Association for Public Policy Analysis & Management

Solar energy is promoted by policy makers to reduce greenhouse gas emissions. Not surprisingly, various policies and financial incentives exist to encourage the adoption of solar panels. Yet these measures are almost never revenue neutral from a fiscal policy perspective and always face the question of whether the cost justifies the gain. Despite these costly policy instruments, the penetration of solar panels is still relatively low. Many organizational, behavioral, and market factors have been analyzed in existing literature to explain the low adoption level. Yet, the impact of one particular factor (electricity rate structure) on solar panel adoption is often overlooked in empirical studies (Novan and Smith, 2017). Time-of-use pricing (TOU), one of the most widely adopted dynamic pricing programs, charges higher prices during peak hours (e.g. late afternoon in summer months) and lower prices during non-peak hours. Based on engineering simulations, in summer months when electricity bills are high, most energy savings of solar panels happen during peak hours when electricity prices are high. Naturally, this correlation might incentivize consumers to adopt solar panels if they are on TOU pricing. Surprisingly, there is little empirical analysis quantifying the impact of TOU on the adoption of solar panels. This study provides the first empirical evidence of such impact. A theoretical model is constructed to show that TOU customers have a larger incentive to adopt solar panels compared to customers on non-dynamic pricing plans. Using household-level data in Phoenix, Arizona from an appliance saturation survey of about 16,000 customers conducted by a major electric utility company and relying on propensity score matching and coarsened exact matching to address potential selection bias, empirical results show that TOU consumers are 27% more likely to install solar panels. Robustness checks include instrumental variable approach, multi-nominal logit, bi-variate probit, and machine learning matching method. The findings highlight that TOU can act as a cost-effective policy instrument to facilitate solar panel adoption, compared to other more costly instruments with a similar magnitude of impacts such as tax credits or rebates of $2,070~$10,472. Our results have important policy implications. TOU is found to enhance social welfare through aligning marginal electricity prices with marginal costs of electricity supply (Qiu et al., 2016). This study shows another positive welfare impact of TOU, which is the facilitation of solar panel adoption. Policy makers should be aware of this impact and view TOU as a more cost-effective instrument to promote solar panel adoption than financial incentives. Based on our estimation, the impact of a TOU plan on encouraging solar adoption is equivalent to about 85% of current size of financial incentives for solar panels. So at least when it comes to encouraging solar panel adoption, policy makers have a third choice besides tax reduction or subsidization—promoting TOU. We then calculate the total annual savings associated with TOU-induced solar panel installation for the utility company in this study and find that the annual monetary equivalent of emission reduction is approximately $0.42 million. This amount is achieved without any fiscal subsidies.