UC Davis Agricultural and Resource Economics

Justin Kirkpatrick, Michigan State University

Valuing Solar Subsidies

Date and Location

Wednesday, April 13, 2022, 2:10 PM - 3:30 PM
Online Meeting, Zoom


The rate at which individuals trade future consumption for present consumption is important across a range of economic behaviors, including savings, human capital formation, health maintenance, etc. Laboratory experiments on intertemporal decision-making are numerous, but credible quasi-experimental estimates of discount rates revealed by market decisions are relatively scarce, and evidence on how discount rates vary with demographics is virtually nonexistent. The latter is critically important in evaluating the distributional impacts of subsidies and taxes, which are sometimes applied to upfront purchases, such as electric vehicle subsidies, and sometimes to consumption inputs that accrue over time, such as gasoline taxes. This paper employs rich and unique micro-data on rooftop solar panel adoption and on the expected returns from solar panel adoption in California to estimate heterogeneous discount rates by wealth. Solar purchases entail an upfront cost to install panels that generate future electricity cost savings. Using proprietary data on rooftop-specific, expected electricity generation of potential solar installations as a function of grid electricity rate and household-specific irradiance, along with solar adoption decisions, household electricity consumption data, and household-specific wealth, income, and other demographic information, we estimate a dynamic, structural model of solar sizing and adoption. Discount rates are identified from plausibly exogenous variation in the future savings from installing solar due to variation in irradiance, relative to the upfront costs of installing solar, and from discrete changes in electricity rates across administratively determined climate zones within the state. We estimate implied individual discount rates of 21.4%, 11.9%, and 8.6% for low-, medium-, and high-wealth households in California. Our results imply that current net-energy-metering policies that subsidize future solar electricity generation at the retail rate are regressive, which implies that decreasing NEM rates and increasing upfront subsidies would increase adoption of solar by lower-wealth households.

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