Dandan Gong BPRO 29000Jessica MillarKerstin MilliusReid Sherman

Photovoltaics vs. Solar Water Heating in California:

Creating Incentives for Green Energy

Table of Contents

Introduction............................................................................................................................2

Photovoltaic Cells....................................................................................................................3

Solar Hot Water Heaters........................................................................................................10

Cost-Benefit Analysis.............................................................................................................14Benefits..........................................................................................................................................14Costs..............................................................................................................................................17Results...........................................................................................................................................19

Policy Considerations.............................................................................................................22Federal Incentives..........................................................................................................................23The California Solar Initiative..........................................................................................................24Solar Water Heating and Efficiency Act of 2007...............................................................................26Opposition to Solar Installations.....................................................................................................27

Conclusions...........................................................................................................................27

Bibliography.................................................................................................................................29

1

IntroductionThe production of energy in California got a lot of national attention in 2000 and

2001 during the electricity crisis, when widespread blackouts caused then-Governor

Davis to declare a state of emergency. After the collapse of Enron and disclosure of its

manipulations of the energy market, it became much less of a public issue, but with

rising oil and natural gas prices and concerns about global warming, energy, especially

alternatives to fossil fuels, is on the minds of the public and politicians alike. The

abundance of clear, warm, sunny days that characterizes much of the state suggests

one particular stable and powerful alternative, the sun. In this study, we consider two

methods by which Californians can harness the sun’s energy: solar hot water heaters

and photovoltaic cells. These two types of systems are currently mass-produced and

available to consumers for individual residential use; solar hot water heaters, in

particular, have been used in thousands of California homes since the nineteenth

century.

California has much to gain by encouraging residential use of solar power. Solar

hot water heaters and photovoltaic cells offer significantly different methods by which

solar energy can be employed. Solar hot water heaters are relatively simple, efficient,

inexpensive systems, but contribute far less to the overall energy needs of a household

than photovoltaic cells do. Photovoltaic cells are far more expensive, but can provide a

greater amount of energy for the house, and the technology is constantly advancing to

greater efficiency. The two types of systems offer distinct advantages and

disadvantages to supplementing the energy production for use in California residences.

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Certainly, encouraging the use of solar power makes sense, but there are

significant differences in the various systems by which Californians can harness the

sun’s energy. Photovoltaic cells and solar hot water heaters are two of the most readily

available of these options, but the two are significantly different, both in mechanism and

in economic and political implementation. At both the individual and state level,

resources are often limited and choices have to be made. If the state seeks to

implement subsidies for residential use of solar energies, should it emphasize

photovoltaic cells or solar hot water heating systems?

Photovoltaic CellsAlthough Albert Einstein is most famous for his theories of relativity, the Nobel

Prize that he won in 1921 was for his explanation of the Photoelectric Effect. The

particle nature of light and its ability to move electrons in a conductor was an important

breakthrough for our understanding of the nature of light, and now it is serving as an

important breakthrough in the science of energy. In this section we will describe the

basic science behind solar cells and how they generate power, and discuss the sort of

systems that might be purchased using the incentives we are considering in this paper.

To generate a current in any system, two sides have to be made, one of which

has electrons at a higher energy state than on the other side. Because free-flowing

particles always travel towards the lower energy state, like balls rolling downhill, the

electrons will flow in a certain direction as long as a conductor connects the two sides,

causing a current. This is the basic principle behind a battery.

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Batteries don’t work as a major source of energy because it takes as much

energy to make them as they produce and they are limited in lifetime: as soon as the

higher energy side runs out of electrons, the battery is dead and there’s no more

current. Here’s where the photoelectric effect comes in. With the proper materials and

configuration, photons can be utilized to move electrons back to the higher-energy

state, and the cell will work like a battery that is constantly recharging when light shines

on it.

To achieve this, semiconductors are used, most often crystal silicon. All atoms

have discrete energy shells that electrons can occupy, and electrons will tend occupy

the lowest possible shells. Silicon has 4 electrons in the outermost occupied shell.

When silicon forms a crystal, the neighboring silicon atoms share the outer electrons so

that for each atom, it acts as though the outermost occupied shell is fully occupied and

the shell above that is completely empty, which makes it very electrically stable and not

able to conduct electricity at all. If any electron got bumped up to the next level, it would

be called a “valence electron”, and it would be able to travel freely between all the

atoms, because that shell is unoccupied in most of the atoms. Since valence electrons

can move freely, the silicon crystal acts like a conductor for them (hence

“semiconductor”).

It takes a lot of energy to bump an electron out of the crystal into the valence

shell, and once there it is hard to direct the current, so pure silicon isn’t good for a

photovoltaic cell. However, silicon cells can be treated to have specific impurities in

them, in a process called “doping”. If silicon is doped with phosphorus, when the crystal

is created, there is one extra electron for every phosphorus atom (since phosphorus has

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5 outer electrons instead of 4), and so there will be some valence electrons. This is

called “n-type” silicon, the “n” standing for negative, because of the extra electrons.

(This is a misnomer, however, because the phosphorus atoms also have an extra

proton each, so there is no net negative charge.) If silicon is doped with boron (which

has 3 outer electrons), then the shell with the shared electrons will have some missing,

and those extra spots where an electron could fit into the crystal are called “holes”. This

is “p-type” silicon, for positive. Since the holes are in a lower energy shell than the

valence electrons, if you put connect n-type and p-type silicon, then electrons will flow

from the n-type to the p-type, and you’ll get a brief current.

Figure 1: Valence electrons from the n-type silicon will drop into holes in the p-type silicon.

As the electrons flow to the p-type silicon, however, the n-type will run out

of valence electrons and, even before that, the p-type, because it is gaining electrons,

will become negatively charged enough to repel any more electrons. So some more

sophisticated configuration is needed. If a plate of p-type silicon is placed on a plate of

n-type silicon, there will be an initial rush of electrons as the valence electrons in the n-

type side closest to the p-type side cross over to drop into the holes. This creates a

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zone at the boundary between the two called a “junction” where the extra negative

charge on the p-type side and the extra positive charge on the n-type side result in a

directional electric field. Because of the electric field, electrons in the valence shell will

be pushed to the n-type side. So if photons with enough energy hit electrons in the

silicon and bump them up to the valence shell, they will tend to move to the n-type side,

and because the n-type side has no holes, it will stay in the valence shell. It (or another

valence electron on the n-type side) can then fall back into a hole on the p-type side as

long as a conduction path is provided that doesn’t go through the junction.

Figure 2: A photon of sufficient energy can bump an electron to the valence shell, where it will be attracted by the net positive charge of the n-type silicon.

A common configuration is shown in Figure 3. Not shown are the wires from the

contact grid to the load, and then from the load to the back contact to complete the

circuit.

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Figure 3: Anatomy of a typical solar cell (howstuffworks.com)

Advantages and Limitations of Solar Cells

The technology to generate electric power directly from radiation coming from the

sun is an amazing achievement. Almost all of the sources of our energy originate with

the sun, but usually we harness the energy after it has been cycled through complicated

processes, like photosynthesis in plants or the evaporation and precipitation of water.

Since every conversion comes with associated losses, the potential for solar energy

should be great. For example, more energy in solar radiation falls on a field than the

energy in the plants that could be grown on it. However, photovoltaic cells as a means

of collecting the sun’s energy have some significant challenges.

Like any other source of energy, there are theoretical limits to the energy that

photovoltaics can produce. With the configuration shown in Fig. 3, the top layer of

silicon must connect to a conductor, and the best conductors are opaque, so any

conductors attached reduce the sunlight incident on the cell. Putting too little

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conducting material across the top lowers the efficiency and capacity to create current,

however, so a balance has to be reached.

Another limit that can’t be gotten around, at least with semiconductors, has to do

with the fact that photons from the sun come in all energies. Low energy photons don’t

have enough energy to bump an electron to the valence band, so their energy can’t be

used. When a high energy photon hits an electron, on the other hand, its energy can

bump the photon up to the valence band, and that energy can be used from the current

produced, but any additional energy over the gap between the energy shells goes into

kinetic energy of the electron, which cannot be harnessed, and is lost. So low energy

photons can’t be used at all, and only a fraction of the energy in a high-energy photon

can be.

There are other difficulties that might be overcome with future research and

development. Right now solar cells are not feasible to run power plants for two

reasons. One is that it is not a constant source of energy because it only runs when the

sun shines, whereas coal and nuclear plants, for instance, can run constantly for long

stretches of time. The energy could be collected during sunny times and used later, but

current battery technology is too expensive to be widely feasible. The other is that a

solar cell plants are much more expensive per kilowatt-hour than almost any other kind

of power plant. This will likely be true for the near future, but as seen in Fig. 4, the cost

of producing photovoltaics has been dropping quite drastically in recent years, and the

Department of Energy’s Solar Energy Technologies Program foresees the costs being

cut almost in half again by 2010.

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Even if solar cells are never the best form for power plants, they still have some

interesting possibilities. One advantage of solar power is that it can be distributed to

many small producers, so that there is a greater power security buffer against a major

power plant failing or being taken offline (one of the causes of the California blackouts).

Another is that land can be used to create solar power that is already in use for other

purposes, like households or parking lots. Putting a roof of solar cells over a mall

parking lot, for instance, could power the mall during the day when the mall’s demands

are the greatest, and would also shade the cars, reducing air conditioner demands.

(Makhijani 2007)

Figure 4: Decreasing cost and increasing capacity of PV systems over time (US Department of Energy – Energy Efficiency and Renewable Energy)

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Solar Hot Water HeatersSolar water heating is nothing new: the sun has been used to provide hot water,

in one form or another, for centuries. Since the invention of commercially viable home

solar water heaters in the early nineteenth century, using the sun’s energy for water

heating has been especially popular when prices for other types of energy, such as oil,

gas and electricity, have risen.

With a warm, sunny climate and scarce energy resources, California took

particular advantage of solar hot water heaters at the beginning of the nineteenth

century. By 1900, nine years after the invention of the first commercial solar water

heater, sixteen hundred units were in use in Southern California, including a third of

houses in Pasadena alone. In the 1920s and 30s, Californians were able to replace

relatively expensive energy resources like imported coal and wood with natural gas from

the large deposit found in the Los Angeles basin. As a result, California’s brief dance

with large-scale solar water heater use came to an end, and further innovations were

concentrated elsewhere in the nation and the world.

Currently, there are three types of solar energy collector systems in use: the flat

plate collector, composed of a glazed, insulated, weather-proofed boxes containing a

dark absorber plate; the integral collector-storage system, which involves a back-up

conventional water heater and performs better in mild-freeze climates; and the

evacuated-tube solar collector, which is more efficient by preventing radiative heat loss,

and is more frequently used in commercial, rather than residential contexts. For

California, we consider the simple flat-plate collector; this equipment is already used

most extensively where residents seek solar water heating technologies.

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The flat plate collector is a reasonably simple piece of equipment. Composed of

copper tubing on an aluminum plate and covered by one or more layers of iron-

tempered glass, these collectors are efficient enough to be used year-round, even in

moderately cold climates. They operate using a simple property of liquids: colder liquid

is denser than warmer liquid, so when liquid of two distinct temperatures is mixed, the

colder falls while the warmer rises. Flat plate collectors contain a number of parallel

copper tubes, tilted (often, aligned with a tilted roof) so that gravity acts on the water in

each tube. Cold water enters the collector from a pipe at the bottom of the collector,

while hot water leaves via a pipe at the top of the collector (Figure 5). In between these

two pipes, the density differential created as solar heat warms the water in the copper

pipes makes the warmest water rise to the top pipe, for use in the rest of the system.

Figure 5: Water flow in flat-plate collector. Cold water is inputted at bottom right; hot water leaves at top left. (US Department of Energy – Energy Efficiency and Renewable Energy)

System types can be divided into active and passive heating systems; the former

is more efficient but more expensive, while the latter is less efficient, but less expensive.

Active systems include direct circulation systems, which require climates where it rarely

freezes; and indirect circulation systems, which can withstand low temperatures and

thus are more popular in colder climates with frequent freezing temperatures. Passive

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systems include integrated collector-storage systems, which work best in warmer

climates, and – because of the integration of back-up conventional hot water systems –

best serve households where there are significant daytime and evening hot water

needs. A second type of passive system is called a thermosyphon system, which is

more expensive and more complicated to install, but yields more reliable results if

installed correctly.

For the purposes of this study, we choose a single system for study: the active,

direct circulation solar water heater (Figure 6). This choice makes sense for several

reasons. Though the energy needed for an active pumping mechanism makes active

solar water heating systems less efficient than passive ones, they are less expensive

and less complicated to install than passive systems. California’s moderate climate

does not call for the additional technology involved in producing a freeze-proof indirect

circulation system, which also involves greater expense. Finally, the active direct

circulation system is most frequently installed in California homes already, so

contractors are most familiar with the installation of these systems.

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Figure 6: Active, closed loop solar water heater. (US Department of Energy – Energy Efficiency and Renewable Energy)

Active direct circulation systems, like the flat plate collector, operate via relatively

simple mechanisms. Cold water inputted into the storage unit is pumped upwards into

the collector, where it is warmed by the sun and falls back down into the tank, leaving

via a pipe at the top of the tank for use in the house. Figure 6 shows a slightly more

complicated version, where an intermediary fluid such as antifreeze is circulated in the

collector instead, heating water in the storage tank indirectly. This mechanism is meant

to guard against pipe freeze in colder climates; in California, where temperatures rarely

dip below freezing, the water travels up into the collector and back to the tank itself.

Cost-Benefit AnalysisA cost-benefit analysis is conducted for both technologies to calculate the net

present benefit or cost of each technology for residential use. We will then compare

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and evaluate the net benefit of both technologies over their lifetime to make policy

recommendations.

BenefitsThe benefits of all solar technology for society are twofold, namely, economic

savings in energy costs, and environmental savings in reduction of greenhouse gas

emissions as we switch from using fossil fuels.

Solar water heating

The most direct monetary benefit is savings from paying for the energy

conventionally used for water heating. The dominant types of energy used to heat

water in homes are electricity and natural gas: about 2/3s of homes in California use

natural gas and the rest use electricity. Other water heating methods do exist but their

usage, and hence impact, is negligibly small.

Most solar water heaters are currently only able to supply a fraction of the

amount of hot water a typical home needs, and therefore substitutes a fraction of the

energy conventionally used in water heating. Typically, a solar water heater can

guarantee 60% - 80% of home water heating; for the purpose of this paper, this

substitution rate will be assumed to be 70% on average. Hence, the first benefit of solar

water heating will be 70% savings in the electricity or natural gas otherwise needed for

water heating. We adjusted this savings in future years in our analysis to take account

of long-term rise in electricity and natural gas prices.

Next, the reduced usage of natural gas and fossil fuels that generates electricity

translates to reduction in carbon emissions. Both electricity generation and natural gas

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mainly emit carbon dioxide. The amount of reduced emission is calculated from

multiplying the average rate of emissions from electricity generation and natural gas

water heating, termed the emission coefficient, by the total quantity of emission ordinary

resulted from water heating. Multiplying the result by the per-unit social cost of carbon

dioxide, in dollars per ton, generates the total reduced social cost of carbon emissions

per system.

The evaluation of the social cost of carbon dioxide has not reached a universal

consensus. Literature review indicates values ranging between $5/ton to $125/ton.

This paper will use assume $25/ ton, as do many other such analyses, and this value is

also used by the Kyoto Protocol as the price of an emissions permit. As the Kyoto

Protocol is from 1997 and prices on carbon trading markets have been rising recently,

this might be somewhat undervaluing the benefits of reduction of carbon dioxide

emissions in the long run, but such a complicated situation as the impacts of global

warming is impossible to put a single number on, so following the example of the Kyoto

Protocol is, we felt, a reasonable assumption.

Electricity generation and natural gas use also results in the emission of other

greenhouse gases such as nitrous oxide and sulphur dioxide. However, their social

costs have not been assessed in detail in available literature, and the respective

quantity of emission is not as significant, hence these other greenhouse gases will not

be incorporated into this analysis. Because of this, our analysis, with only evaluation of

carbon dioxide, undervalues the true benefit of solar technology.

Photovoltaic cells

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The benefits of photovoltaic systems are of the same kind, namely the lower bills

and lower carbon emissions. In this case, the savings to the consumer will be in the

electricity bill as compared to the conventional case, with electricity supplied by a large

utility companies. Some photovoltaic systems have built in batteries, so that the home

user is able to use electricity from storage even in times when the PV itself is not

generating electricity at the moment. These systems are much more expensive and so

we will consider systems without batteries, but that are grid-connected, so that

electricity can be pulled off the grid from the utility company when the sun is not out,

and excess energy can be fed into the grid when the sun is out but usage is low. With

net metering, the homeowner pays only the difference between electricity use and

production, without regard to when each occurred. Hence, owning a photovoltaic

system can potentially fully substitute conventional electricity usage. We assumed the

system purchased would be of the capacity to provide all the electricity needs to current

use but not projected increases in electricity use, so that over the lifetime of the system

the reduction in electricity bill would start at 100% and decrease as the electricity use of

the home rose without a corresponding rise in system capacity. We calculated this

savings by the current average home usage of electricity times the price of electricity in

dollars per kilo-Watt-hour, adjusted in future years for inflation in energy costs.

The secondary benefit is reduction in carbon emissions. Electricity generation

uses a number of different fossil fuels and each has a different emissions rate. One

way to calculate total carbon emissions is by calculating the percentage of electricity

generated by each type of fossil fuel and then multiplying by that fossil fuel’s emissions

rate. Conveniently, various reports have taken this variety into account and calculated

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the average aggregate emissions rate per quantity of electricity generated, which is

what this analysis will use. Hence, total emissions avoided will be calculated by

multiplying this average emissions rate, in tons per kilo-Watt-hour, by the total quantity

of electricity generated by the photovoltaic system.

CostsCosts of most small-scale residential use systems are again twofold, being the

cost of installation, which includes the purchase price of the unit, and subsequent

annual operating and maintenance costs, if any.

Solar Water heater

For the solar water heater, the per-unit price as sold on the market is $3000.

This is a one-time cost for the first year of installation. In addition, each system costs

$117 per year to maintain, which will become the annual cost for the lifetime of the

system, estimated at 20 years.

Photovoltaic cells

For a photovoltaic system, the price of the unit is dependent on usage and the

dimension of the system. The current price of photovoltaic systems is about $9/ peak

watt (meaning watt of production at maximum output). With the weather in California

and the average amount of sun available throughout the year, a system that is able to

supply an average home’s full usage of 7050kWh per year will cost $35,400. The

annual maintenance and operations cost of PV systems are negligibly small.

Table 1: Assumptions

Value Unit Source

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Emissions coefficients Electricity generation (CA) 0.61 lb/kWh EIA Natural gas 13.446 lb/therm PG&EAverage home electricity use 7080 kWh DOEWater heating energy use Electricity 2537 kWh EIA Natural Gas 18 kft3 EIAEnergy price Electricity (CA) 0.1251 $/kWh CEC Natural gas (CA) 10 $/kft3 CECSocial cost of CO2 25 $/ton KyotoSolar Water Heater Performance 70 %Rate of increase in residential electricity consumption 1 %/year DOERate of increase in price Electricity 2% DOE Natural gas 2% DOEPortion of fuel used for water heating Electricity 36% DOE Natural gas 64% DOE

ResultsThe cost and benefits are calculated over 20 years, the lifetime of the system.

The following tables only show figures for first five years; figures from the years after are

omitted due to page width constraints. Overall, solar water heating provides the most

benefits for the least cost: it has a benefit-cost ratio of 0.66, while photovoltaics have a

cost-benefit ratio of 0.36.

We assumed a discount rate of 7%, at which the lifetime costs outweigh the

benefits for both types of systems, though much more so for photovoltaic cells. We did

find that at a discount rate of 0.8%, solar water heaters break even, and at any lower

discount rate than that, the benefits of solar water heaters outweigh the costs.

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We also considered the impact of reductions in price through government

incentives (although better technology or other reductions in price would be equivalent).

At a 7% discount rate, a 50% subsidy would be enough to have the net present value of

the solar water heater system break even. At a 5% discount rate, a 39% subsidy would

be sufficient.

Photovoltaic systems are not nearly as close to having a positive net present

value. Even with a 30% subsidy and a 0% discount rate, the net present value is still

negative (though in this case with a benefit-cost ratio of 0.72). So for residential PV

systems to be a good bet, at least in purely economic terms, better technology or a very

significant drop in price will be necessary.

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Table 2: Solar Water Heater - First Five Years of Operation

Year 2009 2010 2011 2012 2013Without ScenarioAverage annual home water heating electricity usage (kWh) 2,537 2,537 2,537 2,537 2,537Average annual home water heating natural gas usage (kcf) 18 18 18 18 18Cost of electricity based water heating ($) 317 324 330 337 344Cost of natural gas based water heating ($) 180 184 187 191 195

Units installed 1 1 1 1 1Performance (%) 70% 70% 70% 70% 70%

CO2 emission from electricity (ton) 0.70 0.70 0.70 0.70 0.70CO2 emission from natural gas (ton) 1.13 1.13 1.13 1.13 1.13

Total Social cost of electricity CO2 emission ($) 18 18 18 18 18Total Social cost of natural gas CO2 emission ($) 28 28 28 28 28Per unit cost ($) 3,000 3,000 3,000 3,000 3,000Operations and Maintenance ($) 117 117 117 117 117           Benefits

Reduction in electricity bill ($)1 80 83 86 90 94 Reduction in natural gas bill ($) 81 84 87 91 95 Reduction in social cost of electricity carbon emissions ($) 4 4 4 4 4 Reduction in social cost of natural gas emissions ($) 13 13 13 13 13 TOTAL BENEFITS 178 184 191 198 205 Costs

Total cost per unit per household 3,000 0 0 0 0Total annual operating cost 117 117 117 117 117TOTAL COSTS 3,117 117 117 117 117

NET BENEFIT -2,939 67 74 81 88 7% 7% 7% 7% 7%

Discount to present at 7% opp cost of capital -2,939 63 65 66 67

TOTAL NET PRESENT VALUE over system life time ($) -1,509

1 Reductions are weighted according to the mix of energy used for hot water heating in California: 64%*(normal natural gas usage) and 36%*(normal electricity usage).

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Table 3: Photovoltaic System -- First five years of operation

Year 2009 2010 2011 2012 2013Without ScenarioAverage annual home usage (kWh) 7,080 7,151 7,222 7,295 7,367 Average annual home electricity bill ($) 1,015 1,046 1,077 1,110 1,143

Units installed 1 1 1 1 1Performance (kWh/ peak W) 9 9 9 9 9

Electricity bill ($) 886 912 940 968 998

CO2 emission from electricity (ton) 1.96 1.98 2.00 2.02 2.04

Total Social cost of electricity CO2 emission ($) 49 49 50 50 51Per unit cost ($) 35,400 0 0 0 0Operations and Maintenance ($) 0 0 0 0 0           Benefits

Reduction in electricity bill ($) 886 903 921 940 959 Reduction in social cost of electricity carbon emissions ($) 49 49 50 50 51 TOTAL BENEFITS 935 953 971 990 1,010 Costs

Total cost per unit per household 35,400 0 0 0 0Total annual operating cost 0 0 0 0 0TOTAL COSTS 35,400 0 0 0 0

NET BENEFIT -34,465 953 971 990 1,010 7% 7% 7% 7% 7%

Discount to present at 7% opp cost of capital -34,465 891 849 808 770

TOTAL NET PRESENT VALUE over system life time ($) -22,432

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Policy Considerations

Neither photovoltaics nor solar hot water heating have made serious inroads in

the overall energy production in the United States. Solar makes up only 0.1% of U.S.

energy sources, and at best will only triple by 2030. (The National Academies 2008)

Nationwide, only 0.2MW of photovoltaic modules are sold in the U.S. every year.

(Energy Information Administration n.d.) Similarly, Americans purchase only 8,500 solar

hot water systems a year. (Kateley 2007) At this rate, even if all 8,500 heaters were

sold every year to California, it would still take over 1,000 years to get one heater to

every family of four in California alone.

As we can see from the Cost-Benefit Analysis, the main limiting factor for both

photovoltaics and solar water heating systems is cost. Photovoltaic systems cost an

average of $35,400, while Solar Hot Water systems typically cost $3000. Unless

property value increases are taken into account, neither system ever pays for itself

during its life. The high upfront cost discourages many homeowners from installing their

own solar power systems, and therefore should be the main target of any incentive

designed to increase solar installations. Nationwide, compared to other energy

sources, such as nuclear and coal, the solar industry gets very little government

assistance for capital costs of installation or for research and development, thus

increasing the cost the individual faces in the marketplace.

Popular perception about the aesthetics of solar installations also limits their

widespread adoption. Large solar panels typically blend in with only the most modern of

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architecture, and many homeowners associations do not want them in their

neighborhoods (see “Opposition to Solar Installations” below). However, aesthetics are

improving, especially for photovoltaic installations, which can be seamlessly integrated

into homeowners’ roofs. (Faiers and Neame 2006)

Federal Incentives

Energy Policy Act of 2005

As a part of the Energy Policy Act of 2005, the federal government offers equal

incentives for residential installations of both solar hot water and photovoltaic systems.

The incentives cover 30% of the cost of the installation, up to $2,000, and are obtained

through a rebate on the owner’s federal taxes. The credits cover only systems intended

for household use and only the parts of the electrical/heating system that directly involve

solar energy. The credits are set to expire in December 2008.

Solar heating systems for swimming pools or hot tubs are not eligible for this tax

rebate. This is curious, given that the ostensible goal of this incentive is to reduce the

percentage of water heated by non-renewable energy in U.S. households. Given that

swimming pools tend to be concentrated in areas where solar radiation is the most

available (i.e. “Sunbelt States”), if pool owners want to heat their pools, it would be most

efficient for them to do so via solar power. The government would thereby ensure that

a greater percentage of its credits for solar water heating went to the states that use the

solar heaters most efficiently.

Solar America Initiative

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The Solar America Initiative focuses specifically on research and development as

a means to get Photovoltaics to be cost-competitive by the year 2015. The Department

of Energy, which runs the program, boasts that since federal funding was available for

solar research in the 1970’s, the cost of photovoltaics has been reduced by 90%, from

$2/kWh to $0.20/kWh. It expects that further reductions in cost, coupled with increased

future demand, will lead to the installation of 5 GW of solar power by 2015.

The California Solar Initiative

The California Solar Initiative aims to provide California with 3,000MW of solar

power by 2017. This ambitious plan would require over a ten-fold increase in solar

panel installations given the estimated 280MW currently installed in the state.

(California Energy Commission 2007) California has dedicated $3.3 billion to the

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Figure 7: Solar America Initiative – Projections for Future Costs and Installed Solar Capacity

project, mainly in the form of rebates tied to the size and efficiency of newly-installed

photovoltaic systems.

There are a number requirements in place before a homeowner is deemed

eligible for a rebate: the installation must be pre-approved by the program administrator;

the system must be installed with performance meters; the home must receive an

energy audit; and finally, the system must be tied to the electric grid and net-metered

(meaning the owner pays/receives payment for the difference between his electricity

consumption and the electricity actually produced by the panels). Net-metering is a big

boon to consumers economically because of the resulting decoupling of timing of

energy production and use without the energy company profiting off of the consumer’s

solar panels. However, it does not allow the solar panels to work as a back-up in case

of blackout, because the system must be connected to the grid, and will not work well if

solar panels become a large fraction of statewide energy production (though this is

clearly not plausible in the near future and not of major concern). The incentive system

is also complicated by the different requirements for customers of private versus public

utilities. Overall, California’s requirements are much more stringent than those at the

federal level, and their number and complexity may actually constitute a barrier to entry

for homeowners who are not astute enough to figure out the regulations for themselves.

As a result, California homeowners may install many fewer systems than they would if

they faced a more simplified process.

Solar Water Heating and Efficiency Act of 2007

Although the CSI does not fund solar hot water system, a similar initiative passed

in October 2007, aims to install 200,000 such systems in California. (Parker 2007) The

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Solar Water Heating and Efficiency Act created a $25 million/year, 10-year incentive

program for solar hot water systems that would be funded through a $0.13 monthly

surcharge on gas bills. Further details of the program (such as the amount of the

incentive per customer) will be decided pending the results of a pilot program in San

Diego.

The creation of a mainstream market for solar water heating systems is expected

to have a huge impact on California’s consumption of natural gas. Currently,

California’s imports nearly 85% of its natural gas, 24% of which is used for residential

hot water heating. (Huffman 2007) According to Environment California, solar heating

used to be the norm in parts of the state, with areas such as Pasedena suppling more

than 1/3 of its hot water through solar systems in the late 1800’s. However, in the late

70’s and 80’s, tax breaks for solar heaters led to a mini solar-bubble, which, when burst,

left owners with systems of dubious quality and doubts about the viability of solar

heating systems. (Del Chiaro and Telleen-Lawton 2007) The linkage of incentives to

systems approved by independent rating agencies, such as the Solar Rating and

Certification Corporation and Underwriters Laboratories, helps to avoid this problem

today.

Opposition to Solar Installations

Residential solar installations, though seemingly unobtrusive, are not without

their controversies. Earlier this year, a dispute between neighbors became national

news when California courts required a homeowner to remove three redwood trees that

were blocking her neighbor’s solar panels in violation of California’s 1978 Solar Shade

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Act. To prevent further disputes, State Senator Joe Simitian has introduced a bill that

would protect trees that are planted before solar panels are installed. (Barringer 2008)

Often solar panels become a point of controversy simply as a matter of

aesthetics. Homeowners associations throughout the U.S., from Los Gatos, California,

to Bellerose, New York, have denied residents the right to install solar panels on their

roofs for fear they would destroy the architectural integrity of their neighborhoods.

(Barringer, 2008; Groc, 2007; Fischler, 2007) To combat this practice, California

passed the Solar Rights Act in 2004 to minimize the power of local authorities to restrict

solar installations based on aesthetic reasons alone. (Broehl 2004)

ConclusionsCurrently, solar energy is an extremely small part of the energy market. Very few

systems are manufactured and sold in the United States despite an ample amount of

sunshine and energy demand in the rapidly growing Sunbelt. This is largely due to cost.

Dollar for dollar, solar hot water heating provides the greatest amount of benefits in the

solar market, but it is still not economical in the energy market when compared to coal

or even wind power. Unless the capital cost of these systems --especially photovoltaic

systems -- can be drastically reduced, they do not appear to be a smart social

investment at this time.

One way to reduce these costs would be to take advantage of economies of

scale. The Solar Rating and Certification Corporation currently lists 64 different

manufacturers of Solar Heaters and PV panels. While competition is great for

promoting efficiency, this large number of manufacturers combined with a small amount

of aggregate output, means that each manufacturer has an extraordinarily small

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production line. Encouraging a greater demand for solar products then, has great

potential to bring down the per-unit cost due to economies of scale.

In addition, unlike solar hot water heating, photovoltaic technology is relatively

new and could potentially benefit from advances in engineering and science. Society

can best stimulate these through support for research and development such as that

offered by the Solar America Initiative. However, care must be taken that the market for

PV systems is not stifled as consumers wait for prices to come down. One way to not

stifle the market is to encourage net-metering regulations, as discussed above, which

allow consumers to install PV systems connected to the grid without worrying about

capacity and without the electricity they generate being sold at a profit by a utility.

Therefore, sound policies for the solar market should place an emphasis on

increasing the demand and production of solar water heaters. This is precisely the goal

of current Federal and State incentives, which completely cover the individual’s net

costs for solar hot water heaters. While PV systems are somewhat subsidized, further

scientific advances are needed to bring costs in line with its energy competitors. To that

end, research and development should continue to be more heavily supported than

market incentives. In all, continuation of current policies should be adequate to

developing the solar market at a socially beneficial level.

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