Distributional Effects of Residential Solar Subsidies

Abstract

We investigate how household income affects demand for residential solar systems and the distributional effects of renewable energy tax credit policies. 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. 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 16,321 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 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, we characterize the trade-off between equity and efficiency for a range of counterfactual policies that aim to allocate a fixed fraction of total subsidies to lower-income households, in line with the stated objectives of the Biden-Harris administration.