Thursday, 4 September 2014

A Policy A Day: Solar Panel Scheme

In the lead-up to the election, we are going to examine one policy per (working) day. We've selected policies to be as balanced as possible across a range of policy areas and across the political parties. The idea is to explain the background, analyse the policy to investigate the pros and cons, and give a verdict on the policy at the end. Inevitably, some opinion will make its way in and we make no apology for that - after all, we're voters too. Also, I say 'we' because this series will feature some guest posts from other young people, to share their thoughts and ideas as well. A list of all the articles is available hereEnjoy!

Today's policy comes from the Green Party. Announced back in February, the policy aims to massively increase the uptake of solar panels by homeowners.  Taking advantage of the government's lower interest rate (in comparison to what most individuals are able to access), the policy that is offered is:
- Low-cost government loans to homeowners to install solar panels, aiming for 30,000 in 3 years
A full policy document is available here.

Background
New Zealand has one of the highest levels of renewable energy generation for electricity in the world, at 77%. The majority of this comes from our 91 hydroelectric power plants. Helen Clark announced in 2007 that we would aim for 90% renewable electricity by 2025, with the aim of increasing our wind power generation. However, there is a large untapped potential for the use of solar power at the local and residential level. Installation of solar panels has increased by 370% over the last two years, but it is still relatively low by international standards (although there will be a large number of new installations in the Christchurch rebuild).

Solar power is variable in production - it produces more electricity during the summer on sunny days and less in the winter. Solar panel systems are often installed along with batteries so that electricity can be stored during the day, and used during the night. It is generally not intended for solar panel systems to entirely replace power generation by other means - usually it complements the system so that when there is as lot of solar available, we are less reliant on other systems, and vice versa. One of the strong advantages of solar power is that typically households can install systems that produce more electricity than they need, which means they have excess electricity. This excess can be "sold back to the grid", meaning that it is sold to power companies that can be sold to other homes/businesses that don't have solar panels, producing revenue on top of electricity cost savings.

Analysis of the Policy
The Green Party is at great pains to explain that this policy is not a subsidy because it's a loan. The policy is intended to be cost/revenue neutral, since the debt incurred by the government will be paid off over time. It is acknowledged that the policy would incur administration costs of less than a million dollars a year (seemingly the smallest unit available to describe government expenditure). The idea is that a homeowner that wants to install solar panels can apply for a loan of up to $15,000 from the government for a term of 15 years. The solar panels are tied to the house, rather than the individuals living in the house, so that even if people move or the house is being rented out, the value remains with the house. The loan is paid back through the homeowner's local council rates (which will somehow then make its way back to the government). There is a question to be asked here about the efficiency of the movement of money; the more bodies/steps it has to move through, the more administration costs are incurred. That is just an implementation question that requires the government of the day to plan the rollout carefully.

The typical ($10,000 and 3kW) system will leave people about $100 better off a year - producing $1,000 of electricity a year at current prices, but only costing $900 a year in loan repayments, over 15 years, to pay off. The solar panels should have an expected lifespan of 25 years, which means that homeowners can be making pure profit for the last 10 years, and the solar panels tangibly increase the value of the house itself if the homeowners want to sell it. I've estimated that the combination of savings from lower electricity rates and revenue from selling excess electricity back to the grid would be worth roughly $11,500 over the 25 years (in present day dollars). The Green Party estimates that the policy would also create about 1,000 jobs by the third year of implementation. There is a goal to install 30,000 systems over 10 years, which would produce roughly 100 GWh of electricity a year, which would be roughly 0.26% of the total electricity demand of New Zealand.

This leads to one of the arguments against the policy on the environmentalist side - that the policy doesn't go far enough. A number of countries around the world have subsidies, such as where the government pays for solar electricity from homeowners at above market rates, so that there is a stronger incentive to install solar panels. Other countries have actually subsidised the solar panels to offset the cost of installation. There is an argument that this policy doesn't go far enough - 0.26% is not a very large impact on our overall energy production. The plan is estimated to cost $300 million, except that it's a loan that the government is expecting to get paid back (just like student loans), so it should be revenue neutral overall. If that's the case, why stop at $300 million? Why not more? Other environmentalists argue that any effort in this direction is worth pursuing, and it will encourage more activity in the renewable energy area.

On the other side, there is an argument that solar power is more expensive than buying electricity off the grid generated from existing sources.   It may also not be an effective use of our money in that we could spend the same money on other forms of renewables for a larger benefit. Simon Bridges has called the policy a subsidy (even if the Greens refuse to call it one) because it takes advantage of the government borrowing rate rather than the normal market rate, which will eventually have other impacts on the economy and the government's ability to borrow in general. There are also questions around whether it would be more efficient to invest in other forms of renewables such as hydroelectric and wind. Per dollar invested, the US Department of Energy estimates that solar costs (on average) USD$130/MWh, while hydroelectric costs USD$84.5 and wind costs USD$80.3 (taking both fixed investment and variable running costs into account). We are relatively lucky in that there is a lot of capacity for both hydroelectric and wind, so we can predominantly rely on those over solar, while that is not an option for some other countries. The Energy Efficiency and Conservation Authority (EECA) says that small-scale solar power generation in New Zealand does not get as much benefit as other countries do, and we can't simply import their policies across the ocean. It should also be noted that the Chief Executive of the EECA says that a $10,000, 3kW solar panel system doesn't include resource consents or the cost of batteries (which could cost anything between $10k-30k). In some cases these additional costs would mean that the overall solar panel system would incur a net loss over its lifespan.

But the strongest argument (in my mind) for installing solar panels from a national perspective is the concept of energy diversity. Most types of renewable energy are cyclical or seasonal to a certain degree, and also susceptible to different types of environmental disasters. If a country becomes too reliant on one particular type of electricity generation (in our case, hydroelectric), then if something happens to that source of electricity we would be in serious trouble. We have been close to being in danger before, when dry winters (low rain coupled with high electricity consumption) have caused hydroelectric dams to fall to very low levels, and have had to rely on coal-fired and other power stations to keep up with demand. Introducing other forms of power generation would make our overall power generation system more resilient so that if any one type were to fail, we would still be able to cope as a country overall.

Verdict: A pretty good idea, especially if the panels pay for themselves over their lifetime and the payback period is within a foreseeable future. Energy diversity is important to ensure that our system is reliable and robust, and introducing more solar is a good way to supplement that strategy. However, due to the cost effectiveness of solar we shouldn't go overboard and install too many systems. The government (whoever it ends up being) should get behind the policy, as the National Party did with home insulation, and help future-proof our energy ecosystem.

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