Exploring a Potential Solar Rooftop Bubble

In a recent Freakonomics post, Steve Sexton explores the market for rooftop solar panels and concludes that there may be a bubble in the industry that could soon burst. The basis for his theory is that hidden incentives in the current metering scheme which have been favorable (and, he argues, essential) to the growth of the residential solar industry could potentially be phased out en masse soon, a process which could start in otherwise solar-friendly California if utilities have their way.

The net-metering schemes in question are in place in one form or another in 43 states currently, and have been used to entice owners of residential properties to go solar. Utilities dislike these schemes as they are forced to purchase energy produced by residences at the same rate which they sell electricity, a price which includes infrastructure and other costs. Because of the way the laws work, residential producers are receiving retail prices for what is already subsidized generation. Sexton also notes a perverse incentive by which those who might produce energy storage mechanisms are dissuaded from doing so, an interesting point.

As more and more people take advantage of various tax credits to place solar panels on their homes, this type of scheme is becoming more damaging to utilities' bottom lines (Sexton also notes that it is a case of the poor subsidizing the wealthy, but we will leave this valid point for another day). Because of this, utilities have increased lobbying efforts. At this point, the situation has progressed to the point that regulators in California are considering a scheme whereby solar energy producers would pay the utilities back for some of the difference in production and sale costs via a use charge. Sexton argues that this will cause many to abandon solar panels, thus bursting a bubble he has suggested exists.

While I agree that such a usage fee could alter the dynamics in California, I do see some holes in Sexton's analysis. For one thing, the proposed scheme still includes a subsidy. Additionally, it is not yet even a certainty that such a scheme will be adopted in California, never mind anywhere else. States have shown a predisposition toward stimulating residential solar generation, even if it has to be subsidized. This is particularly true when it isn't the state, but rather other consumers, that are doing the subsidizing.

Further, I believe that he underestimates the power of the solar lobby to counter the weight of the utilities. Finally, I think that many people will continue to buy solar panels (albeit not at the same rate) even without subsidies. Therefore, even in a changing regulatory environment, I think that the industry could be a bit more buoyant than Sexton believes, especially as the technology becomes more efficient.

As an aside, assuming arguendo that a bubble does exist, and further that it is on the verge of bursting, it is not clear who would be hurt. Certainly environmentalists wouldn't be happy, but their displeasure would have more to do with less solar energy being produced than any misfortune for manufacturers. And to the extent that manufacturers are hurt, it is not clear what might happen to what is a very fragmented market. A large amount of panel production has moved offshore, with China one notable hotbed for activity. As far as domestic producers, maybe the bursting of a bubble could act as a Schumpeterian evolutionary moment leaving the best technologies and producers to take control of the market. But I digress...

Despite various differences of opinion with Sexton, I respect his analysis and agree that the situation in California is worth watching as change there could well impact the policies of other jurisdictions. After all, California is often cited as the leader in the area of rooftop solar. Just because that maxim is typically uttered in reference to the state's progressivity doesn't mean that Cali couldn't play the Pied Piper in backtracking as well. More broadly, energy policy in the US is a very difficult beast to analyze, and the competing interests are varied and determined. Nothing at all would surprise me as far as statutory and regulatory schemes go, and a lack of certainty is just about the only sure thing when it comes to this very interesting intersection of law and economics.

Tip of the cap to J.N.