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California mandates solar panels on all new homes

If you want to build a new home in California, you will have to build one with rooftop solar, according to a new mandate from the California Energy Commission. 

The solar rules will apply to new single-family homes and new multi-family housing of three stories or fewer. Under the plan, builders who obtain construction permits issued on Jan. 1, 2020 or later must comply.

Read more here:

This is pretty much a textbook definition of a command-and-control environmental policy, a type of policy that, as I repeat ad nauseam to my undergraduate environmental economics students, is one that is very unlikely to be as cost-effective as an incentive-based environmental policy like a pollution tax or a cap-and-trade market for pollution (which California already has BTW).

Environmental economists tend to dislike command-and-control policies.  Severin Borenstein at Berkeley wrote an email to the energy commission chair voicing his opposition, and James Bushnell at Davis has written and op-ed and a blog post arguing against it.  Both of them know a lot about energy and environmental economics, and about California’s electricity markets in particular. 

In addition to not being cost-effective, the policy will likely exacerbate another enormous problem with California’s economy: the housing affordability crisis. 

The requirements are likely to add nearly $9,500 to the construction cost per home as state officials have declared a housing crisis. Home prices have soared in California, and housing stock has failed to keep up with demand.

There are some defenders of the policy (not just the energy commission members, who passed it unanimously). There are two main arguments.  The first is a “second-best” or a political economy argument: a cost-effective incentive-based policy may be best but is unfeasible, so let’s be happy with the imperfect policy that we got.  Costa Samaras tweets:

Lukewarm take on the Calif solar on homes mandate: should they have done something more optimum instead? Yes- & we should assess objectively. But climate policy/deep decarbonization is about coalition politics, & 2nd (9th?) best policy options often happen instead of the optimum.

A second argument is based on induced innovation: this policy will drastically reduce the costs of solar implementation, so it is effectively subsidizing the under-provided positive externality from knowledge diffusion.

Due to the state’s revolutionary 2019 Building Energy Code requiring solar power to be installed at time of construction for all newly built homes, over time California home buyers could see per unit prices drop to rates approaching that of some of the world’s largest utility scale solar installations ($1/W in the United States).

Some previous research has examined the effects of solar mandates on technological innovation, and my reading of this is that the effect is there not not nearly as big as proponents argue. 

Anyways the whole point is that no one ever listens to economists.

Read more here:

Nate Lehrer of SolarCity carries a solar panel to be installed on a job in West Sacramento in April 2015. Hector Amezcua Sacramento Bee file

The residential solar mandate for new homes approved Wednesday by the state Energy Commissionwill make reaching California’s climate goals possibly more difficult and definitely more expensive.

Such requirements are the most extreme tool for energy and environmental regulators, going beyond tax incentives, education programs and renewable standards for utilities. These mandates eliminate consumer choice and assume it is the best solution for all homes everywhere, with limited exceptions.

Not only is residential rooftop solar not the obvious best option for “green” electricity, there is evidence that it is among the most expensive. According to business consulting firm Lazard, the net cost of energy from residential rooftop solar is twice that of solar panels on commercial and industrial roofs and as much as 10 times costlier than large solar farms.

Even at the utility-scale cost of 5 to 6 cents a kilowatt hour, there is growing concern that the massive commitment to solar in California is creating such a glut of mid-day electricity that prices during the day are plunging, and sometimes below zero. We are literally paying people to consume electricity during some midday hours.

Electricity system operators say they will increasingly have to curtail these large, inexpensive, solar producers because we have too much mid-day power. The Energy Commission mandate will pile even more expensive power onto that excess. Costs for society will go up, and the value received will go down.

The Energy Commission justifies its mandate in part though the logic that the electricity bill savings for most households will outweigh the roughly $10,000 in additional construction costs. The problem with this, as economists have argued for decades, is that electricity prices are messed up. Retail prices do not vary enough by time of day, even though costs do. Those costs don’t go down when a house installs solar. Instead, it shifts that burden onto non-solar homes.

Therefore, much of the “savings” is taken from customers who don’t install solar to pay those who do. Overall savings to customers don’t exist.

Residential rooftop solar may have a role to play in the power grid of the future, but it is far from clear that it is the best policy option for most, let alone all, new homes.

The Energy Commission is undermining consumer choice, just as U.S. Energy Secretary Rick Perry is doing by considering exercising emergency powers to essentially require that some customers continue to buy electricity from coal and nuclear plants.

Both efforts represent a dogmatic mindset and are likely to do more harm than good. With its history of innovative policymaking, California can do better

Lessons in Regulatory Hubris

by James Bushnell1 week ago

What the Solar Rooftop Standard has to tell us about our climate policies.

If you follow this blog, you are probably already aware that last Wednesday, the California Energy Commission, the state agency responsible for adopting energy-efficiency related building standards, added a new standard: starting in 2020 almost all new homes in California must install rooftop solar.

While I have already published an op-ed criticizing the move, I’m going to look on the bright side here. You see, this regulation provides what we in the University biz call a teaching moment. Many of us here have been working on climate and energy policy for a long time and realize that some core problems with regulatory approaches keep cropping up in policy after policy. Let’s call them the symptoms of regulatory groupthink.

So rather than picking exclusively on the new solar standard, we can use it as a case study to help illustrate a broader set of problems with many of our approaches to energy policy. As our climate goals get more ambitious, the stakes are getting much higher and we may not be able to continue to ignore these flaws. We are going to need to treat these symptoms or our climate policy could ride off the rails.

Symptom Number 1: If we like a technology, we mandate it!  If we don’t like a technology, we ban it!

One thing the press coverage of the standard seems to overlook is that there are lots of other policy options for promoting low-carbon energy and that we don’t necessarily have to do all of them. There are many pathways to zero-carbon electricity, and many of them don’t require solar PV on all houses. Standards, such as this new mandate from the CEC, are the strongest, and most extreme, tool in the toolkit of energy and environmental regulators. In general a regulatory standard eliminates choice and assumes that the mandated solution is the best one for everyone, everywhere, no matter what their circumstances. Contrary to the stereotype of economists, most believe that regulatory standards have a role to play, but as a kind of last resort. A rule of thumb should be, if everyone were fully informed and faced the right incentives (including the costs of their pollution), they would choose this option. Insulation in a new home meets that description.

In other words, standards should be limited to cases where they mandate an obvious, slam-dunk best option for solving a problem. This is where rooftop solar runs into trouble. In the case of rooftop solar, it should be not just the obvious best choice right now, but for much of the lifetime of a new home. That’s a tough criterion to meet. Consider what you thought to be the slam-dunk best technology 30 years ago.

My colleagues and I who have been critical of the CEC standard in the press have pointed to the fact that electricity from solar on residential rooftops is on average way more expensive than solar in other settings (warehouses, solar farms). I’ve gotten feedback from various commenters, friendly and not-so friendly, making arguments that point to the costs of high-voltage transmission, or concerns over large installations in sensitive desert eco-systems. Such factors should definitely be taken into consideration, and while they may narrow the gap between residential solar and other options, many believe they still don’t outweigh huge cost advantages enjoyed by large-scale installations.

But even having this debate misses a more important point. The burden of proof isn’t on me to show that there are better options for low-carbon energy than residential solar. I’m not the one requiring almost every new home install a nearly $10,000 technology. The burden of proof is on those pushing for a mandate that ignores any concept of a level playing field between possible solutions to show that their technology option is obviously the best choice amongst many others, not just now but also over the coming decades. I don’t think the CEC has come close to meeting that burden.

Symptom Number 2: We continue to treat infrastructure cost-shifts as savings.

This has been a recurring theme on the blog over the years. As Severin Borenstein has pointed out, one of the main reasons residential solar in California looks like a good deal, from the perspective of many households, is because its costs are compared to full retail rates. The problem with this comparison is that retail rates contain a large amount of fixed and sunk infrastructure costs. Those costs don’t go away when a home generates solar energy. Solar homes shift those costs onto non-solar homes.

Consider this situation: we spend $5 Billion to build a bridge across the Bay, and charge commuters $10 per round trip to pay for it.  It’s a good public policy decision because each commuter gains $20 in personal value from using the bridge. Right after the bridge is finished, the transportation commission determines that all commuters could own jet skis, and ski across the Bay at a cost of $8 a day. Two dollars less than having to pay the bridge toll! A win-win! It’s clear that for the best interest of those commuters, we should mandate they all buy jet skis. Except that those billions of dollars in jet skis won’t save us the cost of the bridge. Public policy evaluation needs to look at the full social costs of policies, and not treat cost shifts as free money.

Symptom Number 3: The infatuation with “net-zero <something bad>”.

The CEC solar decision is another step in the push for a net-zero energy standard for new homes. The solar mandate has been justified as one way to get the state closer, but still not all the way, to that goal. Rather than make the solar standard look better, this decision should draw more scrutiny upon the net-zero energy aspiration. This building standard target hasn’t received nearly enough attention or scrutiny, possibly because it hasn’t been taken seriously up till now. It’s a great example of the net-zero everything movement. Economists, or anyone who has spent any time thinking about comparative advantage, have long shaken their heads in disbelief at this stuff. Apparently we haven’t articulated the counter-argument clearly enough. Sure, net-zero energy for every new home could be way to reach our climate goal but it’s almost certainly not the best way. Requiring each California resident to sell enough goods and services to China to offset the imported goods they consume would be way to address our trade imbalance, but not the right way.

Or think of it this way, why not have net-zero energy standard for each room in a house? That would be crazy, you say? What if the roof above one room isn’t facing south and another is?  Well, what if one house has a roof amenable to large amounts of solar and another is a north-facing home with an odd-shaped roof shaded by trees?

Maybe, maybe, net-zero goals have a role as a  gimmick for spurring ideas in a demonstration project setting. When we start taking them too literally and applying things like this to every home, we’ve gone too far.

Symptom Number 4: Our renewable energy policies do not adequately account for the energy or capacity value of the resources we acquire.

In much of our policy a green kWh is considered better than a dirty kWh, but not all kWhs are the same. For example, California has been at the forefront of rapidly shifting its electricity production to renewable generation technologies. Utility-scale renewables have been driven by the renewable portfolio standard (RPS). Distributed renewable generation has enjoyed a raft of implicit and explicit subsidies, including net-metering and an extreme rate structure, which together make rooftop solar an attractive option for many California households. What all of these policies share is a complete indifference, incentive wise, to where and when the energy is produced.


Annual Average Wholesale Prices and Solar Output in CAISO Market

Under the RPS everyone has had an incentive to install the technology that produces the most renewable KWh regardless of when they are produced, and, in California, that has turned out to be solar. Recent work by myself and Kevin Novan, also of UC Davis, quantified the impact of the solar binge in California on the wholesale prices of power. In the last 5 years, thanks to the surge of wholesale solar energy (right panel) the price profile has moved from the blue (solid) line above to the red (dashed) line (left panel). What this means is all the solar we have already installed has driven down the value of midday energy. The next KW of solar capacity we install will be far less valuable than the first. The 10,000th MW of solar capacity we install will generate only about half of the value that the 2000th MW did. But the RPS doesn’t care, it just wants its KWh.


Estimated Value of Incremental Solar Capacity (Bushnell and Novan, 2018)

The new CEC rooftop solar mandate kind of cares, but in bizarre ways. The CEC uses something called the Time Dependent Valuation methodology, a forecast of the time value of energy and other infrastructure over the coming decades (good luck with that). Who knows, maybe the CEC’s consultants are exactly right and this is what the hourly marginal cost profile will look like, but it sure looks different than what I would have come up with.   Maybe reasonable people can disagree on this. This brings us back to point number 1, if reasonable people can disagree, then we shouldn’t be requiring almost everyone to install a technology justified by this one set of debatable assumptions.

As more aggressive and difficult carbon reduction goals loom for California, there seems to be an inclination to grasp at every policy we can think of that can add to the carbon reduction body count. It’s a spaghetti on the wall approach to carbon policy. However, it’s now more important than ever to focus on the efficient tools and policies that can push our carbon reductions in cost-effective ways. We could get away with inefficient policies like net-energy metering and zero-carbon schools when they were relatively small polices. From here on out the costs are going to start to matter.

This paper analyzes the impacts of consumer subsidies in the global market for solar panels. Consumer subsidies can have at least two effects. First, subsidies shift out demand and increase equilibrium quantities, holding production costs fixed. Second, subsidies may encourage firms to innovate to reduce their costs over time. I quantify these impacts by estimating a dynamic structural model of competition among solar panel manufacturers. The model produces two key insights. First, ignoring long-run supply responses can generate biased estimates of the effects of government policy. Without accounting for induced innovation, subsidies increased global solar adoption 49 percent over the period 2010-2015, leading to over $15 billion in external social benefits. Accounting for induced innovation increases the external benefits by at least 22 percent. Second, decentralized government intervention in a global market is inefficient. A subsidy in one country increases long-run solar adoption elsewhere because it increases investment in innovation by international firms. This spillover underscores the need for international coordination to address climate change.¢-kwh/

Due to the state’s revolutionary 2019 Building Energy Code requiring solar power to be installed at time of construction for all newly built homes, over time California home buyers could see per unit prices drop to rates approaching that of some of the world’s largest utility scale solar installations ($1/W in the United States). And if this seems hyperbolic, first let’s lay out the case for why this move by California is about to revolutionize residential solar in our country.

Outside of energy-nerd circles (used here endearingly of course), the dramatic and continuous fall in the price of solar panels is beginning to be acknowledged by the general public. Known as “Swanson’s Law” (a cousin of sorts to the more famous “Moore’s Law”), since the mid 1970s solar panels have gone down about 20% in price every time the volume we ship annually doubles. Put more simply, solar panels are at least three times cheaper than they were just a decade ago. While remarkable, and with every indication that this astounding trend will continue (some data shows the decline speeding up), that’s still just the panels.

What’s different here in the Golden State can be described in just two words: soft costs. For rooftop solar, some of these soft costs include permitting, financing, installation labor, cost of customer acquisition, paying suppliers, … and then of course hopefully some profit is left over for the company if they want to stay in business. Because these soft costs are greater for smaller installations, the U.S. Department of Energy (DOE) estimates soft costs can be almost two thirds of total costs.

Furthermore, soft costs aren’t decreasing as fast as hardware costs. However, this move by California is likely to bring down soft costs sharply, as it is expected to put downward pressure on nearly every one of these soft cost categories. For newly built homes, in many cases it eliminates them altogether.

The first piece of evidence comes from data provided to us by DOE’s National Renewable Energy Lab (NREL) in their annual U.S. Solar Photovoltaic System Cost Benchmark: Q1 2017.

We’re going to use this document as our base of discussion because the $3.17/W value that the California Energy Commission (CEC) decided (see page 38) to use in describing the potential costs per home for solar power, was based on the 2016 version of this document (including 2% inflation from that 2016 value).

Our standard solar power system is 3,015 watt system, composed of nine 335 W panels.  It is assumed this power class will represent the base Tier 1 product available to the market. We chose this value as it is close (slightly larger) to our estimates of what the CEC is requiring under the new code.

pv magazine chose to use values for net profit, overhead and sales & marketing for the new home solar that match up with the standards per the National Association of Home Builders cost to build a home in 2017. And it is here that we see the fat fall away. The residential retrofit solar power industry simply cannot compete with the efficiency of including an extra feature in an already being built new home. This is not an attack on the creative engineers that figure out these solutions – but a recognition of reality. Savings: 81¢/W!

Permitting/Inspecting/Interconnection costs – instead of costing 10¢/W and requiring whole departments, this couple of sheets of paper will be piggybacked on an already existing paperwork process, including an interconnection application.  These costs are estimated at 2% of all hardware and labor costs. Savings: 8¢/W.

Install labor costs will halve due to the efficiency of building at time of construction.  You can almost hear the sigh of relief from many solar installers, not having to snake their body through the sweltering, insulation filled attic with your skin inches away from the shingle penny nails that poke through exposed on the interior side of the attic crawl space.  Since California has higher labor costs than the national average, we used labor costs of $25.09/hr and electrician costs of $38.22/hr, as per NREL. Labor time was estimated at four hours, electricians at three, plus one more for commissioning. An hour for designing the layout was also included. Savings: 19¢/W.

Supply chain costs were looked at closely by NREL when they decided 43¢/W as the standard value. Local installers, buying from local distributors pay multiple layers of markups as products move through many layers. National homebuyers, reaping the benefits of economies of scale much like utility scale developers, will pay a standard 15% markup for shipping and storage. This 15% value is noted as the base value by the NREL report. It is a valid argument that smaller and custom builders will pay some of these fees. Savings: 34¢/W.

Electrical balance of system costs are a large variable on every project because homes are so different, and the upgrades needed vary so greatly. Will we need a new electrical panel? How will we snake the conduit from the roof to the inverter? Is the house up to code? In a new house, all of this is clean and the panels can be planned into the overall construction plan of the house. In fact – the basic costs here are as is: 30 feet of conduit and copper, a single external disconnect switch, a 20 amp fuse and $100 worth light goods (boxes, washers, bolts) to connect the wires. Savings: 18¢/W.

Structural balance of system is really just racking. And 11¢/W for flush mount residential racking is a great price – but even that is expensive compared to what can be done with a clean canvas.

The above QuickmountPV system needs a total of sixteen of their Quick Rack assembly units. You need nothing else but to attach your solar panels afterwards. These units can be bought in bulk, direct from manufacturer, probably at $10/each by a national home buyer. Savings: 6¢/W.

The NREL report suggests standard inverters can be purchased at 13¢/W – and that’s what we went with in this report. There is an argument that module-level electronics will be needed in order meet Rapid Shutdown requirements in NEC 2017 – this could be met on our model project at 4-8¢/W with various solutions. Savings: 6¢/W.

These numbers are not far from what Andrew Birch, former Sungevity CEO, showed us in Australia recently – $1.34/W to retrofit residential solar power versus $2.90 to do the same work in the California, mostly due to savings from those same soft costs that U.S. home builders have obviously figured out.

And there still are a few black swans out there that could drop pricing further. Will an integrated solar+housing material manufacturer like Tesla or RGS Energy deliver a product that combines the cost of racking+structural BOS (40.3¢/W), while also dropping solar labor installation costs (3¢/W) by combining that with the roofing material install time? Tesla’s Solar Roof does this, however, as of yet it is aimed at premium roof replacements and will seemingly cost much more than the base installs with commodity hardware modeled here.

With all these categories added up, this eliminates more than half the cost of a residential system, bringing down the total to $1.12 per watt. From there, the elusive $1/watt is only a few years away in terms of system cost declines.

Adding it all up we come to one last number – the California Energy Commission projects* that a 3,015 watt solar power system will generate, roughly, 133,630 kWh in a 30 year lifetime (4,785kWh/year 1, 0.5% annual degradation). At a system cost of $3,381 – that’s a lifetime cost of electricity at 2.5¢/kWh.

The CEC noted that systems at $3/W will cost new homeowners about $40 a month in a 30 year mortgage. Using these calculations the monthly mortgage payment will be $17 versus the same $80/month savings projected.

*The output of pv systems varies depending on climate and location within California, per the charts starting on page 39. For purposes of this document, we averaged the statewide numbers and then scaled them to our 3kW system.

These values are before incentives. In 2020, the homeowner would be able to claim a 26% tax credit against their solar system costs and in 2021 22%. After that, the residential solar tax credit expires. There are no state level solar power incentives in California – just expensive electricity and time of use rates.

Criticisms of the mandate

The biggest criticisms of California’s requirement seem to largely fall into two camps.  Some academics, intellectuals, and other garden variety wonks have decried this move because it doesn’t align perfectly with their espoused pet framing.  These are largely bereft of any real salient or tractable points, and come off as sour grapes because the naysayer wasn’t first consulted for his self-aggrandized oratory.

From the other flank comes the sophomoric dollar to dollar comparison of constructions costs for rooftop solar versus utility scale. These arguments are championed by those with a requiem for a vision of wide open swaths of landscape striped with clean lines of panels on aluminum rack-mounting laid out with mathematical purity like a giant monocrystalline Zen garden that’s been freshly raked

Looking at the contrasting hot mess of residential one-off installations, a literal piecemeal, it is easy to see why the proponents of this utility-scale-is-the-best-scale position immediately throw out a dollar-to-dollar comparison with the current cost norms of residential solar construction.  This ignores the fact that residential solar generates electricity directly at the point of use (the sun already has an innate distribution system) while utility scale is still dependent on transmission and distribution from the grid. The US grid is estimated to be a $5 Trillion dollar asset, and utility-scale solar and other forms of centralized generation get that for free in the calculation (not to mention all other non-generation costs).

Remember, distributed energy and efficiency just saved a $2.6 billion upgrade to that $5 trillion grid asset in California.

The only lucid comparison for residential solar prices are not the wholesale cost of utility-scale generation, but the retail rates of electricity paid by the consumer.  This requires a necessary shift in thinking. The default perspective for most energy wonks is to first consider the generation asset, and then the journey of the produced electricity through the grid, and then finally almost as an afterthought we note the consumed energy service.  Instead we should start with the point of use for the consumer’s energy service need, then we trace backwards to see how that need can best be met.

This monumental move by California shifts the playing field in unprecedented ways. Now residential solar will be much better able to leverage economies of scale across a wide variety of soft costs in ways that just weren’t possible before. Even for the wonkiest of wonks this will likely require a fundamental shift in thinking about how we characterize these assets and energy services.

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