How economists get it wrong about the value of home solar pv and batteries

We're told that large scale developments are cheaper, but it is not necessarily true

One of Oscar Wilde’s characters in a play said that "a cynic is a man who knows the price of everything and the value of nothing". Much the same could be said of some (usually neo-liberal inclined) economists who report about the much higher costs of home green energy installations compared to large-scale ones. Not only do they not understand the value of the home energy installations, but they are actually remarkably choosey in the prices that they quote when comparing home with large-scale installations.

I strongly assert that both large-scale and small-scale green energy technologies are vitally important. Planning and incentive support policies should vigorously promote both options. We need a rapid expansion of solar and batteries. Ignoring or restricting either small or large-scale projects in favour of the other will only slow down the build-up of solar and batteries.

But the implicit bias of many economists in favour of large rather than home-based green energy has to be called out. Economists, outside of the small band of institutional econiomists (who follow on from Thorstein Veblen), are, in effect, usually biased towards the establishment and the big corporations. Many will earn their way by analysing data generated by big corporations - with their fancy graphs showing the latest analysis of trading of different markets. They look like they are doing something clever with all these graphs, although usually it is borrowed from official trading markets or drawn from commercial databases for which the rest of us cannot afford to pay subscriptions. And of course inasmuch there is work in doing this stuff, it is most often for large-scale commercial clients, who favour the status quo and the interests of corporations.

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Yes, I am going to justify this diatribe against energy economists and their bias in favour of large scale green energy. The evidence to support this is straightforward. But you have to realise that real world energy structures are a bit more complex than the simplistic, implictly biased, offering from the energy economists.

Yes, if you do a simple discounted cash-flow analysis of the costs of solar panels on rooftops or home batteries they come out as being more costly compared to solar farms or large scale batteries. But this is a very bad analysis for which the economists should be ashamed. It takes no account of the different actors involved in the different cases, and the differently priced sources of capital which these actors use.

Most energy economists completely ignore the fact that what is important to society and the state is that is the cost of incentives that you need to give to promote these technologies that counts. This is as opposed to the unrealistic (in real-world) models that economists tend to use for their analyses. In the UK for example, recently lots of solar pv and some batteries have been installed without any incentives from the Government. There is a healthy income stream available - for free - because it saves consumers having to pay for electricity from the energy suppliers. This institutional fact is ignored by economists using their discounted cash flow analysis.

Meanwhile, in the UK, large-scale batteries are being given some support via auctions to supply capacity (though not as much support as given to big power plant of course). Solar farms are now being offered some opportunities for contracts-for-differences. Home solar pv and batteries are being offered very little- the abolition of paying VAT is significant, and good news, but we need more than this.

But what is certain is that when you look at the costs to society, home solar and batteries are certainly not more expensive than large scale installations. That is when you look at the incentives that are given to home versus large scale green energy.

What I am fed up with is the constant stream of graphs and jargonised discussions of ‘duck curves’ increasing ‘cannibalisation’, declining ‘capture rates’ etc etc by the growing crop of fashionable neo-liberal inclined energy economists. As if we do not already know that the sun only shines for part of the day and that does not match up perfectly with demand! You do not need to be clever to know that!

What would be much more useful is some analysis of the various institutional and policy means which we need to manage the growth in renewables. That involves the encouragement of appropriate disposition of grid balancing technologies and storage technologies to remedy this situation. This does, of course, require more thought and analysis of institutions. But we cannot expect that from (usually) neo-liberal inclined economists who think that is something does not easily fit into a trading model then it is not worth considering. Occasionally there are glimmers of light from some quarters, for example Cornwall Energy produced an analysis of the potential gains from demand side flexibility - but such interventions are far too rare.

Most economists are not very good at institutional analysis. They tend to be neo-liberal in that they seem to believe that if you just have more trading then this will solve problems through market means. It won’t usually. In other words, not only do most energy economists not know the value of much, but they do not even know the price of things that really do matter.