This paper from the American Economic Review found that consumers use a discount rate in excess of 15% in valuing residential solar power credits, compared to a social-wide discount rate of 3%. The implication is that a government can incent the same amount of solar investment through an upfront credit for as little as half the cost of a per kilowatt-hour ongoing subsidy.
The California Solar Initiative had two different incentive methods, the Performance Based Incentive (PBI) which was paid out over 5 years and the Expected Performance-Based Buydowns (EPBB) paid out upfront. The former was preferred by policy makers but the latter was more popular with homeowners. Now we know the degree of difference in the preference.
The California Legislature is considering a bill (AB 893) that would require the state’s regulated utilities (including CCAs as well as investor-owned) to buy at least 4,250 megawatts of renewables before federal tax credits expire in 2022.
Unfortunately, this will not create the cost savings that seem so obvious. This argument was made by the renewable energy plant owners in the Diablo Canyon Power Plant retirement case (A.16-08-006) and rejected by the CPUC in its decision. While the tax credits lower current costs, these are more than offset by waiting for technology costs to fall even further, as shown by the solar power forecast above. Combined with the time value of money (discounting), the value of waiting far outweighs prematurely buying renewables.
And there’s a further problem–with a large number of customers moving from the IOUs to CCAs across all three utilities, the question is “who should be responsible for buying this power?” The CCAs will have their own preferences (often locally and community-scale) that will conflict with any choices made by the IOUs. The CCAs are already saddled with poor procurement and portfolio management decisions by the IOUs through exit fees. (PG&E has an embedded risk premium of $33 per megawatt-hour in its RPS portfolio costs.) Why would we want the IOUs to continue to mismanage our power resources?