The economics of solar energy in New Zealand

Abstract

New Zealand has already begun promoting solar energy as a promising technology to address global climate change, but the economic efficiency of large-scale policies to promote solar energy remains a pressing question for policymakers. This thesis aims to help fill this gap by first examining the current financial attractiveness of the primary solar energy technologies, then developing an economic framework to analyze policies to promote solar hot water (SHW) systems, and finally performing a policy analysis of several large-scale residential SHW policies. I find that solar PV is financially attractive only in the niche market of off-grid locations. On the other hand, SHW systems are close to being financially attractive, with an internal rate of return (IRR) around 11% for systems installed on family homes with two or more related people and around 9% for systems installed on non-family homes. With a $1,500 financial incentive program, the IRR improves to 16% and 15% respectively, and SHW systems would likely become financially attractive to a much wider audience. My economic framework points to the environmental, energy security, and flat rate electricity retail pricing market failures as the primary motivation for solar policy. The literature and my analysis indicate that the global climate change environmental externality is largest of these. My analysis of SHW policies indicates that a policy that installs SHW systems on either all homes or all new homes in New Zealand is not likely to have positive net benefits. I develop a 10 year market based financial incentive policy sufficient to lead to the diffusion of SHW systems following a logistic model. I find that this policy has positive net benefits under a relatively wide range of reasonable values for the key parameters. I conclude that if New Zealand is serious about promoting solar energy, then the financial incentive program, along with ancillary training, standards, and information policies, would be an economically efficient approach. However, in light of the recently announced New Zealand greenhouse gas emissions trading scheme, further work is warranted to examine to what degree the announced scheme should replace SHW policy.