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July 06, 2005

Subsidizing the Sun

As China and India (and hopefully other nations) roar out of poverty, the energy needs of their emerging middle class will be immense even if they consume only half the energy per capita we Americans are used to.  I believe that most of the incremental energy should and will be provided by nuclear power over the next several decades. 

Even if sufficient hydrocarbons were available at a reasonable price, it’s not a good idea to experiment with increasing the carbon dioxide content of the atmosphere further. Given a chaotic climate model, the result could be global warming or a mini European ice age caused by the abrupt cessation of the Gulf Stream or something else or nothing.

Nuclear power is not a panacea.  The problem of permanent radioactive waste disposal is more political than engineering, but often engineering problems are more tractable than political ones.  At best, it will be a decade before new nuclear power comes online in the US and, meanwhile, some of our oldest plants may be decommissioned.  Conservation is an alternative for those of us who are used to abundance but not for those coming out of poverty here or in the rest of the world.

In the short-term, some of our energy needs can be met by solar and wind power.  These are relatively low impact solutions which can be online fast.  Recently I helped arrange for solar power installers to come talk to the annual meeting of our neighborhood association here on the Jersey Shore.  It’s a sunny place with few tall trees.

NJ like many states has a law which requires that utilities be willing to buy back power from small producers.   This means that the meter essentially runs backward when more electricity is being produced than is being consumed.  There is no need for batteries because the house remains connected to the grid, buying when needed and selling when able.

Even with “net metering” the economics of home solar don’t work without subsidy.  A ten kilowatt system which would cut our $2900 annual electric bill approximately in half costs about $80,000 installed. With a fairly aggressive assumption that electric rates will go up 5% annually, the net present value of this investment assuming the asset lasts thirty years and discounting at 5% is minus $32,000.  If you’re not familiar with “net present value”, don’t worry about it.  Roughly speaking, this means that you are $32,000 POORER in today’s terms if you make this investment than if you don’t taking into account the fact that you are paying the $80,000 today and getting the benefit only in the future.

But New Jersey is willing to rebate $5300 per installed kilowatt to the homeowner.  And the contractors are willing to front the rebate so the installed cost is really only $27,000.  Now this becomes an attractive investment with a net present value of $20,000.  By contrast, the net present value of a thirty year investment in 5.5% government bonds is $2,793.  Looked at another way, you’d need about 9.6% interest to equal the investment in solar power and that 9.6% would have to be tax free.  (note:  that the IRS has not ruled definitively on whether the subsidy is actually tax free even though it is generally assumed to be and this blog doesn’t give tax advice.)

It gets better.  Last year New Jersey created something called S-RECs.  You get a credit of one S-REC for each megawatt (1,000 kilowatts) you generate from your solar installation.  New Jersey law says that utilities have to generate a certain amount of their power from renewable resources (which they don’t) or buy S-RECs for the power they don’t generate renewably or pay a $300 per megawatt fine for their shortfall in politically correct megawatts.  The State also set up what looks like a pretty simple web-based market for selling and trading S-RECs and they’re currently going for about $200 each.  A ten kilowatt system located where our house is under near ideal situations should generate about twelve megawatts per year so, at current rates, I could earn another $2400/year selling my S-RECs (don’t ask me the taxable status of this income).

Assuming that the S-REC law doesn’t get repealed and utilities don’t generate their own renewable power, if we add the $2400/year to the equation as taxfree, the net present value of the investment soars to almost $58,000 – probably too good to be true.  But the S-RECs are gravy on what is already a good investment.

All of that money and you’re also being a good citizen.  New Jersey has an excellent interactive calculator for all things solar in NJ at www.njcep.com/html/estimator_f.html.  According to this calculator, your ten kilowatt solar installation will eliminate over 21,000 lbs of carbon dioxide emissions per year.  Presumably the social value of that is what all the subsidy is for.  More on that in a future blog.

If you don’t live in New Jersey, look at www.dsireusa.org to see what incentives your state offers and whether it supports net metering.  Most but not all States do offer incentives and do support net metering.

We are getting estimates on solar power installation for our house so I’ll keep you up on how it goes. 

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