Transitioning to a clean energy economy requires development and adoption of clean and renewable energy sources. Researchers in the Resource Economics department are examining drivers of solar PV adoption and identifying government policies that work best to incentivize households and businesses to install solar PV.
Uncertainty and Solar PV Adoption
Financial incentives for residential solar PV are very attractive, oftentimes cutting costs by over 50%. Yet why are so few households installing solar PV systems? Christine Crago and Christoph Bauner recently completed research that addresses that question. In their paper, “Adoption of Residential Solar Power Under Uncertainty: Implications for Renewable Energy Incentives” they argue that uncertainty about future energy prices and government incentives may play a key role in explaining low adoption levels. In their research, they use the “option value” framework, which allows consumers to take an “option” on potential benefits of delaying a solar PV investment in response to uncertainty. (These “options” are like commodity market options that allow you to take advantage of future commodity price changes.) The uncertain potential benefits of a solar PV system include possible changes in government policies about incentives offered to install solar PV systems, payments for solar renewable energy credits, or changes in solar system and electricity prices. Using data from the solar market in Massachusetts, Drs. Crago and Bauner find that the discounted value of benefits from solar PV needs to exceed installation cost by 60% for investment to occur. They also find that government incentives for solar PV increase the rate of adoption, but the impact of financial incentives is weakened if these incentives are uncertain. Results suggest that policies that reduce the uncertainty in returns from solar PV investments—for example upfront payments of solar renewable energy credits would be most effective at incentivizing adoption.
How effective are policy incentives for solar PV?
State governments have rolled out many new policy incentives for residential solar PV in the last several years. But, these programs cost taxpayers money, and the public cost of these programs raises the question: Are these policies effective, and to what extent they increase solar PV capacity?
In a recent paper, “Are policy incentives for solar power effective? Evidence from residential installations in the Northeast” Christine Crago and former MS student Ilya Chernyakhovskiy examine the effectiveness of policy incentives to increase residential solar PV capacity. Using data on household installations of solar PV in all counties in the Northeast from 2005-2012, combined with data on demographic characteristics, solar resources and different state-level policies for solar PV, the authors use econometric techniques to measure which policies have had the most impact on solar capacity growth. They find that financial incentives like rebates and sales tax exemptions, solar-specific mandates such as the Massachusetts solar-carve out, and loan financing programs are important drivers of residential PV capacity growth. Incentives such as the loan program that reduce the upfront cost of adoption are found to have the largest impact. Results also point to a strong link between hybrid vehicle sales and residential PV capacity growth, indicating the importance of pro-environmental preference as a predictor of solar PV demand. Empirical results are used to assess the cost-effectiveness of several state level policy incentives.
Changing the way we use energy is essential to a sustainable energy future. Energy efficiency has been called the fifth fuel and studies have shown that US energy demand could decrease by as much as 20% from improvements in energy efficiency alone. Researchers in the Resource Economics Department are investigating different incentives to promote residential energy efficiency and conservation.
Research being conducted by Christine Crago, MS student Elizabeth Hunter and John Spraggon examines how feedback and social norm nudges can be used to reduce energy consumption in households that live in utility-inclusive rental housing. In their study “Assessing the impact of information and social norms on energy use of non-ratepayers” they use a field experiment approach, in which some households are randomly selected to receive reports about their energy use. In the experiment, some households received information only on their own energy use, while others received information on their energy use as well as how they compare to their neighbors in terms of energy consumed. The energy use of the households receiving the two types of information is compared to that of households in a “control” group that received no information. Results suggest that feedback on own electricity usage reduced electricity consumption on average by 1.9%. Social comparisons on the other hand increased electricity consumption by 3.6%. The increase in electricity consumption from households that received social comparisons appears to be driven by low-consumers of electricity, which subsequently increased their electricity consumption upon learning of their status relative to their peers.