SCTY and solar subsidies

There are subsidies specific to residential solar that aren’t available to other forms of solar.  Essentially, homes without solar subsidize the ones with solar by paying higher electricity rates.  I don’t think that this is sustainable in the long run.  For there to be more residential solar, electricity rates will have to go higher and higher.  (Ironically this improves the economics of subsidized residential solar.)  At some point, I think that voters will ask for lower electricity bills.  Eventually, politicians “ought” to reduce residential solar subsidies.

(The analysis in this post is superficial.  I apologize in advance.)

How the residential subsidies work (as I understand it)

There are two main costs to providing electricity to residences:

  1. The cost of the transmission infrastructure.
  2. The cost of generating electricity.

In most areas, residential users aren’t billed directly for the cost of infrastructure.  Residences pay a retail rate for electricity that is higher than the price a commercial user would pay.  This difference pays for the cost of the infrastructure to carry electricity into a residence.  Residences that consume a lot of electricity subsidize residences that consume very little.  This pricing structure also unintentionally subsidizes solar power.  If a residence generates some solar power, that particular residence will pay a lower share of infrastructure costs because it pays for less electricity from the grid.

Any excess power generated by a solar-powered home will be sold back to the grid at retail rates.  Because these retail rates are much higher than commercial/industrial rates, residences are able to sell electricity back to the grid at rates far above market value.  This is another subsidy.


SolarCity is in the business of helping homeowners install solar panels on their roof.  SolarCity can also help finance the installation.  It can optimize the tax-related subsidies by leasing the panels to the homeowner and passing the tax benefits onto tax equity investors.  SolarCity also uses securitization financings to achieve a low cost of capital.  In theory, growth will create economies of scale for Solar City (e.g. the fixed costs of putting together securitizations creates fixed-cost leverage).  Higher margins from economies of scale combined with higher volumes translate into substantially better economics for SolarCity.  Rosy projections about growth are needed to justify SolarCity’s current valuations.

I personally don’t think that solar subsidies will go on forever.  Eventually electricity rates will reach unsustainable levels.  The story might play out like for-profit education, where an industry was devastated after silly government subsidies were reduced.

If politicians were sensible, they would shift the subsidies towards utility-scale solar (or eliminate solar subsidies altogether).  Utility-scale solar is just as clean as residential solar but has better economics due to larger scale.  Of course, I would never want to bet on politicians acting sensibly.  Nonetheless, I think that they will eventually be forced to do something about residential solar subsidies.

*Disclosure:  Short SCTY.  This is a crowded trade.


Residential, Commercial, and Utility-Scale Photovoltaic (PV) System Prices in the United States: Current Drivers and Cost-Reduction Opportunities

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