Is Solar Energy a Benefit to Me?

I recently purchased a home in Prince Georges County, Maryland and the house came with solar panels installed on the roof. When I saw the panels, I immediately assumed they don’t save much money and if you include maintenance, then it quickly becomes a loss. Why? First, I figured Pepco had lower marginal costs, that is, offered lower rates per kilowatt hour (kWh). Sure, the power generated by the panels travels a shorter distance to my house, but I wouldn’t expect that to outweigh the economies of scale. If I am mistaken, then what is the value proposition of Pepco? Second, solar panels require your attention, if only because you have to keep track of another bill¹, monitor for damage to the roof, and accommodate maintenance staff when the panels malfunction. Nevertheless, I maintained a skeptical-but-open-minded stance and started looking at the numbers.

With few exceptions, solar panel owners in the United States must connect the panels to the energy grid. Truly independent (off-the-grid) energy production is mostly illegal. The contract I inherited says I am to pay a flat rate for the energy produced by the panels, whether I use the energy or not. Pepco redistributes excess supply along the energy grid (or it dissipates?) and any excess demand is bought from Pepco. To the solar panel company, I am a plot of land for installing solar panels and accessing a large market. Frankly, the economic incentive to Pepco is unclear to me. From my point of view, the key feature in my relationship with Pepco is the credit system. When the panels produce surplus energy, Pepco credits me kWh that I use when the panels don’t meet my energy demands. That is, Pepco acts as a perfect battery.

Energy Production

The bill for producing energy from the solar panels is straightforward. The company installs and owns the panels on the roof and charges a flat rate for the energy produced. Currently, the price is $0.1221538 per kWh produced and is scheduled to increase by 2.9% every year.

Pepco bills are more explicitly breaks down costs. In total, the bill lists 5 fixed costs, 8 variable costs, and 3 tax calculations — see the table below. Indeed, Pepco’s cost for supplying energy to me is 7.2 cents, significantly lower than the cost of the solar panels. However, the sum of the variable costs is about $0.14 per kWh, about 18% higher than the energy produced by the solar panels!

Pepco’s itemized costs.

To make it clear, below is a graph of the costs of energy by source. The horizontal axis is the quantity of energy demanded in kWh and the vertical axis is the bill. For the first four kilowatt hours, Pepco pays me $0.09 to $0.56 — the fixed costs are actually fixed revenue. Generally, the answer is clear: solar energy is cheaper per kWh. Each additional kWh produced using the solar panels saves me about $0.02. While the savings are not huge, the fact that it is positive at all curtails my motivation to remove the panels.

Energy cost by source.

Energy Storage

I mentioned that Pepco operates as a battery by crediting me kWh to use when the panels do not meet my energy demands. If at noon I produce a 2 kWh surplus, then Pepco credits me 2 kWh that I can use at any time. As it turns out, the marginal cost comparison I made above is impotent without this feature. Every unused kWh produced by the panels costs me 12 cents to produce. How common is surplus energy? In September, my solar panels produced about 345 kWh, but I only used about 137 kWh, or about 40%. That is, about 60% of the solar energy was produced at times when I did not need it! Without a way to store the energy for later, solar panels would cost me an additional $25 instead of saving me $4. Pepco’s reliable, on-demand energy generation and the kWh credit policy form a set of rules that allow me to “store” energy for later.

Keeping the Panels

This was entirely a personal accounting question: do I financially benefit from producing energy from solar panels? The answer is yes, I personally save a few bucks every month under this arrangement by producing solar energy, all else equal. For as long as that is the case, I don’t see why I would work to have the panels removed. Although, since the problem of surplus energy doesn’t go away by averaging, I wonder how Pepco deals with surplus energy systemically.

Does the economy benefit from this arrangement? Not necessarily — in fact, I highly doubt it, but I will remain openminded.

[1] I download the energy produced by the solar panels as a time series and noticed my bill overcharged me for 133 kWh. I spent over an hour and a half on the phone correcting the solar panel company. They credited me the difference and reimbursed me an additional $50 for my time.

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