South-Western College Publishing - Economics  
It's sunny out. Turn on the solar panels, please...
Subject growth in installation of solar panels on residences
Topic Supply and demand; Government and the Economy; Economics and the Environment
Key Words

solar panel, alternative power, subsidy

News Story

The cost of installing solar panels on one's house has been slowly falling, and the government's been helping to reduce the price. Over the last 10 years, costs of installing solar panels to power a home have been cut in half. A house typically requires 2.5-3 kilowatts of power generation to function. The wholesale price of solar power generation has fallen over that 10-year period to $3.60 from $5.31, cutting the price of installing solar panels for a typical house to approximately $19,000 to $23,000.

What's more, state governments are beginning to get into the solar power market. California offers $2.80 per watt, and an additional $4.50 per watt tax credit. New Jersey offers a $5.50 per watt credit, Nevada pays $4, and Ohio pays $5 per watt of solar power generation. Some states also offer a "power buyback," in which the power from the solar panels on a residence can be bought back by the state during peak periods, making the installation of solar panels a potential moneymaker.

One financial analyst in New Jersey installed solar panels on his home for $50,000, and only paid about $15,000 of that after the credits. Furthermore, he earns about $170 each six weeks in power generation purchased by the state. His investment will be paid off through the buyback in about 4 or 5 years, according to his estimates.

Questions
1.

Indicate graphically the impact of the government subsidy on solar panel installation. What happens to the overall price of the solar panels? What happens to the price paid by the consumer? Why is there a difference?

2. Indicate with a graph of supply and demand the impact of improving the installation technology on the market for solar panels.
3. In many states, the money used for the solar power credits is financed through an alternative fuels surcharge on regular utility customers. Is this an equitable action for governments to take? Why or why not?
Source "Solar Power Heats Up," The Wall Street Journal 2 June 2005. D1+.

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