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Opinion | Richard Schmalensee

Pricing solar so it doesn’t raise everyone’s energy rates

People walk past the solar panels at a wind and solar energy storage and transmission power station from State Grid Corporation of China, in Zhangjiakou of Hebei province, China, March 18, 2016.Jason Lee/REUTERS

Despite its recent growth, solar power remains an expensive energy alternative and accounts for only a small percentage of electricity generation in Massachusetts. If the state is going to make sharp reductions in carbon emissions as well as enjoy healthy economic growth, solar generation will have to be greatly expanded. But given the already high cost of electricity in Massachusetts, it is critical to obtain solar power as cost-effectively as possible to ensure that all consumers benefit.

In a recent study, an MIT team that I led presented a set of policy changes to make solar more affordable. The study shows that because of current policies, we are paying a good deal more for solar electricity than we need to. Residential solar systems are significantly more expensive per unit of capacity than utility-scale systems — about 70 percent more expensive on a levelized-cost basis. In addition, high levels of residential solar penetration often require substantial investments in distribution systems.


Residential solar continues to grow robustly, nonetheless, in large part because it is more heavily subsidized than utility-scale solar. The main federal subsidy, the investment tax credit, has just been extended for an additional five years. Since the amount of the tax credit is directly proportional to system cost, residential systems, which are more expensive on a per-unit of capacity basis, receive larger tax credits per unit of capacity than megawatt-scale, utility systems. This translates into a higher subsidy per kilowatt-hour of residential solar electricity, paid by taxpayers.

Massachusetts’ net metering policies provide another extra subsidy to qualifying solar. Retail rates, which residential generators receive, are higher than the wholesale rates that utility-scale generators earn. The difference is a per-kilowatt-hour distribution charge that was designed to cover the largely fixed costs of the grid itself — the wires and related equipment. As more residential solar comes on line, the distribution charge must be increased to cover those costs, and the burden of covering them is shifted to all customers without solar. Not only is this spending subsidy dollars wastefully, but the cost shift it entails has already produced an antisolar backlash in some states. Subsidizing the high-cost path to solar power more than lower-cost solar alternatives simply makes no economic or policy sense.


Finally, Massachusetts has a Solar Carve-Out program that requires electric suppliers in the state to purchase an increasing amount of solar electricity, generated in Massachusetts by relatively small-scale facilities, each year, regardless of the price. These high costs then get passed on to consumers as an invisible tax that raises electricity rates.

In order to promote the expansion of solar energy in Massachusetts at a reasonable cost, public policies must place a greater emphasis on rewarding the lowest-cost sources of solar electricity, not providing extra subsidies to the highest-cost sources as current policies do.

Policy makers should take all this into consideration as they continue debate on the future of net metering and other solar-related policies. It is clear that much of the state’s impressive solar growth relative to other states is because solar subsidies are more generous here, not because Massachusetts is sunnier. Ultimately, we should treat all solar generators equally, by reforming net metering and other policies that unnecessarily raise power rates for everyone. This is the best way to ensure that more Massachusetts residents have access to clean and green solar energy without placing undue burdens on others.


Richard Schmalensee is professor emeritus of management and professor emeritus of economics at MIT and former director of the MIT Center for Energy and Environmental Policy Research.