New solar rebate study, by MIT Sloan economist, finds user savings but lack of competition

The study on California subsidies pushes against assumptions about solar leasing, but points to an imperfect market



For years, solar leasing companies have faced claims of tricking customers out of their green subsidies. These companies, critics say, install their panels on homeowners’ rooftops, and keep most of the government rebate for themselves.

New research from an MIT Sloan economist pushes back against that notion.

MIT Sloan assistant professor Jacquelyn Pless and her co-author, Arthur A. van Benthem of The Wharton School, studied a California solar subsidy program and found that residents who leased solar panels saw a $1.53 reduction in price for every dollar of subsidy the leasing company collected. That’s compared to residents who bought solar systems outright and received about 78 cents for every dollar in subsidies.



The finding is notable, though most consumers will find a full cost-benefit analysis on leasing versus buying is still complicated.

“This might seem like a good thing for consumers because they face lower prices,” Pless said in an interview discussing her paper “Pass-Through as a Test for Market Power: An Application to Solar Subsidies.” “But what we show — with both theory and data — is that this is a story about market power.”

While solar companies aren’t stealing subsidies from their customers, this “over-shifting” of the subsidy to lower prices is a play at market dominance, Pless’ work suggests.

A simple, straight-forward analysis

The two economists studied 2010-2013 data from the California Solar Initiative. The program started in 2007 with a 10-year planned budget of more than $2 billion in rebates for customers who bought their own solar system, as well as to solar companies that leased systems or signed power purchase agreements with homeowners.

The California initiative is the largest solar rebate program in the United States to date, according to the paper.

California-solar-energy
Solar electricity production in California falls into two categories – solar thermal, using the concentrated heat of sunlight to heat a fluid to make steam to turn a traditional turbine and generator making electricity; and solar photovoltaic (PV), the direct conversion of sunlight into electricity.

There are a variety of subsidies — like upfront rebates at the time of purchase, in this case a solar energy system — or subsidies based on the amount of power a solar system produces and contributes to the larger electrical grid. In the case of Pless’ study, the focus is on these upfront rebates to homeowners (host owners) and to the third-party owners.

“That subsidy goes to [the third-party owners], but they can kind of pass through the subsidy to you in the form of more attractive lease terms, perhaps lower monthly payments, that you wouldn’t have gotten otherwise,” Pless said.

When a pass-through rate exceeds 100%, it’s called over-shifting.

“This finding of over-shifting implies imperfect competition,” Pless said. “It’s a very simple way of identifying some market power to investigate further.”

That’s important for a market like solar energy — particularly the one in California. According to the paper, most of the third-party market was at first driven by one solar energy firm, SolarCity.

“Although the industry has seen market entrants over time and many companies offer [third-party owner] options, the [third-party owner] market is mostly dominated by just a few large firms,” the paper states. “However, there are many small independent installers that offer [host owner] system sales and services.”

Pless said any industry that has marginal cost shocks like a subsidy or tax — such as the automobile, airplane, or computer markets — could use this pass-through analysis to determine whether there’s a play for market power.

“If you can do this kind of pretty simple, straightforward pass-through type of analysis and you find over-shifting, this might be an indication that the market’s not competitive, and that might be some type of motivation for competition authorities to step in,” Pless said.

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This article is written by Meredith Somers (News Writer) for MIT Sloan School of Management’s “Ideas that Matter” blog.

The MIT Sloan School of Management is the business school of the Massachusetts Institute of Technology, in Cambridge, Massachusetts, United States. MIT Sloan offers bachelor’s, master’s, and doctoral degree programs, as well as executive education. Its degree programs are among the most selective in the world.

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