DP11908 The Surprising Pass-Through of Solar Subsidies

Author(s): Jacquelyn Pless, Arthur Van Benthem
Publication Date: March 2017
Keyword(s): buy vs. lease, demand curvature, market power, over-shifting, Pass-Through, solar subsidy, third-party ownership
JEL(s): H22, Q42, Q48, Q58
Programme Areas: Public Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11908

We estimate the pass-through of solar energy subsidies to solar system prices. Rich micro-level transaction and subsidy data from California indicate that pass-through is remarkably high and differs substantially for consumers who buy versus lease solar systems. Buyers capture nearly the full subsidy, while there is more-than-complete pass-through to lessees. We formalize pass-through over-shifting as an under-utilized test for market power that can also be applied in other contexts. We rule out alternative explanations for over-shifting and conclude that our estimates provide evidence for imperfectly competitive solar markets. Our findings have implications for the distributional effects of energy subsidies.