The percentage of world electricity generated by wind and solar energy hit 10% in 2021 according to a recent analysis. Total clean energy (including nuclear, hydro, geothermal, and bioenergy) was 38% of world electricity, exceeding coal at 35%.  Gas was 22%, for a total fossil fuel contribution of 57%. Also, total demand for electricity rose sharply in 2021, partly due to the bounce back from the pandemic, with coal rising 9% total and making up most of the increased demand – so this is a very mixed story.

According to the analysis there are two major forces at work across the world in determining the relative growth of the various sources of electricity, economics and regulations. In political fights over energy (including frequently in the comments to this blog) people will often assume one or the other factor is the only or the major factor involved. For example, the argument has been explicitly made that economics is the only relevant factor and policy is therefore irrelevant, but that is demonstrably not true. Neither is the notion that we can totally control the energy sector through policy without consideration of economic factors. That approach is likely to lead to policy overreach with backlash and unintended consequences. Both factors are involved, and a rational energy policy should consider the relevant economics.

For example, coal surged in 2021 because it is cheap relative to its major competitor, gas. Both rose in price, but gas rose much more than coal, so coal predominated. However, wind and solar are cheaper than both, so they also rose significantly. Even though they are now the cheapest option for adding new capacity, they were outpaced by coal because of regulations and infrastructure – showing that price alone is not the only determining factor.

Countries with regulations conducive to wind and solar saw the greatest increase in renewable capacity. Vietnam is one example:

“In the case of Vietnam, there was a massive step up in solar generation and it was driven by feed-in tariffs – money the government pays you for generating electricity – which made it very attractive for households and for utilities to be deploying large amounts of solar,” said Dave Jones, Ember’s global lead.

Such examples can be dismissed as “subsidizing” solar, but that is dismissive and entirely misses the point. First, fossil fuel is massively subsidized, so it is inconsistent to argue against subsidizing clean energy. Further, subsidies are a policy mechanism for shifting the balance of energy production in the sector. The actual pro-renewable argument is not to prop up wind and solar, but to fairly price sources of energy. If we, for example, reduce unfair fossil fuel subsidies and not allow energy producers to massively externalize their costs, then the different energy sources can be on a more level playing field. In such a situation, fossil fuel is very unattractive and costly.

But there is another policy debate happening as well, the difference between pushing and pulling. On the one hand we can reduce the availability of fossil fuels and increase their cost, on the other hand we can increase the availability of renewable energy and reduce their costs. Obviously we can do both, but with what balance? We can only increase clean energy capacity so fast, and if we reduce fossil fuel availability too quickly this leads to negative economic outcomes and backlash. We are seeing this now with the war in Ukraine – suddenly there is a massive incentive to produce more fossil fuel to keep prices from going to high and to replace the fossil fuel we don’t want to purchase from Russia. We probably should not see this as an anomaly, even though to some extent it is, because we are always vulnerable to world events affecting the market price of fossil fuel.

There is a policy sweet spot somewhere in there – keep fossil fuel fairly priced, not artificially low with subsidies and externalized costs, but don’t make it so expensive that it negatively affects the world’s economies. No country has total control over this, because crude oil is a world commodity, but our policies can influence the price over the long term.

Meanwhile, making renewable energy as cheap and abundant as possible is a win-win-win. It can lower energy prices, reduce our dependence of the world market of fossil fuel (which is largely controlled by dictators and our geopolitical enemies) and improve the environment. Ironically this will also reduce fossil fuel prices by reducing demand, and we can compensate for this reduced market price by increasing taxes and further reducing subsidies (and shifting that money to things like upgrading the grid).

Here is an example of a policy decision that can have a dramatic impact on the adoption of rooftop solar – net metering. We are seeing this play out now in Florida, where the energy companies are lobbying for a change to the net metering laws in their favor. States set these regulations locally, with some states mandating that residential rooftop solar producers can essentially use the grid as backup. So, when solar panels produce excess energy that energy is fed to the grid and the residential producer gets credit for it. They can then use that credit to purchase electricity from the grid when they use more power than their panels produce. This setup makes perfect sense, and if you lease your solar panels is the only system that is viable. Without getting full credit for the electricity sent to the grid, residential solar production is much less attractive or even not financially feasible.

Florida is now considering a law (it was passed by the legislature) so that residential producers do not get full credit for the power they send to the grid, but rather get less than the market rate for their solar and be charged additional infrastructure costs as well. The energy companies argue this is fair because why should they pay more for power from residential producers than commercial producers, and why should they get to use the grid for free? This argument, however, is utter nonsense. Residential users are not getting paid for their solar power sent to the grid – they are getting credit that can only be used to buy electricity back from the utility company. They are not being paid cash for their electricity. Second, anyone connected to the grid will be charged monthly for fixed costs, so they are already paying for use of the grid.

Utility companies further argue that non-solar customers are subsidizing solar producers, but this is also nonsense. Utility companies are just whining about lost profit. Again, everyone can pay the same monthly infrastructure cost. Second, customers who use more dirty electricity and contributing to pollution including greenhouse gases, which have a massive externalized cost. Solar energy producers have fewer externalized costs for their energy – they are doing everyone a favor. They are helping everyone meet clean energy goals. Either they are investing tens of thousands of dollars to install clean energy infrastructure, or they are leasing their property (their rooftop) for such production and are contracted to purchase 100% of the energy produced. They are taking on this expense and liability, and why would they do it if they are going to get screwed in the end by the utility companies?

It is ironic that this is happening in Florida, the Sunshine State. Florida is also arguably the most vulnerable state to climate change. Florida should be doing everything to encourage solar production and home battery backup as well. They should be investing in upgrading the grid. Florida can become a net exporter of solar power. What we are seeing is a shift from centralized to distributed power production, and this shift in the industry will have winners and losers, like any technological shift. The producers of centralized energy will see some of their market share decrease, and they are scheming to protect their profits. That is all that is happening here.

This is a simple policy decision that will have a massive effect on the installation of residential solar in Florida – so you cannot argue that policy does not matter. This is also a good demonstration of how important it is to have policy guided by sound science. If you have a governor who does not believe in climate change then you cannot factor climate change into policy decisions, leading to terrible and unfair policy. And keep in mind, even without global warming, solar is a good deal. It’s clean and cheap, and reduces our dependence on fossil fuels. It reduces pollution with has a massive health benefit. The fact that Florida might be underwater in a hundred years is just the icing on the cake.

Addendum:

A couple of points raised in the comments are worth commenting on here.

One claim is that residential solar costs the utility company money for handling the transmission of this extra electricity. This claim is false.

Multiple reviews, including this one by the US Department of Energy, conclude that the net effect on utility company costs is neutral to positive.

“Despite these significant methodological differences, the 15 studies analyzed in this paper converge on at least three common value categories, all at the wholesale or bulk power level: avoided energy generation, avoided generation capacity, and avoided transmission capacity.”

Utility companies need to build less new capacity, have reduced need for energy production, and reduced need for transmission capacity.

The other claim is that residential solar increases utility rates for other customers. This is also false. Reviews such as this one by the Lawrence Berkley National Laboratory found that the effect on utility rates:

“For the vast majority of states and utilities, the effects of distributed solar on retail electricity prices will likely remain negligible for the foreseeable future.”

So distributed solar has either no effect or a small benefit for utility company costs and a negligible effect on retail electricity prices. This situation is also likely to improve in the future for two reasons. The first is improved technology, specifically smart inverters. These help utility companies actually use installed solar to help regulate electricity on the grid, so they will add to the net benefit to utility companies. The second is distributed grid storage, as residential solar users are increasingly incorporating battery backup to get the most out of their solar panels.

Therefore, cries of shifting costs to poor customers or being unfair to utility companies are simply wrong, and nothing but industry propaganda.