onstitution be Enforced?

By Joel B. Eisen

President Obama’s 2011 State of the Union address termed development of clean energy sources our “Sputnik Moment” and called for 80 percent of the nation’s electricity to be generated from renewables, clean coal, and nuclear power by 2035. The message is clear: We need research, development, and deployment of a new generation of energy technologies.

How can we overcome the built-in barriers of the current electricity infrastructure and bring solar photovoltaic (PV) panels to millions of homes? The technology already exists, but a lack of focus on distribution will limit residential solar deployment unless it is addressed soon.

Given the pressing need to address climate change, more rapid action is needed to achieve routinization in residential solar. Purchase and installation must transform from a model that resembles custom construction to one that is virtually transparent to the consumer. This requires government support of firms I call “solar utilities” that would supplant the nascent industry of residential solar companies.

The barriers to more widespread distribution of residential solar are the expense of the panels, the cost of installation, and the difficulties of connecting to the electric grid. Utilities’ fossil fuel suppliers enjoy far more pervasive subsidies than renewable energy industries, and no persuasion or mandate will prompt utilities to embrace solar.

A homeowner receives a 30 percent tax credit for putting a qualifying system into place, but only after installing and paying for it. Once the average homeowner recognizes that a solar installation is a customized proposition requiring considerable labor and oversight, the tax credit loses some of its luster.

The literature on innovation suggests an “S-curve” along which new technology is adopted, with a lag between invention and mass commercialization. Offering incentives may prompt early adopters to switch to a new “disruptive” product (e.g., the cell phone, unlike the landline, is portable). Professor Everett Rogers’ pioneering work refers to five factors that move an innovation beyond early adopters toward widespread diffusion. Current initiatives for solar address only Rogers’ fifth criterion, and even then, they do so imperfectly.

Even if all criteria were satisfied, no current combination of federal, state, local, and utility incentives will bring the cost of a typical system below the level consumers are willing to pay. In a real-world test, price quotes from solar installers were solicited in six metropolitan areas across the nation. The results are daunting. No installer quoted a system price below $9,900 after applicable tax credits and incentives, and quotes were often far higher. Most homeowners would not proceed further after receiving quotes that would make solar systems more expensive in many cases than the average new automobile.

Relying on the market ignores the extensive subsidization of the current system and the realities of innovation diffusion. Leasing programs and utility incentives have spurred modest growth in installations, but current models to do more have considerable drawbacks. Groups offering volume pricing and selected installers for neighborhood groups shift transaction costs to group organizers and do not address legal issues associated with homeowner associations or local permitting. Also, assuming that volume pricing can bring prices below homeowners’ willingness to pay for solar may not be realistic.

Letting the residential solar business go it alone ignores a critical feature of growth in technology: governmental funding and key regulatory decisions necessary for dramatic transformation in an industry where barriers exist to rapid growth.

Given utilities’ historical lack of involvement, it makes more sense to establish a separate distribution channel. Yet attempting to build a solar company from scratch and operate on a regional or even national scale in competition with incumbent utilities would take an extraordinarily committed entrant into the market with the technical skills to perform installations, the regulatory know-how to evaluate the existing utility landscape in every state, and the financial wherewithal to convince funders to support the company.

I propose a different business model called a “solar utility”: a company responsible for the entire process of solar marketing and distribution in a wide geographic area. Counterintuitive as it may seem to create regulated utilities in a field that already has them, the barriers to entry in residential solar make for the type of anti-competitive environment that has historically prompted governmental intervention to entice prospective venturers. This system could be structured in numerous ways, and research into many legal and financial issues is under way.

As one example, a solar utility could provide PV panels to a homeowner at no cost and recoup its investment through a combination of charging for electricity (as in the power purchase agreement context), tax incentives, and sale of renewable energy certificates. The “solar utility” also could be a “smart grid” company that offers a portfolio of products and services, such as vehicle charging or home energy management software.

If we depart from thinking about subsidies and instead focus on bypassing the existing distribution channel, we may make more significant progress than we have in the past four decades. An incumbent utility could morph into a complete smart grid service provider, supplying digital meters and home energy displays, leasing solar panels, and owning electric vehicle charging stations. But it is more likely that distributed solar must be offered by new entrants, given utilities’ historical focus on providing power to safely meet demand. Given the pervasive subsidization of the status quo, developing the alternative infrastructure for delivering residential solar and supporting it will take active governmental involvement.

Joel B. Eisen is a professor of law whose expertise includes energy and environmental law. The article from which this excerpt is taken was voted one of the four best of 2011 by the Environmental Law Institute and Vanderbilt Law School.