A Free-Market Energy Blog

Rooftop Solar: Grievous Grid Economics

By Landon Stevens -- September 30, 2013

“It’s these subsidies and unfair billing credits–coupled with the intermittent nature of solar energy–that has utilities, utility customers, and taxpayers questioning the expansion of solar power. Until the solar industry can effectively operate in a free market and not burden consumers who cannot or choose not to install rooftop solar, this debate will continue.”

Solar power generation in the U.S. rose nearly 600% from 2000 to 2010 (NREL), and this trend is continuing. Fueled by an array of federal, state and local subsidies along with utility-bill credits, the economics of photovoltaic (PV) energy might seem too good to pass up. This is especially the case with residential or rooftop solar systems.

However, a closer look at industry subsidization, the unique properties of PV, and controversial billing practices for solar users, such as Net Metering, show that solar power is not as great a deal as its supporters would have you believe.

Economics of Rooftop Solar

For homeowners looking to add solar panels to their rooftops, there is no shortage of handouts to help make this possible. First, there is a 30 percent Investment Tax Credit from the federal government, in place until 2016. If not used completely at the time of installation, this credit can be carried over for up to five years. On top of that, state, local and utility specific programs sweeten the deal. These programs vary greatly by location.

California, for instance, implemented a 15% tax credit and an upfront subsidy of $4.50 per watt of installed capacity following the energy crisis in 2001. Those upfront subsidies have decreased as adoption has increased, but the cost has been substantial and will total over $3.3 billion by 2017. Depending on where you are in the country, these subsidies may never be recoverable due to limited efficiency of solar power in a given area.

For instance, a homeowner in Rochester, New York decided to put a rooftop solar system on his house to demonstrate the exorbitant government waste. In 2009, the homeowner put 20 solar panels on a pergola that tilts to follow the sun and provides shade for plants beneath it.  The system cost $42,480, and the home owner received $29,504 from the federal and state government in subsidies and tax credits (almost 70 percent of the total project cost), making the home owner’s investment just under $13,000 for the system. Of the $29,504 the home owner received in government funds, about $17,000 came from the New York State Energy Research and Development Authority; the remainder from the federal government.

The absurdity that is demonstrated here is that the solar panels will not generate enough electricity to cover their cost, even though New York’s electricity prices are some of the highest in the country. Since the solar panels were installed in 2009, they have generated about 15,000 kilowatt hours of electricity in four years, reducing the home owner’s electricity bill by several hundred dollars a year. The payback period to recoup the homeowner’s original investment of $13,000 is almost 20 years. But, it would take 60 years to recoup the entire investment of $42,280—well over the economic life of the solar panels!

Grid Reliance of Hybrid Solar

The Rochester example highlights a major flaw in rooftop solar that is generating huge discussion at the national level. Despite their best efforts, nearly all solar users are still dependent on the utility grid for energy much of the time. That is, a very limited number are able to completely go “off the grid”.

This results in rooftop solar installations acting as part of a hybrid solution. During the day when it is sunny, solar units are powering the home. However, on cloudy days or at night little to no power is available from the panels and the home begins drawing from the local utility grid just like homes with no solar panels. In no cases does the power simply go out when the solar supply does.

According to the U.S. Energy Information Agency, by 2018 photovoltaic solar panels will have a capacity factor of only 25 percent. This means that solar is only producing, on average, 25 percent of its maximum output throughout the year. So, residents with solar installations on their homes could find themselves using electricity provided by their utility companies around 18 hours a day.

Net Metering: Shifting Costs

Another controversial consideration in the economics of residential solar is the practice of “net energy metering”. The idea behind the net metering system is simple—it allows people who generate electricity on their homes and businesses to sell electricity back to the grid when their generation exceeds their usage. At first blush, this seems like a non-controversial proposition. In fact, in 2005 Congress passed the Energy Policy Act of 2005, which mandated net metering in all states when requested by a state’s residents.

Over the years, the costs of solar power systems have come way down. Yet the subsidies paid to solar adopters have remained the same. As customers have realized this, there has been a massive spike in solar expansion beyond what most utilities projected and had prepared for. In the last three years alone, the cost of solar panel units has dropped 75 percent, largely due to Chinese production and policies that have driven prices down. This drop in price combined with lucrative subsidies has resulted in a 600 percent increase of installed solar power capacity in the U.S. in the same timeframe.

Utilities have issues with net metering because of the rate they pay customers for generating electricity. When a net metering customer generates surplus power and feeds electricity to the grid, the utility is compelled to buy that power at the full retail price. Most of the time this represents an amount much higher than the wholesale prices utilities pay when purchasing power generated from power plants.  In Wisconsin, for instance, the average retail price is 400 percent more than wholesale.

Due to the intermittent nature of solar energy (it only works when it is sunny), solar users will have a need for backup power supplied by their utility. (Distributed storage is prohibitively expensive.) However, when solar owners are subsidized at high rates, and in higher than expected numbers, utilities are paying more than they would otherwise for electricity.

study by Navigant Consulting, prepared for Arizona Public Service utilities, showed that the amount solar customers pay for electricity (after bill credits) is below the utilities’ costs for servicing those customers. Utilities must then charge its non-solar customers to cover the fixed costs solar customers are avoiding in self-generation, leading to higher bills for those non-solar customers.


Governments and homeowners may rush into a new technology without fully appreciating all the issues involved, but eventually the economics will catch up and there will be a price to pay. This is true with respect to the rooftop solar industry. It is already heavily subsidized by federal and state governments, and it could also end up costing non-solar homeowners for its share of the grid if net metering continues, not to mention its wasting of government funds on an industry that cannot generate enough electricity to cover its cost.

It’s these subsidies and unfair billing credits coupled with the intermittent nature of solar energy that has utilities, utility customers and taxpayers questioning the expansion of solar power. Until the solar industry can effectively operate in a free market and not burden consumers who cannot or choose not to install rooftop solar, this debate will continue.


Landon Stevens, policy analyst at the Institute for Energy Research, specializes in issues regarding government regulation and federal mandates for renewable energy sources. Originally from Calgary, Alberta, he also covers North American and international energy issues.


  1. Eric Simpson  

    In an article titled “Germany faces rising electricity costs and at least $270 billion for wind power with an exit from nuclear power,” Nextbigfuture reports:

    According to the Institute for Energy Research, this year German electricity rates will increase by over 10% due to a surcharge for using more renewable energy and a further 30 to 50% price increase is expected in the next ten years.

    German electricity is already about triple the price of electricity in the USA and four times the price in Canada. Without a change in course, says the government, costs could rise to 40 cents/kWh by 2020 [or much more as it already costs as much as 34 cents / kWh].


  2. Ed Reid  

    The adverse economic impacts of net metering on non-generating customers and utilities are economically easy to remedy, though politically difficult. The adverse economic impacts are largely caused by rate structures which require utilities to recover some percentage of their fixed costs through the variable portions of their rates. This is the same issue which causes utilities to under-earn their allowable rates of return during weak economic times and/or years of relatively mild weather; and, to over-earn their allowable rates of return during periods of strong economic activity and/or years of abnormally warm or cold weather.

    Revision of utility rate structures to allow full recovery of fixed costs through the fixed portion of the rate (monthly service charge) would resolve most of the economic issues with net metering. Such a revision would result in a doubling, tripling or even quadrupling of the monthly service charge, depending on the regulatory jurisdiction, which explains the political difficulty of this solution. The current beneficiaries of net metering would be impacted both by the increase in the monthly service charge and by the reduction in the energy charge, which would reduce the value of the energy they export to the grid. Non-generating customers, on the other hand, would see their electric bills decline, ceteris paribus, since they would no longer be subsidizing the fixed costs avoided by the generating customers; and, they would be protected from increased costs resulting from the projected growth of customer generation.

    This rate structure revision might affect both the rate of adoption of on-site generation and the percentage of on-site generators choosing to go off-grid, though the magnitude of these impacts would be very difficult to predict.


  3. rbradley  

    Good post–MR is back in the Top Ten (#10) today at Technorati among ‘green blogs’ with this post: http://technorati.com/blogs/directory/green/.


  4. Steve P  

    Great post. Every time I review the economics of PV – the bare economics with no subsidies, I get a simple payback of 27 years, even with relatively expensive power at $0.15 per kWh. How then do these people keep trumpeting that PV has already reached “grid parity” ?



  5. Jerry Graf  

    Excellent post. I completely agree with your assessment of subsidized and mandated solar power implementation, and your views on net metering. I recently had an exchange with a roof top solar owner in PA who could not fathom that their net metering deal was going to adversely affect the cost of electricity. I ended with the following points:

    The coal generators must deliver huge amounts of very consistent electricity to the electric companies, very reliably, very repeatedly, hour-by-hour, day-by day, and in the exact quantities demanded. They get paid maybe $0.05/KWh on average.

    The natural gas generators also provide huge amounts of very consistent electricity to the electric companies, very reliably, very repeatedly, hour-by-hour, day-by-day, and in the exact quantities demanded. In addition, they need to be able to react very rapidly with stand-by capacity to fluctuations in public demand hour-by-hour or even minute-by-minute. For this extra costly service they might get paid $0.08-$0.10/kwh on average, maybe a bit more if fluctuations become highly pronounced.

    The roof-top solar panel owners deliver a trickle of highly unreliable and variable electricity, whenever they are able, in whatever quantity they are able, whether the electric company needs it or not (if not it is instantly lost & wasted). The electric company does not know if, when, or how much electricity they will be getting from the solar panels; the power level delivered at any given time will change by the minute; and they have to figure out how to deal with what is being thrown at them; meaning they may well end up paying their natural gas providers more for bigger fluctuations in their demand.

    For this, the solar panel owner expects it is reasonable that their electric company is forced by law to pay them significantly more for their “solar” electricity than is paid to other suppliers. In fact the solar panel owners feel it is reasonable that the electric companies should be forced by law to accept the “solar” electricity for the same price they sell it to their other residential users, for a higher price than they sell it to their commercial users; and for a price that forces them to take a loss on the transaction.

    How could anyone NOT realize that this is going to drive up the cost of everyone’s electricity???

    I have also reviewed other solar energy projects in my home state of Ohio, such as the Cincinnati Zoo, the Toledo Museum of Art, and the largest solar farm in Ohio at Wyandot.


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