The Economics of Solar Installations

When businesses provide consumers with a good or service they can unintentional enrich or hurt third parties. These unintentional economic boons and hardships are termed externalities. The energy market is no exception to this creating mostly negative externalities through pollution. More specifically this market creates a large portion of the world's CO2 output.

Most economists believe that the cost/benefit of these externalities should be placed upon those who take part in the transaction. The argument starts in how these externalities are placed upon the market. For example some suggest that through property rights pollution  can be controlled while others suggest direct taxation and others regulation. Each way has distinct strengths and weaknesses. Whether or not it is right the energy market's externalities have been mostly controlled through taxation and regulation for the past few decades.

The problem with externalities and placing them on a market is that it is sometimes difficult to ascertain an exact monetary amount. This is the case with the energy market. Scientists disagree on the effects of greenhouse gasses alone without even discussing the cost. With that in mind let's consider solar power. 

Solar power has long been lauded for its pollution free energy production; however, solar supplies less than half a percent of all US demand. This is due to solar's variability and cost. It is not economically viable when considering the buyer and seller alone. This could change if the externalities were completely placed on the energy market. In a recent scholarly article produced at Berkeley they discuss the current problems of solar as well as delve into the economics of solar energy. Here is the link: The Economics of Solar Electricity.

Whether or not these externalities are placed on the market may ultimately be a moot point. New technologies are being invented every year to tackle the price delta of solar vs. conventional. A recent power plant in Arizona uses the idea of concentrated photovoltaics (CPV) and removes the substrate from the equation. This plant uses parabolic mirrors to concentrate sunshine on oil that then heats either water or salt. The water powers a steam turbine while the salt holds the potential heat energy in reserve. The potential energy is used whenever output does not meet or exceed demand. This type of power plant solved the costly dilemma of having to have a reserve gas or coal plant for use during the night or when a cloud blocks out the sun. Here is NPR's article on that plant: In Ariz., A Solar Plant That Powers 70,000 Homes Day Or Night.


Dave Tufte said...

Ryan Brockway: 88/100 ("unintentional enrich", and I took off just once for a couple of run-on sentences).

Clean up those links, or I'll dock you some more points.

Well ... no ... solar isn't externality or pollution free. What about the pollution costs of making solar cells? Of disposing of them? How about the salt? Those parabolic mirrors are straightforward, but they also create the mother-of-all burning-ants-with-a-magnifying-glass issues.

None of this is to suggest that the externality problems of solar are larger. What I am suggesting is that we're too willing to understate them.

Matt Walter said...

This was a very interesting read. The salt batteries and new technologies provide exciting news for the solar power industry. The CPV solar product powers 70,000 households at an additional cost of $15.36 per year to every APS customer – whether they receive any portion of the solar energy or not. The CPV plant may have partially solved the electricity storage dilemma, but added a significant financial burden to their residential customers and probably an even larger burden to the commercial consumers.

A newly created externality also comes into play - 3 square miles of destroyed ecosystems just for this one solar plant. It would take well over 42 square miles or 27,000 acres of land covered with nothing but solar collectors to power 1 million homes. This problem could sort itself out in the long run with new advances in technology.

Dave Tufte said...

Matt Walter: 50/50

1) For perspective, the externality in the second paragraph outlines supply a metropolitan area comparable to Salt Lake City, by covering an area the size of Sandy and South Jordan combined, with solar panels. Fair enough. But can you imagine bureaucrats arguing for building power plants covering the same area?

2) Did you catch the numerical sleight of hand in the first paragraph? Read this part again: " The CPV solar product powers 70,000 households at an additional cost of $15.36 per year to every APS customer ...". In order to understand that, you actually need to figure out how many households APS has: 1,100,000 according to their website. Now do the math: they're going to charge everyone an extra $15 a year to supply electricity from this source to about 1/16 of their customers. The obvious question is why not charge that 1/16 of their customers 16 times more (or $240 extra per year). My guess is because they wouldn't stand for that sort of nonsense.

Dave Tufte said...

Oops: I should have written "supplying" instead of "supply".

Ryan Brockway said...

I am posting with the knowledge that there will be no change to my score.

Dave Tufte: You are aboslutely correct in that solar is not pollution nor externality free.

That aside the main point of the post was that it may, keyword being may, be cheaper to use solar energy when you consider all parties. All parties being buyer, seller, environment, and those that use the environment. Would the buyers and sellers be unhappy if all the externalities were placed upon their transaction? I think they would be unhappy, but not more unhappy than those that receive a tax on cigarettes and alcohol. These taxes are also semi-based on externalities.

In the end the real economic question is do we place the costs/benefits of externalities on the market that creates them? It is my belief that we do and I personally believe in the property rights school of thought. One particular way of implementation that I like is the use of pollution credits. The federal or state governments can issue these credits through auction and corporations are held to only emitting accordingly. I know it may not be the best way, but it is the best I have heard thus far.

I would like to hear your thoughts on what would be the best way to distribute the externalities in regards to pollution.

Dave Tufte said...

FYI: you're all welcome to comment on your own threads. As long as I don't get the impression that you're doing it because it's an easy way out, I'm fine.

Ryan Brockway: 50/50

Hmmm. Your question is getting into a sub-field called mechanism design. They gave a Nobel Prize for this a few years ago, but honestly I'm very weak in this area.

But, I'm all you've got, right?

Is it possible that solar may be cheaper. Yes. Are we close to that? No. We're ridiculously far away from that point. Solar is the perfect solution for many situations, but not for all of them.

You brought up internalizing externalities. Here's a tidbit that shocks most people: we already tax gasoline more than the size of the tax that would be optimal for addressing the worst case global warming scenarios. Why? Because gas is easy to tax. Perhaps we should be asking for some of that to be diverted towards other uses than what it is presently going to.

I agree with your thoughts on internalizing costs through property rights. Having said that, government attempts to do this in Europe were so ham-handed that the economics was labeled as wrong. It wasn't.

This is off topic, but it makes a good analogy. There's some rude videos on the internet called ASDF. One that my kids love has a voice saying "The kids are on fire.", and a crudely drawn woman responding with "Buy me more jewelry." Yes, it's crude and insulting to women (sorry about that). But, it reminds me of some of the criticisms made of economic solutions to pollution. Economists have been thinking longer about externalities than other specialists, and yet most peoples' criticism of economists' conclusions is ... is just bizarre statements that don't really follow from the premise. The ability of politicians and bureaucrats to get involved in an economic problem, not follow the economists advice, and then blame them for being wrong ... seems boundless. This doesn't make me hopeful about property rights as a solution.