Distributional Effects of Residential Solar Subsidies

Abstract

The residential solar market has grown significantly in the past decade due partly to falling prices and government subsidies. However, this growth has been driven by high-income households, leading to inequality in the distribution of subsidies. In this paper, we investigate how household income affects demand for residential solar systems and the distributional effects of renewable energy tax credit policies. We estimate a dynamic model of solar adoption using novel household-level data on hourly energy consumption, prices, household income, and solar panel installation for utility company customers in the Phoenix, AZ, metropolitan area from 2013 to 2017. We find that the household’s sensitivity to the system cost decreases as income increases. While low-income households are more sensitive to reductions in the system cost, high-income households are more likely to receive the full benefit of a non-refundable tax credit due to their higher tax liability. Specifically, making the tax credit refundable would increase the take-up rate among low-income households by 16%, with no effect on high-income households. Finally, our counterfactual analysis demonstrates that targeted policies designed to allocate 40% of total benefits to lower-income groups can enhance equity in solar adoption while increasing total solar production by 2% compared to nonrefundable policies. Our findings highlight the importance of designing subsidy programs that effectively balance distributional equity and overall efficiency.