Solar Industry: Love it, Hate it

solar_panels

I plan to install a solar array on the roof of my house.

Prior to installation, I asked a local solar expert guy to provide specific architectural plans, for my house. He provided estimates on monthly savings I could expect, based on my past energy usage as well as the specifics of my roof.

I love my spreadsheets (who doesn’t?) so I had fun calculating my ‘return on investment’ for a planned solar panel installation. I’ll mention the financial ‘return on investment’ I expect to receive a little further on in this column.

Having mentioned that I plan to install solar panels, there’s a real grumpy part of me that kind of hates the solar industry. Let me explain.

Solar Subsidies

I don’t know how much sense these industry subsidies make.

I start with an aversion to public subsidies for private gain, especially when the private gain will probably be captured by higher-income homeowners, because they are the ones who can afford to make multi-thousand dollar optional improvements to their home. Solar proponents will reply that the public gains broadly when we move toward sustainable energy and away from non-renewables. Financially, however, private households capture the monetary gain from the public subsidy, so it rubs up against one of my principles of private gain on the public dime.

Maybe even more worryingly, I have a pet theory that all the local and federal subsidies over the decades are actually inhibiting solar innovation. It’s relatively easy to read about all the ‘innovative’ solar technology coming down the pipeline. But I also kind of feel like we’ve been hearing about all this innovation since the Nixon administration, and residential solar still isn’t a good financial choice for households, if we removed all the government subsidies.

Some industries over the past forty years – think of advances in telephony, software, or computing power in that span – relentlessly innovate in a competitive market and produce stunning breakthroughs and extraordinary cost reductions. Solar power was not-quite-competitive with non-renewables in the 1970s and it’s still not-quite-competitive with non-renewables in the 2010s. Why is that? I can’t prove this, but I have a sneaking suspicion that an industry built around government subsidies will attract a different set of talents and mindsets than an industry built around market competition.

Which kind of begs the question: Are all the subsidies – in the long run – helping or hurting a faster shift to renewable energy?

I don’t mean to be overly harsh on solar power. Obviously, I’m installing it at my house. In general, I’m in favor of boosting our mix of renewable energy usage versus non-renewables, because that just makes sense. A billion years of future solar power versus even a few remaining centuries of oil & gas certainly argues for using more of the former and less of the latter.

Sustainable?

I’m a markets guy, however, and when an industry can’t become market-competitive over the years, it tends to just remain a niche player. Solar power is not yet – in a real markets sense – “sustainable.” As a markets guy I want to put on my Inigo Montoya accent to remind solar proponents who talk about solar power as “sustainable” to say “You keep using that word. I do not think it means what you think it means.”

inigo_montoya

The punchline

Ok, but can I make money installing panels at my house? I estimate that the annual return on my initial investment, after twenty-five years, would reach 6.3 percent. Theoretically, I could earn more than that, if I kept the panels installed for more than twenty-five years. On the other hand, I’ve learned the expected lifespan of the system is about twenty-five years, so it doesn’t make much sense to expect it to last longer than that, in my model.

Is that enough?

What do I think about a 6.3 percent return personally on investment in renewable energy?

It sounds about right, as a private incentive to invest my money. 6.3 percent easily beats what I can earn in a wholly ‘safe’ investment, like a bond or a money market account. It’s also a return on money above what I pay on my mortgage, so that it makes theoretical financial sense to outlay the money for solar panels, rather than just pay down my mortgage principal faster. 6.3 percent is below historical long-term returns from stock investments, but that seems ok too. With any more federal and city subsidy, my “private return on capital” might seem excessive.

Like any model, a large number of assumptions go into calculating a financial return on solar panel installation.

Assumptions

These assumptions include the following:

  1. I get my local utility rebate following installation as promised, which looks right now to total about 30% of the cost of installation.
  2. I get my 30% federal income tax rebate next year, as promised by the IRS.
  3. The solar production of the panels I install generate as expected.
  4. I use similar amounts of electricity in the future as I do now. Specific to my model, my energy needs only increase 1% per year.
  5. The price of energy (essentially the rates my utility charges me) only increases by 1% per year.
  6. The effectiveness of the panels in generating energy only degrades at 0.5% per year
  7. My costs of maintenance on the panels only runs about $120 per year.
  8. I stay in my house enough years to reap the benefits of installing panels. Specifically for my ‘annual return’ estimate, I stay in my house for twenty-five years.

If all those assumptions hold true – admittedly a pretty large set of ‘ifs’ – I’ll reap a pretty good private return on my capital.

 

A version of this appeared in the San Antonio Express News

 

Please see related posts:

Turtles All The Way Down

Natural Gas Revolution in South Texas

Oil companies – This Makes No Sense

 

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Worst San Antonio Financial Idea of 2015: Bringing Raiders to Town

A version of this post appeared in the San Antonio Express News

alamodome_san_antonio

Are you ready for my first nomination for San Antonio’s Worst Financial Idea of 2015 Award?

“What? So soon,” you say? “We just started the year!”

Yes, but I’ve resolved against procrastinating in the New Year, and this idea clearly needs highlighting.

Are you ready? Drum roll please:

Moving the Oakland Raiders to San Antonio!

We’ve got a winner!

My goodness, what a terrible idea. [1]

Former San Antonio Mayor Henry Cisneros told the Express News he believes moving the Raiders to San Antonio is a “very clear 50-50 proposition,” which it most certainly is not.

But more importantly, in financial terms, it’s a horrible idea. Like a $500 million horrible idea for taxpayers.

Here’s the logic

Picture yourself for a moment as Mark Davis, the owner of the Oakland Raiders.

The city of Oakland will not build you a shiny new stadium.

But that doesn’t seem fair, because you really, really want a city government to give you a subsidized place for your team to play. And anyway, that’s the reason why your dad Al Davis moved the Raiders from Los Angeles to Oakland in 1995.

Oakland_Raiders

As some of you other billionaires out there may know, rent for your privately owned business can be darned expensive!

Anyway, the way you get a public entity to provide hundreds of millions of dollars for your private business is to pretend that you are willing to move your team, especially if a different city is willing to pay you those hundreds of million dollars, in the form of free or reduced rent.

You don’t really want to leave, but on the other hand, there’s always a price, right?

But, the big question is, what’s the price?

Well, these things can be estimated, within a reasonable range.

The price depends on the cost of building a new stadium, the amount of public money offered (that’s your tax dollars at work!) and the relative attractiveness of a city’s media market.

The taxpayer price

According to a study done by the Minnesota Vikings, in the last ten years five NFL stadiums have been built at an average price of $871.5 million, with an average public subsidy of $327 million. Of course, that’s just an average.

For reasons I’ll explain below, I think the public subsidy in San Antonio will need to be larger than the recent average.

Public funds supported Jerry Jones’ privately-owned business through $444 million of Cowboy-stadium subsidy, while Indianapolis supported Jim Irsay and his Colts to the tune of $619 million in stadium subsidy. Averaging those, we’re talking around $500 million. That seems about right for San Antonio.[2]

The difference in media markets

The difference in media markets accounts for why San Antonio taxpayers would have to pay the high end of the range of subsidies to bring the Raiders to town. That’s because ‘national revenue’ through media deals, sponsorships and broadcast rights typically make up a significantly bigger proportion of an NFL team’s earnings than ‘local revenue’ like ticket, concession and merchandise sales.

Please forget the oft-repeated and misleading claim that “San Antonio is the seventh largest city in the United States.”[3]

For the purposes of an NFL owner, San Antonio is the 36th largest media market in the United States.

No owner of an NFL football team would ever willingly downgrade the value of his franchise by moving from the fourth largest media market (San Francisco/Oakland) – or forgo the opportunity to play in the second largest media market (Los Angeles, which still doesn’t have a team) – to play in the 36th largest media market in the US (San Antonio), unless he was buried in public money to induce him to make that choice.

stadium_money
Burying Mark Davis in stadium money might work

Would Davis give up Oakland – or the chance at LA – for that?

Is that clear? If former Mayor Henry Cisneros and his backers get his way, San Antonio taxpayers should be prepared to pay, and pay bigger than any city has ever paid before.

Economic impact

I understand this column will immediately be rebutted with folks carrying consultants’ economic impact analysis[4] showing that building the Raiders a shiny new stadium will bring many millions of dollars into the San Antonio economy – providing “good jobs” and “revitalizing neighborhoods” along the way.

I have two responses to those critics.

First, we’ve all heard the theory of stadium-driven neighborhood revitalization. Have you visited the Alamodome and AT&T Center lately? I live right near one, and I have visited the other frequently. The expected stadium-driven economic development and neighborhood revitalization is still – let’s politely say – in the “potential” stage.

Second – and this is a personal rule of mine – I don’t support public subsidies for individual businesses, as worthy as Mark Davis’ Oakland Raiders may appear to some. Public subsidies and public funds should go toward broad benefits in this city of extraordinary needs – public safety, schools, roads, libraries, parks, housing, and poverty alleviation all come to mind as high priorities.

Subsidizing the private business of a billionaire owner with up to $500 million in tax breaks tends to be a low priority for me.

But hey, that’s just me.

 

Please also see and listen to the followup discussion including Heywood Sanders of UTSA, Gregg Easterbrook of ESPN, author Neil DeMause, and me, on KSTX’s The Source – The NFL Coming to Town Might Be A Bad Idea

 

[1] And I don’t mean horrible for the following reasons: I don’t mean horrible because the Raiders are the worst team in the NFL, by a good margin. I don’t mean horrible because of the terrible lives led by brain-damaged and injured survivors of an NFL career. I don’t mean horrible because of the pattern of domestic abuse by players and the false ‘We’re so shocked!’ pretend-reactions of the NFL leadership from Commissioner Roger Goodell on down. I live with all that hypocrisy already, as I enjoy watching my team on Sundays. (Brady, Belichick, Arizona-bound baby! Woohoo!)

[2] Needless to say, nobody deserves half a billion dollars worth of private business subsidies more than upstanding gentlemen like Messrs. Jones and Irsay. Please don’t mention the sexual harassment and DUI charges personally leveled against those two gentlemen-owners, as that would be both impolite and not financially relevant to the discussion. Let’s focus instead on the half a billion dollars that Mark Davis will expect in public subsidy to move his Raiders to San Antonio.

[3] For the vast majority of you readers who do not live in San Antonio, that particular “7th Largest City” chestnut is something San Antonians tell themselves (and actually say outloud, and in print) on a regular basis. It has to do with the measurement of population within a metropolitan area, while the boundaries of that metropolitan area can be redrawn outward every few years in a seemingly limitless sprawling suburban way. I know, it’s embarrassing. But you can Google it and see where San Antonians get the idea.

[4] That’s a post for another time, but lets just say, the public sector could build a giant hole in downtown San Antonio, then immediately cover it up with dirt, and get a consultant to write a report claiming massive follow-on economic impact effects of the “Downtown Giant Hole and Fill” project. Think of all the ‘shovel ready’ jobs!

 

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