On today’s show, we are talking about solar energy. Let me be clear, I want solar to work. I have solar electric panels on both of my sailboats. I love the idea of getting energy for free.

If solar energy is going to take hold on a large scale, it will be because it makes financial sense for all the stakeholders including consumers of electricity to make the investment. Governments in California don’t trust the population to do the right thing. So starting Jan. 1 of this year, all newly constructed homes and low-rise apartment buildings in California are required to have rooftop solar panels. The state is the first in the nation to carry such a mandate. Prior to the enactment of the law, about one in 5 new homes came equipped with some form of solar energy supplement. All new building permits in 2020 and beyond will require it.

The law also requires better insulation and air filtration for new homes. Some areas also are seeing mandates on the use of natural gas.

The rules for energy use are intended to help alleviate the state’s greenhouse gas emissions. The new laws apply only to newly constructed homes.

The California Energy Commission estimates that the solar mandate and additional building code changes could add between $8,500 – $9,500 per home in construction costs. However, they say the changes will save homeowners $19,000 in energy and maintenance costs over 30 years, or $55 a month. From my perspective, that’s an optimistic view. The solar contractors I contacted estimate the savings at closer to $35 per month per home. That means we’re talking about a 22 year payback on the solar installation. I don’t know about you, but these solar systems have not been tested to a 22 year life. If they don’t last beyond 22 years without maintenance or repairs then it’s likely that the solar installations never fully return their investment.

Many states have implemented financial incentives to sell power back to the electric utility at favourable rates. These rates are often higher than the cost of producing electricity using convention power generation, and certainly higher than the retail price of electricity.

Most utilities, including California have switched from buying power at peak rates to a method called net metering. So let’s say that your home generates more electricity than you use, will the utility write you a check?

The answer is no.

The problem is that the economics don’t yet support solar on its own merits. The cost of electricity from your utility is driven by two major costs. The first is the variable cost. That is, the cost associated with producing an incremental KWH of electricity. If you are burning natural gas to produce that electricity, then the cost of the fuel is the variable cost. The bigger problem is the cost of the infrastructure required to produce and distribute the power. The power system provided by the utility is designed to handle the peak power demand, not the average. Solar power systems produce electricity that lowers the average consumption, but doesn’t really lower the peak demand.

The problem is that the majority of the cost associated with delivering electricity to a residential home is fixed. That is, the infrastructure is so expensive, that the majority of the cost is the amortization of the fixed infrastructure over a number of years. The actual variable cost associate with the energy burned to deliver that electricity to the end customer is tiny by comparison. The problem is that the revenue model for the utility is based on consumption. Lowering consumption lowers the revenue for the utility, but doesn’t actually lower the cost by very much.

The problem is that politicians in this instance are pandering to an idealistic notion that is not born out in reality. If they could shut down a power generation plant, or retire the transmission infrastructure, they could save some real money.