Author’s comment: This is an example of deep analysis of an issue I care deeply about, but come to a conclusion based on facts that is contrary to what I initially believed. You can expect similar analysis of issues that come before the legislature as I seek to protect your pocketbook.
Utility sized solar is the best choice for lowest cost electricity, coupled with nuclear base power for reliability.
Sources of information: I have been a longtime advocate for solar energy as an alternative to energy produced by the burning of fossil fuels. The projected impacts of climate change are simply too big to ignore. In 2019, we had 49 solar panels installed on the roof of our home. In December 2023, I studied solar power and passed the exam to become a Certified Electrical Practitioner under the North American Board certification program. Then I went through training with a solar installation company to sell solar installations.
Abstract: I have gone from a strong advocate of residential rooftop solar and/or community solar to now believing the focus should be utility scale solar. Solar, and along with low-cost wind energy, needs to be backed up by nuclear power for reliability. This is the best way to have the lowest cost reliable electricity for our homes and businesses.
Size of solar projects matter. Solar installations have greatly decreased in cost per kWh as costs of installation have fallen.
From the graph, it is clear that utility sized installations have the lowest costs, with commercial installations a close second. Residential installations are much more expensive. The reason is simple: economies of scale. From an earlier source, this is also shown for residential installations:
A takeaway from this is that you need a large array of panels to have a chance of being economical. For residential, this means either a big house or a ground mount system. A big house usually means a higher income homeowner. A ground mount system may be limited in size due to the restriction of 120% of projected production by your proposed solar installation compared to your previous electrical usage to qualify for net metering.
How an installation is paid for matters. When interest rates were extremely low, solar installations were often paid for by borrowing the installation costs, and basically swapping the monthly utility bill for a payment on the amount borrowed. This no longer is economical with higher current interest rates. Thus, the only buyers who can economically install solar are those who have access to cash to purchase the installation. This excludes most low-income households.
Federal tax credit. Currently, the federal tax laws allow a tax credit of 30% of the cost of the solar project when you file your federal income tax return. The credit, however, can only be claimed against your actual tax liability. Any unused tax credit in the year of installation can be carried over to following years, but due to the time value of money, credits claimed in later years are less valuable. Takeaway: to make best use of the federal tax credits, you need to have high taxable income. I.e., be wealthier.
Net metering: In Minnesota, you get a credit in your electrical bill for every kWh of electricity of power your solar array produces. This is currently $0.1271 for Minnesota Valley Electric Cooperative, our local utility. If you have a rooftop solar system that is less than 40 kW AC, you can choose to get paid at the average retail utility energy rate for the energy you generate and contribute to the grid. Every year, utilities update this rate for each customer group by taking the total yearly revenue, subtracting the total yearly fixed charges, and dividing the result by the total yearly kWh sales.
This net metering credit is the major reason solar installations are considered. These are the “savings” that justify a major initial financial investment. To make solar economically viable, you need to consider the savings in future electrical costs at some assumed rate of increase in electrical rates. The higher the rate assumed, the better the investment looks. The solar company I trained with (but quickly abandoned) used an assumption or 5% per year for the 25 – 30-year period. However, the U.S. Energy Information Administration was only projecting 2.32% average annual increase.
The Statista Research Department actually projected a decrease in the real (deflated) cost of electricity:
The net metering rate received is not guaranteed into the future for the life of the solar installation. In February, the Minnesota House Energy Finance and Policy Committee approved HF845 by an 8-7 party-line vote and sent it to the House Floor. The bill would exclude municipal and cooperative electric utilities from the requirement to offer average retail rate compensation for net metering, and would also restrict compensation for canceled credits to the PURPA avoided cost. The bill would only apply to qualifying facilities that begin operation after June 30, 2025. Qualifying facilities that began operation before that date are subject to Minnesota Statutes 2024, section 216B.164. This bill is not expected to become law this year.
The rationale given for the bill is that costs of the utility system are being shifted from the owners of solar installation to the utility ratepayers who do not have solar. Net metering is also available in some other states. California was a leading state using net metering as an incentive for households and businesses to install solar. But, recently, the net metering plan has been substituted for a less generous plan for all new installations. The same may someday come true when the full impacts of solar installations begin to impose significant cost shifts to non-solar ratepayers. If that happens, the hope of current solar owners and participants in community solar gardens is that any changes in Minnesota would also grandfather existing solar installations to honor the financial commitment those early adopters have made. Meanwhile, investors in solar must accept the risk that their expectations of continued net metering are dashed. Wealthier people can better accept this risk than low-income people.
Community Solar. In an effort to make solar energy available to (a) renters of property, (b) homeowners with sites unsuitable for solar (not a good angle to the sun or too much shade), and (c) low-income households, community solar gardens have been made available for ratepayers in the Xcel serviced areas. While more cost effective than residential rooftop solar due to economies of scale, they are not as cost effective as utility based solar. In fact, Minnesota regulations prohibit them from being big enough to get the most of economies of scale. (In Minnesota, community solar gardens are capped at 5 megawatts (MW) of capacity. This means that individual solar gardens cannot exceed this size. Additionally, there’s an overall annual limit of 100 MW for new projects approved each year, with this limit decreasing to 80 MW in 2027-2030 and then to 60 MW after 2030.)
An additional cost burden borne by community solar gardens is the cost of the marketing and bureaucracy required to meet the regulations regarding making sure low-income households are included in each project. As well-meaning as they are, and as socially beneficial the additional efforts are to combat climate change, I strongly favor utility based solar where all rate payers have access to lower cost solar.
My decision to install solar. As much as I wanted to support the solar industry and to fight climate change, I did not wish to make an unwise financial decision in installing solar on our rooftop. So, I made an Excel spreadsheet as follows to analyze the decision. I made the assumptions shown highlighted in yellow.
Items to note:
1. I used only a 1% increase in electrical prices (and therefore an increase in the net metering credit) for the life of the project.
2. My cost per installed kilowatt is $46,491 / (49 x 335) = $2.83
3. My home had just been reroofed before the solar installation so it turned out better than this projection.
4. I was able to take the entire tax credit in that tax year but that was in the second fiscal year of the project.
5. I used the Excel Internal Rate of Return calculator to compare the financial feasibility of the project as close as I could to alternative investments. The 7.09% 30-year before tax IRR was deemed attractive enough to justify a decision I really wanted to make anyway.
6. Nonetheless, there is financial risk as even with these conservative assumptions, it is year 16 before the project was projected to get a “return OF investment”, i.e., the breakeven point. (This is a pet peeve of mine when solar installation companies use the breakeven point as being the IRR, which I regard as a misrepresentation as it does not compare easily to an alternative investment such as a bank’s certificate of deposit.)
7. Tracking the actual performance vs. the projections:
8. The actual electrical production has been 85% of the projected production.
9. At 1% per year increase in the net metering rate assumed would have been $0.12726 per kWh compared with the actual current rate to $0.1271, so the rates have increased just barely more slowly than assumed, far from the 5% used by the solar installation company.
10. The updated spreadsheet shows a 30-year internal rate of return before taxes at 6.38%, vs. the 7.09% initially projected.
Conclusions:
It only makes financial sense for a homeowner to install solar if you:
- Have a very technically efficient site, i.e., good orientation to the sun, optimal tilt of the roof and no shading.
- Can use the federal tax credit in the tax year of installation
- Can have a big enough installation to purchase the solar for less than $3.00 per installed kilowatt.
- Can pay cash.
- Have the financial ability to absorb risks of electrical prices not rising as fast as projected and/or net metering being discontinued without grandfathering.
Thus I conclude that only wealthier homeowners are likely to be able to install solar with it making financial sense compared with other investments. If one does not care about financial feasibility, no problem. I just have a hard time recommending someone do something I would not do myself.
Regarding net metering: It strikes me as perverse public policy to subsidize the wealthier members of our society by shifting costs to lower income people. Thus, eventually, I see net metering going away.
If the goal is to provide ALL ratepayers the lowest cost reliable electricity, the renewable energy should be produced by utility sized installations with base power produced by zero carbon dioxide emissions nuclear plants to ensure reliability.
Pushback I have received:
An argument can be made that distributed energy production is a benefit to all ratepayers, as there needs to be less money spent on increasing the size of the distribution electrical lines and needed substations. Also, in the future, forming small community based cooperative systems, particularly as batteries become more efficient and cheaper, may be possible for some of these systems to avoid needing the grid at all. While these are possible arguments, I perceive them to be not only speculative but also of minimal in amount. (As supportive as I am to efforts to fight climate change – the biggest issue of our times, other than the current immediate challenge of retaining our constitutional democracy.)
Prepared and paid for by Olson Senate Committee, P.O. Box 15, Prior Lake, MN 55372