The Impact of Solar Panel Installation on Electricity Consumption and Production: A Firm's Perspective

Abstract

Since 2010, the Uruguayan government has fostered the installation of solar panels among firms to promote the production of small-scale renewable electricity. Under this policy, firms that have installed solar panels are allowed to feed any surplus electricity into the grid. Using a novel data set on firm-level electricity consumption and grid injection, we study the economic and environmental consequences of this policy. First, we find that installing a solar panel reduces the amount of electricity extracted from the grid. Second, we find that it increases the electricity injected into the grid. Third, we find that it reduces CO2 emissions only marginally. Fourth, we provide evidence of a rebound effect, which ranges from 20% to 26%. Lastly, we propose an alternative policy that allows firms to store their excess electricity in batteries rather than immediately injecting it into the grid. This policy would further reduce CO2 emissions by 2.7%, incentivizing the injection of electricity at night, when fossil-fuel-based facilities meet the demand at the margin.