Residential demand for energy in light of changing solar prices

Abstract

The residential solar market has been growing steadily during the past decade, driven primarily by falling solar energy prices. This trend will indubitably continue into the near future, given the ever-improving solar panel energy-generating capacity and the resultant drop in solar energy costs. These unprecedented changes have major implications for solar energy consumption but also those of other energy sources and consumer welfare.

We evaluate the effects of the solar price changes on the residential consumption of natural gas, electricity, petroleum, solar energy, and wood in a demand system framework that allows quantifying demand interrelationships thereof. Our pioneering effort utilizes a state-of-the-art demand system that allows for potential pre-commitments in energy consumption while addressing energy expenditure endogeneity. We empirically confirm that most energy sources are net demand substitutes and find that natural gas, electricity, and wood are consumed in pre-committed quantities. Based on our elasticity estimates, we further evaluate the effects of dropping solar prices on energy consumption by source and consumer welfare and assess the investment tax credit program-induced tax revenue consequences.