Friday, July 20, 2007

Solar Power and Offsets

A friend recently mentioned that she was interested in adding solar panels to her house, as her contribution to reducing greenhouse gas emissions. An article in yesterday's San Francisco Chronicle suggests that many Californians share the same motivation for solarizing their homes. Residential solar power is growing rapidly in the US and elsewhere, and that's all to the good. But while the large investment this entails might make sense as a way to save money on residential electricity rates, it turns out to be a pretty expensive source of emission reductions.

The Chronicle cites the cost of a typical 2 kW home photovoltaic system at about $19,000--or $15,000 after state and federal tax benefits. In sunny California, such a system would generate roughly 4500 kW-hrs of electricity per year, which would be worth around $650/year, based on the minimum rate in PG&E's current schedule. The resulting simple investment payout is pretty long, but if you assume a 20 year life and factor in future inflation in electricity costs, the effect on your property value, and the benefits of financing, you might earn a long-term return of more than 10% on your investment.

From an emissions perspective, those 4500 kW-hrs of solar electricity would save about 2700 pounds of CO2 per year, based on California's average rate of 0.61 lb/kWh. So over a 20-year lifetime, a 2 kW home system will save a total of 28 tons of CO2. The value of those avoided emissions is currently around $300 in the retail offsets market in the US and under $1000 in the official EU emissions trading system. As it happens, my friend doesn't live in California, but in a somewhat less sunny state that relies heavily on coal for its power. In her case, the avoided 20-year emissions would be closer to 75 tons. At current offset costs, however, they would still only be worth about 10% of the total price of her photovoltaic system. Unless she's paying a lot more for electricity than I think, she would be better off staying on the grid, buying offsets for 100% of her consumption and spending the rather large difference in cost on something else.

Whether my friend ultimately follows my advice is entirely her choice. But because of the role of federal incentives for solar power, I feel more than a friendly interest in her decision. We're not just talking about one solar roof, after all, but potentially millions. In light of the figures above, incentives for residential solar power start to look questionable as climate policy, at least compared with the kinds of projects behind the emissions offsets being traded in the marketplace. In other words, while residential solar power offers important benefits in reducing peak electricity demand and greenhouse gas emissions, the government appears to be paying individuals a large premium for those reductions, compared with investing in wind turbines, landfill methane converters, reforestation, and other means of cutting or capturing CO2 emissions. And the more the government spends on each ton of reductions, the fewer emissions it can reduce.

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