Econ 101 Lessons from Highway 61 Revisited
A year ago, I wrote about twin examples offered by one of Minnesota’s Twin Cities, St. Paul, of the principles of Econ 101 in action. The Saint Paul City Council passed a minimum…
Elected officials in Minneapolis don’t seem to understand that there is no such thing as a free lunch. That’s why their idea of assisting small businesses hurt or destroyed in the riots this summer is to give out $1.17 million in energy grants aimed at small businesses owned by people of color, immigrants and those affected by this year’s civil unrest, according to the Star Tribune.
The City Council and the Mayor clearly believe this is the right thing to do, but their faith in the effectiveness of their approach shows they don’t really understand how energy prices work in Minnesota, particularly how people are paid for the electricity generated by solar panels on their roof. If they did understand it, they would realize that their grants for some are reducing energy costs for the people who receive them, but they are making electricity much more expensive for everyone else.
How Electricity Pricing Works
In Minnesota, people with solar panels are paid the full retail price of electricity for every unit of electricity they sell to the grid. This practice is called “net metering.”
At its core, net metering pays people with solar panels more for their electricity than it is worth. This is accomplished by paying people with solar panels the retail rate for their power, rather than the wholesale rate. As a result, people who have solar panels on their roof are not paying their fair share to upkeep the rest of the electric grid. These costs are then foisted upon everyone else in the form of higher prices.
The diagram below helps people visualize how the wealth transfer works.
In 2018, the retail cost of commercial electricity was 10.38 cents per kilowatt hour, according to federal government statistics. About two cents of this cost comes from buying coal, while the remaining 8.38 cents is the cost of upkeeping power plants used when the sun isn’t shining, paying employees, and distribution lines.
The solar panels on a businesses roof can therefore only save the two cents used by burning coal, because the rest of the expenses involved with maintaining the grid don’t go away because the sun is shining.
When people with solar panels are paid the full retail price of 10.38 cents per KWh, instead of the 2 cents of avoided fuel costs, they are effectively forcing their neighbors to pay the remaining 8.38 cents per KWh to maintain the grid, hence the reason all the houses in the neighborhood who don’t have solar panels are so sad in the graphic.
Rooftop Solar is the Most Expensive Solar
Rooftop solar is the most expensive source of solar because they systems are small and cannot take advantage of economies of scale. Estimates of the cost of rooftop solar from the National Renewable Energy Laboratory (NREL) show the cost of a small solar system in the Midwest is about 11.8 cents per kilowatt hour, which four times more expensive than the electricity generated at Minnesota’s coal-fired power plants. Adding more expensive forms of electricity generation makes electricity more expensive, not less expensive.
However, solar panels do help the people who are privileged enough to have them by paying them the retail price of electricity, but these costs don’t disappear, they are simply foisted on to other people. This raises the cost of doing better in the city and makes everyone else who does not receive this grant worse off. This is the opposite of “building back better.” It is making it less worthwhile to rebuild at all.
Minneapolis Has Much Bigger Problems
If Minneapolis wants to help businesses rebuild, maybe they shouldn’t hold the permits to remove rubble hostage until the city gets their property tax payments. The city should also consider waiving the $15 minimum wage requirements which were already causing businesses to struggle before the COVID pandemic, the riots this summer, and skyrocketing waves of violent crime that followed the City Council’s rhetoric on defunding the police.
Using this grant money to make energy more expensive is a step in the wrong direction. Unfortunately, the City Council doesn’t seem to understand that.
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