,
Lesson

# Fewer Watts and Fatter Wallets

Updated: October 10 2019,
Author: Cheryl McGaughey

### Concepts

Students learn about incentives for alternative energy programs and the role played by non-price determinants in energy choices.

### Introduction

Solar power and other alternative energy sources are not new. They have been around since ancient times. They are becoming more popular today for a variety of reasons, including incentives designed to increase their use.

### Learning Objectives

• Learn about the incentives provided by state and local governments regarding a variety of energy sources.
• Calculate the costs and benefits for an individual family to convert to alternative energy.
• Consider non-price determinants that might affect the decision to use alternative energy.

### Process

Assign the students to read this Homepower Magazine article, Making Sen\$e of Solar-Electric System Costs . Discuss the article, focusing on what the students have learned from it.  You could also have students look at the California Energy Commission’s Consumer Energy Center home page for a better discussion.  Conclude your discussion and begin the activity described in the next few paragraphs.

Tell the students to calculate the benefits and costs under the actual rebate program offered in Burbank, California for solar energy systems; then ask the students to decide whether a customer would be likely to participate in the program. The rebate program offers customers a rebate of \$3 per watt for photovoltaic solar systems up to a maximum of 2 kilowatts (1 kilowatt = 1000 watts), so customers can get up to \$6,000 off the cost of a solar system. For a 2,000 square foot house that has been constructed with the latest provisions for energy efficiency, it would only require a 2 kilowatt system to handle all the house’s energy needs (emphasize the point that more conventionally constructed houses would require larger systems to be self sufficient).

A cost of \$16,000 for a new system is assumed here (costs vary from approximately \$15,000 to \$20,000 so this is a realistic assumption). Since the 2 kilowatts system qualifies for the maximum incentive (2,000 watts x \$3 = \$6,000), the after-rebate cost will be reduced to \$10,000. Ask the students how long it would take to recover this cost. The Department of Energy estimates the average yearly household energy bill is \$1,500. Based on the \$10,000 installed net cost of the solar system, it will take 6.7 years (10,000/1,500) to recover the cost of the system. Then ask the students if they think customers should install a solar system, based on how long it takes them to recover their costs. Also ask what their answer would be if the yearly energy bill was \$3,000 (this increase in energy costs would decrease the payback period to 3.3 years and would probably cause more students to vote for installing the photovoltaic system).

Ask the students about non-price determinants that might influence some consumers. These might include a more environmentally-friendly way to provide for their energy needs (since renewable energy would cause less pollution) or a desire to be independent of utility companies. Some people have experienced blackout periods with their utility companies and might want to switch to alternative energy as a more reliable source of energy. Others might live in remote areas that are “off the grid” and thus need an alternative energy source.

Be sure to explain to the students about pay periods. Pay periods are the time it takes people to recover the cost of investments they have made. Be sure that the students take pay periods into consideration when making decisions about an investment as big as the solar panels. How long one plans on living at the house in question would be a major consideration for installing the new solar cells. Solar panels can be considered to be Capital Investments, and the decision to install them should not be taken lightly. Since capital investments can be so costly, careful thinking is necessary when deciding to upgrade to newer or different hardware.

### Conclusion

Tell the students to look up their state and see what incentives are offered for both corporations and individuals at the https://www.dsireusa.org/ Web site. If they don’t understand what the incentive program is offering, they can click on the program name and see what is offered to the corporation or individual. Some programs offer tax reductions or rebates. Have the students read about some of the incentives offered. If your state offers only a few types of incentives, you may want to go to another state to learn about more programs.

California offers quite a few state and local incentive programs. The glossary at this Web site defines the different types of incentives. There is no one state that offers financial incentives in all the categories listed. California has the largest number of financial incentive programs at 24. Ask the students why some states offer more incentives. Some reasons include a scarcity problem in some states in which energy producers cannot meet the demand. This is true in states such as California, especially in the summer when demand increases, sometimes causing blackout periods. Alternative energy sources would alleviate this problem in part. In addition, prices in the electricity market have been very volatile in recent years (again, think of the California market over the past few summers), and businesses and households have been hit with higher-than-expected prices. Fuel-free sources such as wind and solar typically have more predictable price patterns.

Another reason state and local governments offer incentives is the expected economic development benefit. New jobs in manufacturing, construction and installation of alternative energy systems can be significant. One study found that adding 10,000 megawatts of wind power to the United States over a 10-year period would generate nearly \$8 billion in revenues. Finally, renewable energy creates little or no emissions compared with more traditional sources of energy. In states such as California where air quality is a problem, the state sees alternative energy as a way to reduce emissions and improve air quality. Other states and cities have similar environmental reasons for encouraging alternative energy.

### Extension Activity

Using the https://www.dsireusa.org/ Web site (click on schools going solar), the students can learn about incentive programs for using solar energy in schools–and see if their school is listed. Then the students will answer the questions in the interactive. If their school is listed, the students could contact local school authorities to get more information, including how much the program cost the school and why the school participates in the program. If their school is not listed, the students could discuss possible reasons for not participating and could get information from school or district officials.

View Interactive Activity

1. If your school is listed, what possible reason do you think the school district had for participating in the program? [Answers will vary.]
2. If your school is not listed, why do you think it is not participating in the program? [Answers will vary.]
3. Do you think it would be a good idea for the school district to investigate in the possibility of using renewable energy? [Answers will vary.]
4. What would be some of the costs and benefits for the school and the taxpayers/community? [Benefits: Tax Incentives, Environmental Incentives, Rebates. Costs: Subsidies, Higher Energy Costs.]

### Assessment

Tell the students about the \$2,000 one-time tax deduction offered by the federal government on 2004 or 2005 hybrid cars. Ask them to compare the costs related to buying a \$21,500 hybrid car (50 mpg) and a \$16,000 non-hybrid car (22 mpg) assuming the driver drives 15,000 miles per year and gas is priced at \$2.00 per gallon.

[The annual gas cost for the hybrid would be 15,000/50 = 300 gallons of gas per year X \$2.00 per gallon = \$600) while the annual gas cost for the non-hybrid would be (15,000/22 = 682 gallons X 2 = \$1,364).
This results in a gas cost savings of \$764 per year (1364 – 600). There is a difference of \$5,500 in the price of the two cars; based on the gas savings of the hybrid, the price differential would disappear in approximately 7.2 years (5500/764). Since the owner only plans to keep the car for seven years, he would not recover the additional cost of the hybrid. Now considering the \$2,000 tax deduction, which (if the driver were in the 25 percent tax bracket) would result in a \$500 tax savings (2,000 x .25 = 500), this would effectively lower the price of the car to \$21,000 and the difference between the two car prices would only be \$5,000. Based on the \$764 annual gas savings, the price differential between the two cars would disappear after about 6.5 years (5000/764). Since the driver planned to keep the car for seven years, he would recover the price differential. However, many students may think this is still too long a time over which to recover the additional cost.]

Ask the students if there are other non-price factors affecting the demand for hybrids. One non-price reason might be the increased performance of hybrids which makes them more comparable to other cars. Some consumers like to be among the first wave to adopt any new technology and see themselves as trend setters. The students may also bring up the problem of emissions as many hybrid customers are concerned about the environment and may be willing to pay more for an environmentally-friendly car. And some students may cite the desire to decrease U.S. dependence on foreign oil as a reason.

Subjects: