When Solar Power Cuts Costs and Emissions

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The epic droughts that have devastated Latin America over the last five years, drying up river beds and crippling electricity generation, stand as a clear warning. Latin America and the Caribbean may be one of the world’s most important regions for hydroelectric power, with nearly half of generation capacity currently supplied by dams. But ever increasing dry spells engendered by deforestation and climate change threaten the vital resource and make it imperative that the region develop alternative technologies to guarantee energy supplies and continue its fight against global warming.

Area governments are well aware of the challenge. In 2015, renewable energy in the region increased by 6.6%, the fastest rate ever, with the largest increases in solar photovolataic capacity (+166%), followed by wind energy (+42%) and geothermal (+17%), according to the International Renewable Energy Agency. That follows several years of robust growth, spurred by policy measures including new regulatory systems, tax breaks and special power auctions as well as precipitous drops in the costs of both solar and wind technologies.

Still, the region seems to be neglecting one of the most promising alternatives: rooftop solar. Rooftop, or residential, solar offers special benefits. It permits a household to produce much of the energy it consumes. And since energy is produced on-site, it can lessen congestion in the power grid and the need for costly new transmission lines. Today, however, only around 3% of solar energy capacity in Latin America lies in residential solar, with roughly 90% in utility-scale plants.

A key issue is expense. In the United States, for example, a solar system for a home in 2014 cost between $15,000 and $29,000, more than half the median household income at the higher end. Tax incentives and policies have helped the distributed solar market develop. For example, legislation in 2006 created a 30% tax credit for solar installations. Net metering, established in various states, also helps. It allows homeowners to defray costs by compensating them for excess energy they generate and add to the grid.

Growth in the United States residential solar market has largely been fueled by access to credit through a wide variety of financing mechanisms. Power purchasing agreements permit the homeowner to avoid upfront costs and purchase the solar-generated electricity from the developer that supplied the equipment. Similarly, solar leases allow the homeowner to only pay a monthly lease to enjoy the benefits of their roof’s solar production. Over the last five years, as the solar market has expanded, these “third-party ownership” models have ranged from 42% to 72% of the market.

These financing mechanisms have pushed the solar market ahead. Costs for equipment have come down, and consumers are especially drawn to long-term savings on utility bills once initial investments are paid off. Since 2010, solar capacity in the United States has grown significantly to include 1.1 million solar rooftops. Today, though rooftop solar in the United States accounts for less than 0.5 percent of electricity, an analysis by the National Renewable Energy Laboratory suggests it could eventually rise to nearly 40%.

For Latin America and the Caribbean, this is good news. Large sun-baked extensions give all countries in the region great solar potential, according to an IDB study. With smart tax policy and credit mechanisms, such as those that exist in the United States, and in some cases outright government grants, they might dramatically expand their exploitation of the sun’s rays. Greenhouse gas emissions and pollution would fall. Rural areas might gain a regular, cheap form of electricity. Many countries with a high dependency on imported oil and diesel might benefit economically.

Of course, the sun does not always shine, and battery storage is still not good enough to guarantee sufficient energy for extended rainy days. But alternative sources of renewable energy, like that from utility-scale wind power, can complement solar. Better weatherization and more efficient appliances in homes can reduce energy needs. The key, especially for countries with large oil and natural gas reserves, is not falling into the trap of investing in infrastructure dependent on fossil-fuel electricity generation to meet short-term goals at the expense of longer term environmental ones. Solar, mixed with other renewables, may be a better long-term solution, easing long-term electricity expenses for homeowners while helping the region – and the world – meet climate change goals.

 

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The Author

Bridget Hoffmann

Bridget Hoffmann

Bridget Hoffmann is an economist in the Research Department of the Inter-American Development Bank. Her research interests are applied microeconomics, development economics, and environmental economics. She received her Ph.D. in Economics from Northwestern University in 2015. She holds a bachelor’s degree in Financial Economics and Mathematics from the University of Rochester.

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