The marginal cost of solar backup

The long-run marginal cost of providing electricity for solar heating and hot water systems is estimated for three utilities and compared with the cost of providing electricity to electric-only systems. All investment, fuel, and operating costs are accounted for. Hot water systems and combined heating and hot water systems are analyzed separately. It is found that the marginal cost for solar backup is no more than the marginal cost of electricity used for purely electric heating and hot water devices and also no more than the incremental cost of normal load growth. For the three utilities studied, there appears to be little basis for rate distinctions between solar devices using electric backup and electric-only heating and hot water devices. “Off-peak storage” heating and hot water devices have a much lower marginal cost than the standard systems; again, there appears to be no basis for distinguishing between solar and electric off-peak devices. Compared with average cost pricing, marginal cost pricing offers benefits to customers using solar and electric heat and hot water, especially if a separate lower rate is adopted for off-peak storage devices; these benefits can amount to several hundred dollars a year. Substantial savings in the use of oil and gas fuels can be achieved if residences using these fuels convert to solar systems, savings not necessarily achievable by a shift, instead, to electric systems.