Cheap Natural Gas Undermining Solar Dreams

Michael Giberson

NPR reports from Pennsylvania how low natural gas prices have helped put the damper on some solar power dreams:

Barbara Scott had 21 solar panels installed last March on her house in Media, Pa. Scott’s family was the first in the community, and she was prepared to evangelize, “We can have open houses and write newsletter articles and promote the idea of solar,” she said. But that was before the economics changed.

With government rebates and tax incentives, Scott says, her family spent $21,000 to install the system. She figured it would take eight years to recoup that investment.

But that eight year (private) payback period turned out to be too optimistic. First, too many other Pennsylvanians also invested in solar, which caused the price of solar power credits to drop sharply.  Scott figures the change added seven more years to the payback period. Second, the price of electric power is lower than it would have been because of low natural gas prices. Scott adds another two years to the payback period for that effect.

With a new total of a seventeen-year payback period, Scott observed: “We’re up to 17 years, which is, essentially, the life of the system. And we haven’t even considered what happens if the system breaks or what it’s going to cost to take the system off the roof and dispose of it. ”

As noted, this is a private payback estimate, it only reflects the homeowners expenses and net electric bill reductions. Omitted from the calculation are the taxpayer- or ratepayer-funded subsidies (likely large) and external benefits of the system (likely modest but could be significant). Furthermore, these sort of casual payback calculations frequently omit consideration of opportunity costs (i.e. the time value of money or foregone interest income.)

But isn’t it sort of interesting that the story builds around the effects of low natural gas prices as a culprit even though the effect is relatively modest compared to the much larger solar credit price effect resulting from too many other Pennsylvanians getting into the subsidized solar game?

3 thoughts on “Cheap Natural Gas Undermining Solar Dreams

  1. Nor does it consider the capital cost of back-up systems for those rare days that folks in South-Eastern Pennsylvania don’t get 15 hours of bright clear sunshine;-)

    I repeat: Solar does not make economic sense, even if the cells are free.

  2. Shoddy reporting, definitely. Other problems: The focus on Payback/ ignoring time value of money. And letting the homeowner’s “essentially the life of the system” comment stand unquestioned. That’s about the life of the inverter, but solar panels last much longer.

  3. Tom, obviously there is a trade-off of sorts since most homeowners are not up for a thorough financial modeling exercise (with monte carlo simulations of future power prices, variations in solar intensity, hazards, etc.). The same is probably true of some managers with million dollar capital budgets, but at least in such cases they can afford to pay someone else to understand the analysis for them. Payback periods may miss a lot, but they capture something of the intuition of an investment, with up front costs and a return over time.

    Policy critic that I am, I worry about the lack of much consideration to the public’s return on its investment. Enough information to calculate the “public payback period” would be an improvement, even if inadequate for a complete analysis.

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