Googling Electricity

Google recently announced that it would be providing a $280 million equity investment in SolarCity to support SolarCity’s residential solar lease program.  SolarCity claims that the cost its 20 year solar PV system lease would be lower than the electricity bill savings over the life of the lease.  The prospect of a rooftop solar system providing electricity at a lower cost than the local electric company is a potential game changer that I had to investigate.  I was surprised to find out that by putting a leased solar system on my rooftop I can get electricity for 20 years at a fixed price of about 12¢ per kWh.  How could this be?  Does it portend the beginning of the end for the electric utility industry?  Was Jerry Brown aware of this when he made a campaign promise of 12,000 MW of distributed generation in California?  So I decided to sharpen up the spreadsheet and find out.

How Does It Work?

There are currently at least three companies offering residential solar leases or power purchase agreements in my area.  They all offer variations on the same concept:  a zero down payment ten or 20 year lease with payments (per month or per kWh) that increase by a fixed percentage (2.5 to 4%) each year.  The lease can be converted to a fixed payment for the entire term by making an up front payment of 5% or more of the net purchase price, or could be entirely prepaid.   The effective annual interest rate for deferring payment is over 13%, which takes a serious bite out of the savings and makes prepayment attractive.  The cost of the prepaid 20 year lease came out to under $3.50/watt DC, including a 20 year equipment warranty and a meaningful[1] annual production guarantee.  The maximum cost of electricity (payment / total guaranteed production) is 13.2¢/kWh, compared to my current average electricity rate of 17.5¢/kWh, a price which has increased an average of 5.3% annually over the last 10 years.  The utility’s net metering program, which credits peak period (daytime) production at higher rates, results in an actual bill reduction of 27.5¢/kWh, making the solar investment look even better.  Should utility rates continue to increase at 5.3%, the savings would average almost 48¢/kWh.

Is It Really That Cheap?

This can’t be right, there must be hidden subsidies involved somewhere.  In fact, the difference between the total cost of the system and the prepaid lease cost is about $2.70/watt – over 40% of the total system cost of $6.20/watt.  And this is without attaching any value to the performance guarantee or the 20 year warranty, which includes anticipated replacement of the inverter after a dozen years or so.  The reduction includes the California Solar Initiative (CSI) - $.30/watt,  a 30% Federal investment tax credit - $1.76/watt, and lease savings - $.64/watt.  How can it possibly cost less to lease a system for 20 years (after which they either give it to you or uninstall it and return your roof to its pre-solar condition) than to buy it?  Two things – depreciation and RECs.  Google – the equity investor – gets to depreciate its entire cost of the systems it leases in the first year, which translates to a 30% income tax reduction off the top.  Assuming a 100% equity investment and all the other subsidies, Google’s net cost of the system is $2.16/watt.  That leaves $1.34/watt for operating cost and profit.  The value of the Renewable Energy Credits (RECs) is a bit more difficult to estimate.  Values from 0.5¢/kWh up to the California PUC’s price cap of 5.0¢/kWh have been suggested, which over 20 years equates to between $.13 and $1.30/watt.  And, of course, it will be much easier for Google to extract that value from $280 million in solar investment than it would be for anyone with a small residential sized system.  So, Google gets a healthy return on its green investment, I get to save money on electricity while demonstrating my green chops, and SolarCity gets to create jobs and support US-made solar equipment.  Everybody wins.

So Who Pays?

Obviously, if I’m paying $3.50/watt for a solar system that costs $6.20/watt to install and SolarCity and Google are profiting, someone else is picking up the tab.  For that we can thank the American taxpayers and California utility customers.  Federal tax credits and accelerated depreciation cover more than half of the retail cost of the system.  In a less “climatically correct” environment these would be characterized as tax loopholes that increase the federal deficit.  The CSI rebate, one component of a 1.5¢/kWh “Public Purpose Program” charge on California electric customers, currently covers 30¢/watt (it was once $2.50/watt).  Net metering – the ability to be credited for daytime solar generation at high peak period prices (26.5 to 48.5¢/kWh) while being charged for night time usage at off peak rates (9.3 to 31.6¢/kWh) – means that every kilowatt-hour my leased solar system generates at a cost of 13¢/kWh reduces utility charges by 27.5¢/kWh, while saving only 6-10¢/kWh in fuel costs.

Is It Worth It?

Advocates of renewable electricity cite energy independence, climate change mitigation and job creation as reasons for investing in (or subsidizing depending on your perspective) technologies like wind and solar.  As I pointed out last year here, the United States uses very little oil to make electricity.  In California the marginal fuel for power production is natural gas, little of which is imported.  As a source of GHG reduction, solar costs about $187/Tonne of CO2 equivalent.  The renewable industry does appear to create jobs, however, and does so without competing with other non-government industries.  I guess we should just think of it as a 21^st century version of public works projects.  Yes, I did indeed decide to buy 20 years of electricity up-front.  Just doing my part for the economy.  

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[1] You are paid 18.9¢/kWh escalating at 3.9% annually for production under the guaranteed level.