Accounting for Solar's Positive Externalities

Some have pointed out that my previous post on subsidizing solar power didn't account for the positive externalities that solar power generates. So let's have a look at what those might be. From the story:

Craig Sherman, president of Hope Pharmaceuticals, said the panels have been a good investment.

"We feel good, the tenants feel good, they can tell their customers that they're green," Sherman said.

Rick Kidder, Scottsdale Area Chamber president, accompanied Mitchell. "If we can start to use more solar here and reduce our carbon footprint in the process and save a little money, it's a win-win-win," Kidder said.

Mitchell said that solar panels will have many benefits for the country.

"The more publicity this gets, the more research that is done, I think it's good for our economy, it's good for national security and it's certainly good for jobs in Arizona," Mitchell said.

So the possible positive externalities listed are, 1) We feel good, 2) We reduce our carbon footprint, 3) More research is done, 4) It's good for the economy and jobs, and 5) It's good for national security.

Let's take them in reverse order.

5) The project has no effect on national security. Although electric power is energy, almost all of it is generated from resources produced here in the US - coal, nuclear, and most of the natural gas. The national security argument works for imported oil, but oil is far to valuable as a transportation fuel to use to generate electricity.

4) It's only good for the economy and jobs if we don't have something better to do with the expenditure. If you have to subsidize it at 77 cents on the dollar, then we obviously have better things we could be doing.

3) More research will get done if the output of the research is expected to make money in the marketplace. It would seem to me that subsidizing existing technology, which is used for today's implementations, would actually reduce the incentive to do research. Said another way, if they'll subsidize today's stuff so that we can make a profit, why not focus on current production rather than research. It pays better.

2) If we generate power using solar rather than coal or natural gas, we will reduce carbon dioxide emissions. If the alternative is nuclear power, this argument doesn't hold. If the offsetting power is coal, which generates 2.1 pounds of CO2/ kWh then we have reduced emissions by about 92 tons per year or 1,380 tons over a 15 year service life. With natural gas at 1.25 pounds/kWh it's 876 tons over the life of the panels.

The Chicago Climate Exchange is currently selling a metric ton of CO2 offsets for $3.80. That makes this positive externality worth between $3,000 and $5,000. (The total subsidy for the project is $138,000.)

1) Finally, we feel good. As best I can tell, the taxpayers and SRP customers are paying about $133,000 so that some people can feel good.

Subsidizing Solar at 77 cents on the dollar

Congressman Harry Mitchell has been out touring new solar energy installations highlighting the need to renew their tax credits. Since the story provides a lot of information, let's run the numbers.

Marvin Borsand of the Body Sculpting Center, 2255 N. Scottsdale Road, paid $180,000 to install a 30-kilowatt system at the south Scottsdale business in January.

"It's made a very significant difference for us, much more than we expected," Borsand said. "We originally thought they'd pay back (in) maybe seven years. It's down to about four now."

The federal government rebate covered 30 percent of Body Sculpting's costs of the panels and their installation.

The business also received credits from the state and from the Salt River Project, which issued a one-time $66,000 rebate based on kilowatt-hours saved by the solar panels.

The 30% federal rebate covers $54,000 of the $180,000 cost. The state tax credit is 10% covering another $18,000. SRP kicked in $66,000 so the net cost of the system to the business was $42,000 or 23.3% of the total. A 30 kw system generating power 8 hours a day for a year offsets the purchase of 87,600 kwh of electricity at a rate of around 15 cents per kwh. That saves the business about $13,100 a year which pays for a $42,000 investment in less than 4 years.

Rick Kidder, Scottsdale Area Chamber president, accompanied Mitchell. "If we can start to use more solar here and reduce our carbon footprint in the process and save a little money, it's a win-win-win," Kidder said.

While it's a win-win for those directly involved, the taxpayers and other SRP customers get stuck with over 77% of the bill.

I don't understand how something is sustainable when it requires a subsidy of 77 cents on the dollar to entice businesses to use it.

Lobbying for Incentives

In economics, examples of rent seeking include:

lobbying the government for tax, spending or regulatory policies that benefit the lobbyists at the expense of taxpayers or consumers or some other rivals.

Lots of people and companies engage in rent seeking. A recent local example is Honeywell International.

Honeywell International Inc. spent nearly $1.1 million in the second quarter 2008 lobbying on aviation regulation, defense spending, energy-efficiency tax credits and other issues, according to a recent disclosure.

Perhaps this activity is related to Honeywell's involvement in ASU's solar panels I mentioned a while ago.

Product differentiation in Agriculture

When I talk about perfect competition in class, I often use agriculture as an example. Here is the counter example - a farmer that has differentiated his product and delivers to a very specific market niche.

McClendon, a longtime pharmacist turned botanist, runs one of metro Phoenix's only U.S. Department of Agriculture-certified organic-produce farms.

Although most farmers with his credentials sell to wholesalers that stock grocery-store shelves, McClendon has carved a niche by custom-growing exotic crops for some of the Southwest's top chef-driven restaurants.

In the summer, he harvests Corno Di Toro sweet peppers - the seeds are imported from Italy - exclusively for famed pizza maker Chris Bianco of Pizzeria Bianco in Phoenix...