The hidden costs of residential solar – Watts Up With That?

From Climate Etc.

by Planning Engineer (Russ Schussler)

In Part 1, we showed how wind and solar’s low costs over 80% of the time are overwhelmed by expenses at peak times such that they offer no cost advantages to the generation mix. Residential solar follows a similar pattern: it seems affordable for homeowners, but raises system costs through rate structures that over-incentivize adoption. Generous subsidies, like retail-rate net metering, drive excessive solar growth, risking grid stability and shifting costs to non-solar customers that are often less affluent. Less generous rates for residential solar slow adoption, but better align solar adoption with grid needs, ensuring fairness and sustainability.

The Economic Problem: Cost-Shifting Through Rate Structures

It’s hard to understand why many don’t see the unfairness in rate structures, as similar arrangements would seem absurd in other industries. Imagine hotels required to keep rooms ready for all customers (at standard rates) just in case they “might” want them. Worse, during low occupancy, hotels must send guests to customers’ Airbnb properties whenever there are excess rooms. Or consider pizza chains forced to buy excess pizzas from restaurants during slow hours while supplying low-cost pizzas during peak hours and covering all pickup and delivery costs. In all of these cases, the major problem is that large infrastructure investment is required that will sit idle most of the time and receive inadequate compensation from the beneficiaries.

How Residential Solar Rate Structures Work

Residential solar systems, typically  tied to net metering, let homeowners generate and sell power in ways that appear cost-effective:

• Serving own needs: Solar panels produce during sunny, low-demand periods (e.g., midday spring), letting homeowners avoid utility charges. These charges are usually a flat rate based on average costs. (Note: The utility backs them up when panels don’t produce enough electricity.)
• Selling excess power: Surplus power goes to the grid, with net metering crediting it at rates varying by state. Typically, these payments exceed the energy’s value to the utility during low-demand periods.
• Hard Times: At night, on cloudy days, or during peak demand (e.g., summer evenings), panels produce little. Homeowners buy grid power at flat rates, which don’t reflect the high costs of peaking plants.

Rate structures today vary to the degree to which they subsidize residential solar. Below are general categories of rate structures, ordered by levels of subsidies, from high to low.

• Retail-Rate Net Metering: Credits residential solar at full retail rates (~$0.20–$0.42/kWh, e.g., Hawaii, Massachusetts, New York, New Jersey, Rhode Island). Yields high returns for residential  solar (20–50% ROI) and encourages rapid adoption (e.g., Hawaii’s 30% penetration, ~200,000 homes).
• Partial Retail/Hybrid Net Billing: Credits at 50–80% of retail (~$0.10–$0.20/kWh, e.g., Connecticut, Vermont, Maryland, Minnesota) support moderate adoption of residential solar (e.g., Vermont’s 8% penetration, ~15,000 homes) with less cost-shifting.
• Net Billing at Avoided Cost: Lower credits (~$0.05–$0.08/kWh, e.g., California’s NEM 3.0, Arizona, Arkansas) slow growth.
• Wholesale/Avoided Cost Rates: Minimal credits (~$0.03–$0.07/kWh, e.g., Alabama, South Dakota, Tennessee, Idaho, Kentucky) yield low penetration (0.02–1.2%, ~270–10,000 homes), reducing subsidies and

Initially, solar power rate structures used retail-rate net metering. Lower subsidies  could not attract sufficient participation.  Since participation was low initially, the small subsidies from the overwhelmingly  large group of non-participants were not significant. As more customers adopt solar, the economics change.  California’s experience highlights the unsustainability of this approach. California  now on version 3.0 of its net metering approach, which pays only for avoided costs for new customers. Retail-rate net metering became unsustainable as participation levels increased.

This chart shows the relationship between higher credits and the resulting penetration of residential  solar for a sampling of states.

Of course, higher subsidies correlate with greater participation. California NEM 3.0 looks like an outlier, but it must be understood this participation rate was built not on the NEM 3.0 rate structure. The big base they have of residential solar was built on legacy policies, and viability today is supported by the area’s high retail rates and grandfathering of existing residential solar customers under the old tariffs.

In a 2015 post, I discussed various approaches to cost sharing for residential solar.  It’s worth reviewing at this time as it provides additional coverage on the topic at hand.  In that piece I noted that the models with the least subsidies still only required residential solar users to pay the incremental costs they incur, not shared system costs. Should residential solar customers help with basic system costs?   The answer becomes increasingly important with high levels of residential solar.  Responsibility for the basic system costs becomes attributable to fewer and fewer customers.  Unfortunately, those footing the bill are disproportionately less affluent consumers who are most burdened by increasing energy costs.

The economic toll of overly generous rates:

• Lost Revenue: Utilities need steady charges to cover fixed costs (grid lines, backup power). Solar homeowners avoid these during low-demand periods, reducing revenue.
• Overpaid Purchases: High credits for low-value power strain utility budgets.
• Fat Tail Costs: Peak periods drive high costs (peaking plants and transmission and distribution expansion). Non-solar customers face 1-2% rate hikes in high-solar areas, per National Renewable Energy Laboratory studies.

Generous rate structures, like retail-rate net metering, fuel excessive solar adoption, raising costs and inequity. Less supportive rates, like California’s NEM 3.0 or South Dakota’s wholesale rates, reduce uptake, which is proper when solar outpaces system needs.

Early net metering aimed to boost solar, but its costs—shifted expenses and grid risks—are now evident. Regulators, prioritizing green energy, often mandated generous rates, as in California’s NEM 1.0/2.0, which achieved 25% penetration before NEM 3.0’s lower rates slowed growth. Fair pricing proposals are often labeled as anti-renewable, stifling reform.

A common justification is that subsidizing residential solar will lower prices and increase affordability.  What goes unrecognized is that the cheaper residential solar becomes, it exacerbates unsustainable rate designs as fewer non-solar customers remain to support the system.

A Path Forward

Residential solar programs rely on structures that overpay for power and undercharge for grid use. Better designs would reduce incentives and align adoption with grid economics.  Potential options for improving solar tariffs include:

• Time-of-Use Rates: Credit solar at market value less during the mid-day and charge more for peak power. This slows adoption, as seen in California’s NEM 3.0 (80% installation drop).
• Pay Avoided Costs: unlike time-of-use rates, avoided costs could be set at average rates to avoid costly metering and complexity.
• Grid Access Fees: Fixed fees ensure solar homeowners pay for reliability.
• Peak Demand Charges: Bills based on peak usage reflect true costs.

These options promote equity, reducing subsidies from non-solar customers to wealthier adopters. The key is recognizing cost differentials between what solar customers receive and what they provide.  Fewer incentives mean less solar, which is proper when it drives costs, as in states like Alabama (0.7% penetration). Political pressure to support solar will resist such efforts.

Wrapping Up

Poor rate designs hide solar’s true costs, making it seem affordable while raising electricity rates for all. Retail-rate net metering drives excessive adoption of solar, shifting costs to non-solar customers. Less supportive rates, like avoided costs or California’s NEM 3.0, slow solar growth, aligning it with grid needs. This ensures fairness and avoids cost spirals. A sustainable energy supply requires pricing that reflects true costs, ensuring affordability for all.

Future posts will focus on utility economics, discuss problems with energy markets and delve into many of the often-ignored unaccounted costs associated with wind and solar.  For example, many assume the grid is easier to operate when part of the load base meets its own needs. In reality, residential solar burdens system operators, increasing complexity and costs of stabilization efforts. In Australia, a renewables leader,  operators see a need to switch off rooftop solar during stressful periods to maintain system stability.  Look for follow-up posts in the coming weeks.

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