegas, the price of which escalated beyond any reasonable valuation based on costs or revenues?  Well indeed!  How does "bubble" describe the market for rooftop solar systems whose price is declining due to economies of scale and increased efficiency of solar panels?  Not well at all!

Yet, despite price declines of about 1% to 2% per month, Freakonomics labels the rooftop solar system market a bubble.

The piece suffers from a poor choice of words, chosen for dramatic effect--to draw eyeballs or for reasons of blogging economics.  While there is no bubble in solar rooftop systems, the Freakonomics piece does usefully highlight how the burgeoning use of on-site electricity generations systems, whether they be gas microturbines, solar systems, fuel cells matters not much, challenges the existing economics and pricing of grid power. 

As more customers produce more power at their homes and businesses, they purchase less kilowatt-hours from utilities or the grid, decreasing revenues to the utility.  These homes and businesses, however, remain connected to the grid and take power from the grid when they need to do so. 

The decline in revenues to the utility caused by distributed generations systems means that the fixed costs of the grid must be collected from less electricity delivered, pushing up the rate for each kilowatt-hour, shifting costs between customers who generate power on site and those who do not.

The Freakonomics piece focuses on a proposal by a utility in Southern California to the California Public Utility Commission to assess essentially a 5 cents per kilowatt-hour standby charge for solar PV customers.  The charge would amount to 31% of the current total bundled rate.  Assessing the 5 cent standby charge, would mean that a rooftop solar system could not avoid all 15 cents of the utility's current rate but instead just 10 cents of it.  Such a charge would slow solar deployment but not stop it.

At current rates of solar rooftop price declines, the equivalent of 5 cents per kilowatt-hour will be cut from solar pricing in about 3 years.  Moreover in about 3 years, the price of grid power would likely increase 10% to 15%.  Or in the case of the utility featured in the Freakonomics piece, its grid power would rise in 3 years from 15 cents per kilowatt-hour by about 1.5 to 2 cents.  The combination of declining prices for rooftop solar systems and rising grid power would erase the economic impact of the 5 cents standby charge in less than 3 years.

Rooftop solar is proliferating in Southern California so it is not a surprise that a regulatory battle over assessing a standby charge and its amount has broken out there.  As solar PV, microturbines, fuel cells proliferate, there will be more such standby charge cases.  These standby charge fights will be common, because the boom in rooftop solar PV is not a bubble and the same is true for gas microturbines.

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