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Economic Currents

Keep up to date with the latest UHERO news.

The Costs and Benefits of Installing Solar PV

Renewable energy presents many new challenges at the system level. Before we get to that, it helps to first look at things from a homeowner’s perspective.

The Homeowner’s Solar PV Decision

If you’re a homeowner, and you haven’t already installed PV solar, you may want to look into doing it very soon.  To see why, and how much you could benefit, we’ve developed a calculator to help you sort out the costs and benefits of your particular situation.  Our wonky calculator includes a few extra features to take into account uncertainties that can factor into your bottom line, or battery backup if you’re inclined to consider it.  This calculator should help you to decide how large of a system to install and maybe help you comparison shop across solar providers.

 

Homeowner Solar PV Calculator

Value to Homeowner
 
Internal Rate of Return
 
Annual Energy Use
 
Annual Energy Production
 
Up Front Costs
 
Up Front Battery Costs
 
 
 

To get started, you need to estimate your electricity use per day, averaged over the whole year.  You can find this number on your electric bill.  Make sure you average over all twelve months of the year.  Adjust that number up or down depending on you future plans: Do you expect to install more air conditioning? Thinking about buying an electric car? If so, you might want to bump the number up.  Do you plan to install solar hot water, more energy-efficient appliances, air conditioning or LED lights?  If so, you might want to start with a lower number.

Your guess may be a little high or low.  Also, generation from your solar panels and your electricity use may vary depending on the weather or other factors.  To account for uncertainty, you can enter a number for how far off you expect your estimate to be.  A conservative number might be 20% of your estimate (say, 4kWh / day if your best guess for average use is 20kWh/day). 

You also need to account for how much sunlight your panels will be exposed to.  This can vary a lot across each island.  Online resources are available to help you approximate this.  Here is an example for Oahu.  Enter the equivalent hours of peak sun for your location. On Oahu this can vary from around 4 to 6 hours.

Uncertainty about electricity generation and use can make a big difference to your bottom line under the standard net-metering agreement.  That agreement allows you to obtain credit for excess generation from your panels in one month, which you may use in a later month when your use exceeds the energy generated by your panels.  But there’s a limit to the amount of credit you can build up.  Each year, any surplus generation is zeroed out.  So far, homes typically install far more solar than they need.  And as you will see, there’s a fairly strong incentive to over-install, especially if you’re highly uncertain about your electricity use.

The default values in the calculator are those for my house.  I don’t have solar yet.  I’m still waiting for my net metering agreement.  My recent quote for installed cost of my panels, $4.04/Watt, is from a large reputable company.  You can find quotes for less if you shop around.  And keep in mind that prices have been falling fast, and may continue to do so.  You can find this number by dividing the size of the system you plan to install (mine is 3.51 kW) by the total cost BEFORE tax credits, and including taxes and everything else.  Once you have the other numbers pinned down, you’ll want to adjust the size of the system to make the net present value as big as possible (do not maximize the internal rate of return).

The Federal tax credit is currently 30 percent, and the Hawai’i tax credit is 35% up to a maximum of $5000 per 5kW installed.  In my case, the Hawai’i tax credit is just under the cap, $4,963.14. 

Finally, you need to include an interest rate.  If you’re borrowing to finance your solar installation, include the rate on the borrowed funds.  If you’re using savings, you might enter the rate of return you expect on a safe investment vehicle, like a savings bond, certificate of deposit, etc.  This number goes in the first line of the calculator.  I’m using 5 percent.

You can adjust the other assumptions in the list, or just take the default values we’ve entered.  You might ask your solar provider about decay rate, life expectancy of the panels, maintenance, etc. and adjust accordingly.  The price of electricity is assumed to stay constant over the lifetime of the panels.  This may be conservative: most projections we’ve seen anticipate rising prices.  But you can adjust the price level up or down to account for your own expectations.

We’re not considering battery backup now, but some rough numbers are in there in case you want to consider it.  In the not-too-distant future it’s possible our grid may not be able to handle any more solar, which may require you to unplug and use a substantial battery backup if you want to install PV solar.  Note that battery costs vary a lot, depending on the kind of battery, how much you want to store.  Batteries remain expensive, but costs are falling

What’s the bottom line?  Installing this system on our house should net us a present value of approximately $19,949*, with an internal rate of return of 54.4% on our out-of pocket expense of just $5,167, after tax credits. My “pay back” period is about 2.5 years.  Needless to say, you would be very hard pressed to beat this kind of return for any other investment.  Note that I expect to use less electricity than I generate, but installing fewer panels would reduce my net present value. 

Note that I would still net almost $15,000 without the state tax credit and over $10,000 without state or federal tax credits.  Also note that without tax credits, it pays less to over-install.

Hawaiian Electric’s Bottom Line

Although HECO loses sales of 5.5mWh each year when I install solar, amounting to a revenue loss of about $2026, they also save about 7mWh in generation.  At a levelized generation cost of 22 cents/kWh, HECO saves about $1550.  Factoring in a monthly connection fee of $17, HECO nominally loses a net of about $272 per year from my solar installation.

This loss, however, doesn’t account for revenue decoupling, which allows HECO to raise prices on everyone else to make up the full $2026 revenue loss, ultimately providing a net gain of  $1,754.  We expect HECO’s grid management costs have gone up due to high penetration of solar and wind, and these costs would have to be subtracted from this net gain.  Nevertheless, it’s easy to see how HECO can benefit from the revenue decoupling rule and current net metering agreements.

The data do show Hawaiian Electric’s net generation has fallen by a lot more than sales have, a clear indication of widespread over-installations.  In 2009, EIA reports that Hawaiian Electric generated an average of 917.5 million kWh each month, falling to 817.8 in 2013.  Sales, in contrast, fell from 844 to 791.7 million kWh, or just over half the decline in net generation.

Incentives for Energy Efficiency

One side effect from current net metering agreements is that households over-installing solar typically will have little incentive to conserve electricity.  Once it becomes clear that a household will not use all of its solar generation for the year, there is zero cost for leaving lights on and zero benefit from upgrading to LED light bulbs, buying more energy efficient appliances, and so on.  This disincentive is tragic, because most efficient way of reducing greenhouse gas emissions, dependence of foreign oil and generally saving money, is through energy efficiency, even without distorted incentives.

In subsequent posts we’ll discuss alternative regulatory and policy structures that might be more efficient.

- Michael Roberts

 

* Numbers in the text may be slightly different than the calculator due to a random “Monte Carlo” evaluation of uncertainty.  If you refresh the page, the numbers change very slightly each time.


Why are Hawai’i’s Electricity Prices So High?

Excluding rooftop solar, Hawai’i residential consumers pay an average of about 37 cents for a kilowatt-hour of electricity. Taking refrigerators, water heaters, stoves, air conditioning and other uses into account, the average Hawai’i household uses about 18.5 kWh each day, for a monthly bill of about $205.

That’s a lot, between three and four times the average price on the mainland, and by far the highest price of any state. Thankfully, high electricity prices hurt a little less here than on the mainland, because our mild climate means we don’t have heating bills and we can usually get by without air conditioning.

But keep in mind that well over two thirds of the state’s generated electricity is used by commercial businesses and industry, which factor into the prices we pay for everything else. Businesses tend to pay less for electricity than households do, but the price is still high, so it’s easy to see how high prices are a burden on Hawai’i’s economy.

Electricity prices can be roughly boiled down to the price of oil, which is used to generate most of our electricity, plus price we pay for fixed costs like power plants, the grid and its management. These costs are fixed in the sense that they don’t vary with the amount of electricity generated and consumed. We have record high electricity prices because oil prices remain high, and because the fixed price of our infrastructure, averaged over the amount of electricity we use, is very high and rapidly growing.

Besides oil, there is one coal power plant on Oahu, which produces electricity much less expensively. Hawaiian Electric also buys electricity through a series purchasing power agreements (PPAs). Prices paid on PPAs vary across contracts and timing (peak or off-peak). These comprise a small share of total generation and the prices, on average, are roughly similar to the cost Hawaiian Electric’s reported cost for oil-generated electricity. Some new lower-cost PPAs should be coming online soon, and some older higher-cost PPAs expire relatively soon.

The Public Utilities Commission (PUC) allows Hawaiian Electric to adjust prices as oil prices change, but there is a bit of a lag between change in oil prices and changes in electricity prices. Every three years the PUC performs a rate case to evaluate costs more thoroughly. The three utilities, HECO, MECO and HELCO have rate cases performed on a rotating schedule. Some of the details remain confidential, and what is available can be difficult to discern from publicly available documents.

Historically, a good predictor of electricity prices in the current month is the average Brent crude oil price over the previous four months (figure 2). In our analysis we found Brent crude oil prices predicted Hawai’i’s average electricity price even better than prices reportedly paid by HECO.

Recently, however, we’ve seen prices drift up from the historical relationship. Statistically, a clear break occurred around November 2008, during the height of the financial crisis and the deepening recession. In the graph, we show months since this break in blue, and the historical relationship in black.

From the pre-November, 2008 relationship between electricity prices and crude oil prices, we can approximate the fixed-cost component of price at about 10.7 cents per kWh, which roughly equals the number reported by Hawaiian Electric. This margin covers cost maintaining the grid, infrastructure, billing and Hawaiian Electric’s profits. This fixed cost roughly equals the average retail price of electricity on the mainland. High fixed costs are partly a testament to the smaller scale and geographical constraints of an island economy. It’s hard to know whether or how much competition could reduce these costs.

We can calculate the portion of electricity price left over after we have accounted for estimated variable (fuel) costs by adding 10.7 to the difference between each month’s price and the fitted line in figure 2. We’ll call this the “estimated price per kWh towards fixed costs” shown in figure 3. Since the break in November 2008, prices have drifted upward from the historical relationship, which suggests the fixed cost share of price has risen to around 15 cents per kWh, or about $83 dollars per household per month.

Fixed costs have drifted up due to a number of factors. A 2009 rate case granted Hawaiian Electric permission to raise Oahu prices 5.7 percent to finance new infrastructure and meet rate-of-return requirements. A $1/barrel tax was also implemented in 2010 to fund renewable energy and food security initiatives. But this tax amounts to only 0.2 cents per kWh. The spread between Hawaiian Electric’s oil costs and world Brent crude oil prices has also increased slightly since 2011 (figure 4).

 

 

Finally, there’s the revenue decoupling rule, which allows HECO to increase prices each year between rate cases to compensate for revenues lost due to energy efficiency and distributed generation (i.e., new solar installations). The intent of decoupling is to align HECO’s interests with those of competing solar providers, as described in my last post. With revenues stable, and generation costs falling, HECO can profit from this policy between rate cases. So far, revenue decoupling adds 1.3 cents per kWh, and a leaked document from the Public Utilities Commission suggests this will soon rise to 2.2 cents per kWh.

Looking forward, we might hope for electricity prices to come down. The cost of generating electricity from wind and solar is less than oil, and falling rapidly. Natural gas, a cheaper, cleaner and less expensive fuel, might be brought in to substitute for oil. But the intermittent nature of renewables and our antiquated grid will limit renewables, and rapidly growing fixed costs may limit how much residents and businesses will ultimately gain from lower generation costs.

An over arching concern is that fixed costs of the grid are approaching levels that could make battery backup to “unplugged” distributed systems a viable substitute for the grid. With PV solar and battery costs falling, and fixed costs rising, we may be setting up an unavoidable “death spiral” that makes the whole grid obsolete. We will navigate this issue in more detail in later post.

In the next post of the series we’ll review the costs and benefits of solar, net metering, the rapid growth of solar installations, and how this growth can stress the current grid infrastructure.

--- Michael Roberts


Is Monopoly a Barrier to Hawai’i’s Ascent?

In 2012 Joseph Stiglitz, a Nobel Prize winning economist and Columbia University Business School Professor visited Hawaii to give the Stephen and Marylyn Pauley Seminar in Sustainability. Stiglitz discussed sustainability within the context of our depressed national economy and ongoing struggles with debt and unemployment. For our economy to fully recover, we need more investment, and Stiglitz argued that investments ought to be in education, technology, and green infrastructure, with solar, wind and an improved electricity grid being obvious choices.

Stiglitz then discussed Hawai'i’s local economy (around the 50 minute mark in the linked video). He saw monopolies in inter-island transfer, electricity, and shipping as key obstacles to Hawai’i’s sustainable growth. Of the three, he pointed to the second, Hawaiian Electric Industries electricity monopoly (HECO, MECO and HELCO) as the most important.

To be fair, Stiglitz has no unique insight into Hawai’i’s circumstances. Our unique geography makes it difficult to tell how much unavoidable costs or market control factor into our unusually high prices for electricity and other goods and services. What’s clear is that, at least in the case of electricity, the old regulatory model is being challenged by the rapid growth of renewable energy.

 

Regulatory Challenges

Historically, for electricity and many other utilities, there can be economies of scale, meaning it can be less costly for one company to produce than many companies. Think of large power plants and the impracticality of having many different electric lines running to each house. Similar situations arise for water, cable TV and phone services. The obvious problem with monopolies is that, left to their own devices, they'll maximize profits by charging prices that far exceed costs. As a result, local governments typically regulate utility prices, as they do here in Hawaii.

Regulation is tricky, however. Monopolies have no incentive to be forthcoming about their actual costs. And they have little incentive to innovate or find creative cost-cutting measures, if lower costs simply cause the public utility commission to commensurately lower regulated prices. Some argue that regulators, starved of resources or the right incentives, might serve the monopoly's interest instead of the public's. 

 

Green Energy Challenges the Status Quo

Today, rapidly improving technology and a push toward green energy are challenging our electric utility monopoly. Economies of scale in generation no longer exist. Even without state and federal subsidies, rooftop solar and wind are becoming competitive with traditional carbon-based fuels, even on the mainland where electricity prices are less than one third those in Hawai'i. And Hawai’i’s geography suits renewables better than most places on the mainland.

A key technical challenge for renewables is their intermittency, which makes it more difficult to match demand with naturally varying supply. Another is our existing grid, which is designed for centralized generation, not a distributed network with tens or hundreds of thousands of rooftop power sources.

Engineers are working hard on the technical challenges, and so far have managed to accommodate more solar and wind power than many had thought possible on our antiquated grid. Experiments with variable time-of-day pricing might help match intermittent supply and demand. Others are dreaming up new ways to store energy or distribute it further, like the costly and controversial inter-island cable

The political and regulatory challenge is facilitating access by these competing energy sources to a monopoly-controlled grid. Competition is good for consumers and economic efficiency. But, as Stiglitz noted, competition kills profits, so Hawaiian Electric has no incentive to facilitate grid access.

 

Revenue Decoupling

Thus far, the political solution to the grid-access problem is revenue decoupling. The idea, implemented in Hawaii over four years ago, is to allow the regulated monopoly to raise prices to compensate for sales lost to competing generation like solar. Revenue decoupling is the key reason electricity prices have continued to rise in Hawai’i over the last four years, even as generation costs have stabilized. Those higher prices have compensated Hawaiian Electric for roughly 200 megawatts of PV solar that have been installed on Oahu since decoupling in 2010.

Decoupling aligns the financial interests of Hawaiian Electric and competing solar interests, allowing both to profit from expansion of solar, wind and improved efficiency. The losers are commercial, industrial and residential consumers of generated electricity, who, for one reason or another, haven't installed solar. For a number of reasons we will discuss in subsequent posts, decoupling may not be a sustainable model over the long run.

 

Continuing Dialogue

On April 15, 2014 Vice President Al Gore will deliver another Stephen and Marylyn Pauley Seminar in Sustainability. Surrounding the Seminar will be a larger event with many local and national experts that will consider various sustainability issues in Hawai'i, including one session dedicated to our ongoing challenges and opportunities with electricity.

In anticipation of this event, UHERO will develop a number of posts that dig into some of the economic issues surrounding Hawai'i's push toward renewable energy, and over-arching challenges with managing the grid and regulating prices.

If you're confused by a lot of the jargon and complex details, you're not alone. Our hope is to add some clarity to the debate, aided with lots of nifty graphs and charts of available data. On issues that still confuse us, we'll use this blog to highlight key questions and ambiguities. We'll do our best to answer your questions, too.

---Michael Roberts

 

UHERO blog posts are intended to stimulate discussion and critical comment. They views expressed are those of the individual authors. 


Hawai‘i’s Environmental Response, Energy, and Food Security Tax (aka Barrel Tax)

The one-dollar increase in Hawai‘i’s environmental tax from five-cents since its inception in 1993 to $1.05 effective July 1, 2010 was a stepping stone in Hawai‘i’s clean energy progress. While in theory it serves to discourage fossil fuels (internalizing the negative externality), its major impact has been as a funding source for energy and food security initiatives. Act 73 temporarily created three new funds—the Energy Security Special Fund, the Energy Systems Development Special Fund, and the Agricultural Development & Food Security Fund. Providing support for the Hawai‘i Clean Energy Initiative (HCEI) and the Greenhouse Gas Emissions Reduction Task Force (GHGRTF) as well as instrumental research conducted by the Hawai‘i Natural Energy Institute (HNEI) are just several examples of how the barrel tax has contributed to advancing the State’s energy goals.

What does the barrel tax apply to and how much has been collected?

As of the end of fiscal year 2013, the $1.05 per barrel tax on petroleum products—excluding jet fuel (aviation fuel) and any fuel sold to a refiner—totaled $80 million dollars statewide; on an annual basis this translates to approximately $27 million dollars. The petroleum products taxed represents roughly 2/3 of the barrels of oil imported each year.

Ongoing/Current Issues

Originally, of the $1.05 tax, forty-five cents was allocated to supporting environmental response, energy, and food security, while the remaining sixty-cents was apportioned to the general fund. During the 2013 Legislative session, though unsuccessful, it was proposed that the tax be distributed according to its intended purpose, rather than given to the general fund. As such, increasing the amount allocated to environmental response, energy and food security funds, along with re-establishing the energy systems development special fund, and extending the barrel tax to 2030 have been proposed under SB2196 in the current Legislative Session.1 The barrel tax is set to sunset in 2015, and Hawai‘i’s energy industry hopes to extend the repeal of the barrel tax to 2030, the same year as Hawai‘i’s ultimate renewable portfolio standards (RPS) target.

 

Table 1 below shows the original breakdown under Act 73, SLH 2010, and the allocation as of July 1, 2013.

 

-- Sherilyn Wee and Makena Coffman

 

 

1  The bill text and status can be found here: http://www.capitol.hawaii.gov/measure_indiv.aspx?billtype=SB&billnumber=2196&year=2014


Hawaii's Minimum Wage, Poverty, and Job Creation

Ten different bills have been introduced at the legislature this session to raise Hawaii's minimum wage. According to proponents, raising Hawaii's minimum wage is necessary to help the working poor whose buying power has diminished. In the past, UHERO briefs and blog posts have argued that the minimum wage is not an efficient tool to fight poverty and pointed to the earned income tax credit as a more effective tool. On the flip side, we have pointed out that, unlike other anti-poverty programs, raising the minimum wage is politically attractive because it involves almost zero administrative cost and no new government expenditures. This post focuses on the growing body of economic evidence that small minimum wage increases reduce poverty and have little or no adverse effects on employment levels.

For example, a new paper by Arindrajit Dube from the University of Massachusetts Amherst finds that raising the minimum wage by 10 percent (for example from $7.25 to $8.00) would reduce the number of people living in poverty by 2.4%. Dube's paper makes use of data from the Current Population survey for the period between 1990 and 2012 to examine the impact of minimum wages on the distribution of family incomes for non-elderly individuals. This line of research generally compares areas with minimum wage changes to a control group of areas with no minimum wage changes. A key contribution of Dube's work is demonstrating that estimates from earlier research suffer from serious limitations due to their failure to adequately control for state-level economic performance unrelated to minimum wage changes. When he accounts for these factors, he finds larger anti-poverty effects and "robust evidence that higher minimum wages moderately reduce the share of individuals with incomes below 50, 75 and 100 percent of the federal poverty line." To put these findings in perspective, SB 2828  introduced on behalf of Governor Abercrombie would increase the Hawaii's minimum wage to $8.75 dollars/hour in 2015 and could help reduce Hawaii's population living below the poverty line by more than 7,000 persons. The additional increases to $10/hr in 2010 may reduce poverty even further, but note that the estimated 2.4% reduction in poverty is based on the small minimum wage changes observed historically and such estimates should generally not be extrapolated to reach conclusions about much larger changes.

While the conclusion that an increase in the minimum wage helps to reduce poverty is fairly widely accepted (even if there are more efficient but less politically acceptable means of attacking poverty), many economists will still point to the potential negative effects of raising the minimum wage on employment levels. Any Econ 101 student should know that imposing or raising a minimum wage in a competitive labor market reduces the quantity of labor demanded and leads to unemployment. But this theoretical prediction is subject to empirical verification, and this is where much of the economic debate has occurred during the past 20 years. A recent paper by Dube, Lester, and Reich (2010) compares changes in restaurant employment across contiguous U.S. counties with different minimum wage levels using quarterly data from 1990 to 2006. Their rich data set provides them with significantly more experimental variation than most of the literature, and they find "strong earnings effects and no employment effects of minimum wage increases." Using the same statistical techniques common in the earlier literature, they largely replicate the literature's finding of job losses associated with minimum wage increases. But when they control for regional and local differences in employment trends that are unrelated to the minimum wage, they find "no detectable employment losses from the kind of minimum wage increases we have seen in the United States."

There is no doubt that the debate over the impact of minimum wage laws is alive and well. But there is some evidence that economists are leaning towards raising the minimum wage and indexing it to inflation. In a survey of 41 leading economists by the the University of Chicago's Booth School of Business, 47% agreed that the benefits outweigh the costs of such a policy, while only 11% disagreed (the rest of the panel had no opinion or were unsure). Research is increasingly turning to the question of how can a minimum wage increase not lead to job losses. While the Econ 101 competitive model of labor markets leads to the invariable conclusions that there will be job losses, there are a wide variety of frictions and costs that are not considered in this simple model. For example the costs of job search may result in lower turnover when minimum wages are higher. It is possible that some employers will be discouraged from creating new jobs as minimum wages rise, but others will be more successful in filling positions and retaining workers. As you might have guessed, Dube, Lester and Riech (2013) find evidence that worker turnover falls sharply following a minimum wage increase while overall employment in low-wage sectors is largely unchanged. A survey of the literature conducted by John Schmitt at the Center for Economic and Policy Research summarizes the research into why minimum wage increases don't lead to employment losses. The evidence suggests that businesses adjust to minimum wage changes in a wide variety of ways, and that reductions in labor turnover; improvements in organizational efficiency; reductions in wages of higher earners ("wage compression"); and small price increases "appear to be more than sufficient to avoid employment losses, even for employers with a large share of low-wage workers."

- Carl Bonham


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