Subsidies for Close Substitutes: Aggregate Demand for Residential Solar Electricity

66 Pages Posted: 23 May 2024

See all articles by Alexander Abajian

Alexander Abajian

affiliation not provided to SSRN

Nick Pretnar

Carnegie Mellon University - David A. Tepper School of Business

Abstract

Subsidies promoting residential solar systems are intended to reduce carbon emissions by lowering demand for electricity from the grid. The ability of these subsidies to reduce grid demand hinges on how close, on aggregate, the two sources of electricity are to perfect substitutes. To test the efficacy of these policies, we form a tractable model of national residential electricity demand that identifies the aggregate substitutability between residential systems and electricity drawn from the grid. When estimated on the United States, we find that while the two are close to perfect substitutes, the degree to which substitutability is imperfect has material implications for policy. 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.

Keywords: Residential PV systems, residential electricity demand, elasticity of substitution, energy subsidies

Suggested Citation

Abajian, Alexander and Pretnar, Nicholas, Subsidies for Close Substitutes: Aggregate Demand for Residential Solar Electricity. Available at SSRN: https://ssrn.com/abstract=4839400 or http://dx.doi.org/10.2139/ssrn.4839400

Alexander Abajian

affiliation not provided to SSRN ( email )

No Address Available

Nicholas Pretnar (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

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