By Hoel Weisner

Renewable energy technologies are a much needed, clean alternative to the conventional fossil fuel electricity power plants of the last century. The market for installing solar panels on rooftops is a highly promising avenue for expanding the use of these technologies, but its profitability depends significantly on the electricity prices offered by electric utilities. Investing in solar panels offset a percentage of the electricity purchased from the utility. This paper models the investment decision of electricity consumers and looks at what the optimal per unit price of electricity should be in order to make building solar panels a profitable decision for a target share of households. The model shows how this optimal rate decreases at lower prices of investing, when the share of utility-purchased electricity offset by the panels increases, and when the target level of solar adoption decreases. Finally, it looks at how this per unit rate impacts the utility’s decision to set a fixed monthly charge for electricity in order to recover all of its operating expenses.

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Advisor: Leslie Marx | JEL Codes: L94, Q42, Q48 | Tagged: Electricity Price, Renewable Energy, Solar Electricity