Munich Personal RePEc Archive

Subsidies for Close Substitutes: Evidence from Residential Solar Systems

Abajian, Alexander and Pretnar, Nick (2023): Subsidies for Close Substitutes: Evidence from Residential Solar Systems.

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Policies promoting residential solar system adoption are designed assuming the associated generation displaces retail electricity purchases on a one-for-one basis. This assumption is not innocuous; electricity from residential solar systems is unlikely to be perfectly substitutable with grid electricity. We estimate a model of U.S. residential electricity demand allowing for spatial heterogeneity and imperfect substitution between forms of electricity to quantify the implications for green energy subsidization. We find subsidies inducing one kWh of residential solar electricity demand displace only 0.5 kWh of grid consumption. As an emissions reduction policy subsidies had national abatement costs of $332 per MTCO2 in 2018.

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