Betony Jones is Founder and Principal of Inclusive Economics

 

I. Introduction

The Biden-Harris Transition Plan prioritizes addressing climate change while creating good union jobs. This commitment builds on mounting evidence demonstrating that climate change and economic inequities can be addressed with well-tested solutions. A recent UC Berkeley Labor Center report [1] commissioned by the California Legislature provides such sector-by-sector solutions.

Despite growing commitment to policy solutions that ensure more equitable climate solutions, many industry players vehemently oppose such solutions, arguing that we can either respond to the urgency of saving the planet or we can create quality jobs and ensure economic equity… but not both. This argument is advanced by both the clean and fossil energy industries, the former claiming to save the planet and the latter claiming to save the working class. In reality, both arguments obscure the goal common across industries—to retain the power of capital over labor.

One example of this rhetoric shows up in the solar industry in debates around prevailing wage. Prevailing wage standards specify hourly wage rates for workers, including apprentices, in different skilled construction trades. Prevailing wage laws also require contributions to workers’ benefits such as healthcare, paid time off, retirement funds, and apprenticeship training. Prevailing wage is good for workers and the local economy, but the solar industry argues that prevailing wage standards will make projects too expensive and halt solar development. The logic of this argument gains an easy foothold, but it’s simply not true.

Evidence shows that higher wages due to prevailing wage do not slow solar demand. Why not? First, labor costs don’t increase much with higher wages and benefits. Installation labor (to which prevailing wage would apply) represents only 6–11%of total project costs, so even large increases in worker compensation don’t lead to large increases in total costs. In other words, a 50% increase in labor costs would increase total costs by only 3–5%. Second, improvements in worker productivity that come with a skilled workforce typically offset any wage increases. If a skilled worker provides 50% more value via productivity than an unskilled worker while earning only 25% more pay, higher compensation is a sound investment. Third, prevailing wages vary, and there is wide flexibility in the use of prevailing wage standards. Use of apprentices, for example, lowers labor costs while providing other equity benefits. And finally, developers can choose to reduce costs across other categories. Sales and marketing, overhead, and profit cost allocations are three to five times greater than the cost of installation labor. Thus, any marginal increase in providing a living wage can be absorbed by other cost categories without increasing total project costs. These points are further explained in the sections below

In sum, the solar industry could prioritize worker needs and pay prevailing wages while maintaining steady growth. In the event that costs incrementally rise to pay middle class wages, projects can absorb such increases through reductions in other costs categories including overhead, marketing, and developer or investor banking profits.

II. Installation Labor Costs Represent a Small Fraction of Total Solar Project Costs

According to the National Renewable Energy Laboratory (NREL) cost benchmarks [2], solar installation labor costs represent a small percentage of total costs. In the residential market, installation labor ranges from 7–11% of total project costs, depending on location. In Hawaii, labor costs are 68% higher than in Florida, but projects are only slightly more expensive. In Nevada, residential solar wages are 29% higher than in neighboring Arizona, but total project costs are actually lower in Nevada. This shows that higher residential wages do not automatically translate into higher project costs.

Prevailing wage would likely have the greatest impact on total costs in the residential sector. Because of the wage differential, our analysis shows that prevailing wage in the residential sector could increase total project costs by 5–9% (before accounting for productivity and other cost savings). In the commercial sector, prevailing wage could increase project costs by up to 2–5%. On utility-scale projects, the cost impacts are 1–2%.

In the commercial sector, project cost is primarily determined by project size with larger projects being more cost-effective than smaller projects, e.g., 1 MW projects are 12% cheaper per Watt DC than 100kW projects. In the commercial sector, installation labor costs are even less influential to total costs, representing just 6–9% of total costs. Commercial solar wages in Hawaii and Massachusetts are 64% higher than in Florida, Arizona, and Texas, but if labor costs were to increase in those states, all other costs remaining unchanged, total project costs would increase only 4%. California and New York, where labor costs are 45 and 55% higher than Florida (respectively), have lower total project costs than Florida. For perspective, 4% is the amount typically withheld for unexpected expenses. A 4% cost increase nearly vanishes over 25 years of energy sales. This shows that, as in the residential sector, higher installation wages in commercial solar do not translate into higher project costs.

In the utility-scale sector, NREL [2] has attempted to provide some guidance on the cost impact of prevailing wage by state, but their findings are questionable. NREL projects cost increases of up to $0.15/Watt DC due to prevailing wage. This assumes that prevailing wage would increase labor costs by 250% even after accounting for productivity gains. To translate this into wages, this means that if the prevailing wage for a typical solar worker was $35/hr, the non-prevailing wage rate would be $14/hr. In our analysis, a 250% increase in wages is a gross exaggeration unsubstantiated by market data. It would mean that non-prevailing wages in utility-scale solar are extremely low, poverty-level wages.

Our review of non-prevailing wage and prevailing wage in solar in Illinois indicated prevailing wage (when accounting for total compensation packages including healthcare, pension, and worker training contributions, and with a standard ratio of one apprentice to five journey-level workers) could increases solar labor rates from 5–109%. This would increase residential wages by at least $15,000 per year, with a four-fold increase in benefits like health insurance and retirement contributions. These significant quality-of-life improvements for workers and their families would increase total project costs only 1–9% (see Table 1). The difference is higher in the residential sector and lower in the utility-scale sector. It is also higher for small independent installers and lower for larger installers [3], who are assumed to offer more generous fringe benefits even when not covered by prevailing wages. In addition, compliance may also be harder for small independent installers serving the residential sector, particularly if they run payroll manually) [4].

Table 1. Percent of total project cost increase due to prevailing wage

Note: These estimated increases in cost are calculated before well-documented productivity benefits of prevailing wage requirements
Source: Inclusive Economics [5]

These increases nearly disappear over the life of the project. When we evaluated this impact on the levelized cost of energy (LCOE) using NREL’s System Advisor Model (SAM), the average impact in the residential sector was half a cent per kWh; the average impact in the commercial sector was just over 1/10^th of a cent per kWh; and the average impact in the utility sector was 6/100ths of a cent per kWh. These miniscule increases are unlikely to change consumer decision-making about solar.

III. Higher Costs Are Offset by Increases in Worker Productivity

While prevailing wage requirements may increase worker pay, this does not automatically translate into higher labor costs. The effect depends on the extent to which increased wages are offset by productivity gains. In its most recent solar benchmark report [2] REL finds that solar costs have declined every year since 2010 across every project type—residential, commercial, and utility scale—despite increasing labor wages. This is due, in part, to higher labor productivity, particularly in the residential sector. When wages increase in construction, contractors typically respond by substituting in more highly skilled workers [6]. As a result, worksite productivity is 14–33% higher in states with prevailing wage laws [7]. Since labor costs are only a small portion of total costs, the boost to worker productivity offsets the increase in worker compensation [8]. What all of this analysis shows is that it is possible to pay good family-sustaining salaries and benefits to solar workers without setting the industry back.

In fact, on-the-ground evidence from over 15 years of union-built solar projects in California shows no tradeoff between higher wages and the pace or scale of solar development. Nearly all of California’s utility-scale solar projects, and many commercial arrays, have been built with union labor. Lawmakers were initially concerned about the energy cost impacts of the Renewables Portfolio Standard (RPS), and adopted cost containment mechanisms [9] to avoid “disproportionate rate impacts.” But these mechanisms were never deployed: despite paying union wages and benefits, renewable energy costs have continued to decline. Increases in worker productivity and reductions of other soft costs have more than offset steadily increasing pay for workers.

IV. Prevailing Wage Isn’t One Fixed Wage

Prevailing wages vary across geographies, sectors, and trades. The potential added cost of prevailing wage depends on these variables as well as the ratio of journey-persons to apprentices working on the project.

Prevailing wages vary by geography and sector and cost of living. Workers in urban areas generally command higher wages than their rural counterparts. For example, according to Davis Bacon Act wage tables [10], union electricians in San Francisco, one of the most expensive cities on the planet, earn $78/hr plus $36 in fringe benefits, whereas in Fresno, where cost of living is significantly cheaper, they earn $40/hr plus $25 in fringe benefits. In Oregon, wages and benefits for residential electrical work are 36% lower than wages for commercial and heavy construction electrical work. Where projects are installed and the type of solar project will influence the prevailing wage for solar.

Prevailing wages also vary by trade and level of training. In general, Carpenters and Laborers earn lower hourly compensation than those workers in the specialty trades (electricians, plumbers, ironworkers, etc.). For example, in Denver, CO, laborers earn $14–17/hr, carpenters earn $18–21/hr, operating engineers $19–21/hr; ironworkers $31/hr, and electricians $37/hr. When solar work is distributed across trades, the average solar wage is lower than it would be if electricians performed all the work. In California, the Building Trades have negotiated a five-trade agreement for solar work, allocating work tasks to Electricians, Laborers, Carpenters, Ironworkers, and Operating Engineers. Allocating work across two or more trades can help standardize installation labor costs across projects.

Another variable that can alter labor costs is the use of apprentices. In their on-the-job training, apprentices earn wages and benefits with standardized wage progressions as they develop knowledge and skills. Employing apprentices on solar projects is a great way for entry-level workers to gain occupational skills in their chosen trade. Starting apprentices earn 50–60% of the journey-level wage, which means that their starting wages are comparable to entry-level solar installers in the non-union labor market. While for public works construction, the apprentice-to-journey ratio is 1:5, some solar and other private sector projects use a 1:1 apprentice-to-journey ratio. In addition to the workforce training benefits, this can keep labor costs competitive with non-prevailing wage work.

In California, IBEW has created a position called Construction Wireman that is an entry-level position for workers who have not yet been accepted to an apprenticeship program. Construction Wiremen perform a range of tasks on private construction projects, including solar installation. Their wages and benefits are lower than starting apprentices, but they learn valuable on-the-job skills that can help them gain entry to apprenticeship programs. Additionally, this early-career on-the-job training is also a proven mechanism to increase diversity and inclusion in unionized construction. In California, people of color have comprised around 70% of the apprentice classes for the last five years [11].

V. Reducing Labor Costs Is Not the Only Way to Reduce Solar Costs

Before arguing that increasing installation labor costs will make solar projects unacceptably expensive for consumers, it’s worth looking at some of the other categories that make up total project costs. In the residential sector, where installation labor costs represent a higher fraction of total costs (7–11%), sales and marketing costs to acquire customers represent 13–15% of total costs, overhead represents another 11–13%, and net profits are 12–13% of total costs. Each of these categories alone contributes more to the total cost of solar than the installation labor. Together, the cost of sales and marketing, overhead, and profits are three to five times higher than the cost of installing the solar panels! If each of these three cost categories decreased by 20%, labor costs could increase 180% without changing total project costs. Figure 1 shows these cost elements relative to installation labor by state.

Figure 1. Residential Solar Non-Hardware Costs

Source: NREL U.S. Solar Photovoltaic System Cost Benchmark: Q1 2018

 

VI. Conclusion

The evidence and analysis presented above debunk the idea that prevailing wage requirements will halt solar progress. In fact, experience has shown that prevailing wage actually accelerates solar development. In California, the predominate use of union labor on utility-scale solar projects has fortified political support from organized labor for legislation and regulatory policy that continues to accelerate in-state solar development [12].

Not only can job quality and compensation continue to improve for workers without spelling doom for the industry, but this analysis is further proof that we can rapidly address climate change and protect working people. Prevailing wage is one such solution.

Endnotes

[1] Carol Zabin, UC Berkeley Labor Center, “Putting California on the High Road: A Jobs and Climate Action Plan for 2030,” September 3, 2020, https://laborcenter.berkeley.edu/putting-california-on-the-high-road-a-jobs-and-climate-action-plan-for-2030/.

[2] Ran Fu, David Feldman, and Robert Margolis, “U.S. Solar Photovoltaic System Cost Benchmark: Q1 2018,” National Renewable Energy Laboratory (NREL), 2018, https://www.nrel.gov/docs/fy19osti/72399.pdf.

[3] While there isn’t a formal threshold for small and large installers, “small” installers were those with few staff, operating in only one location, and “large” installers covered multiple locations.

[4] Compliance with prevailing wage requirement is often tracked with compliance software like LCP Tracker or Elation Systems. When payroll records are electronic, the administrative burden is minimal. For busy contractors, there are always those who would prefer not to spend the time setting up new administrative systems if it can be avoided. Technical support can help small, women-owned, and minority contractors to meet higher labor standards. Generally, support and capacity building constitute a more equitable approach to improving economic inclusion than perpetuating the low road under the auspices of improving diversity, equity, and inclusion.

[5] Betony Jones, Inclusive Economics, “Potential Impacts of Prevailing Wage on Solar Costs in Illinois,” November 2020, https://drive.google.com/file/d/13ZWw7rOiIomG_mURNcmD0cw1p934FBSX/view?usp=sharing.

[6] William Blankenau and Steven Cassou, “Industry Estimates of the Elasticity of Substitution and the Rate of Biased Technological Change between Skilled and Unskilled Labour,” Applied Economics 43, no. 23 (2011): 3129–42.

[7] Peter Philips, Donald Vial Center on Employment in the Green Economy, University of California, Berkeley, “Environmental and Economic Benefits of Building Solar in California: Quality Careers, Cleaner Lives,” November 10, 2014, http://laborcenter.berkeley.edu/pdf/2014/building-solar-ca14.pdf.

[8] Further, by promoting the use of higher skilled workers, prevailing wage laws reduce expenditures on materials, fuels, and rental equipment. See: Kevin Duncan and Alex Lantsberg, “How Weakening Wisconsin’s Prevailing Wage Policy Would Affect Public Construction Costs and Economic Activity,” National Alliance for Fair Contracting, 2015, http://www.faircontracting.org/wp-content/uploads/2015/05/How-Weakening-Wisconsin%E2%80%99s-Prevailing-Wage-Policy-Would-Affect-Public-Construction-Costs-and-Economic-Activity2.pdf.

[9] California Bill No. SBX1 2 adopted in 2011, http://www.leginfo.ca.gov/pub/11-12/bill/sen/sb_0001-0050/sbx1_2_bill_20110412_chaptered.html.

[10] “Wage Determinations,” beta.SAM.gov (Official U.S. Government website), accessed October 20, 2020, https://beta.sam.gov/search?index=wd&keywords=&is_active=true&sort=-modifiedDate&date_filter_index=0&date_rad_selection=date&wdType=dbra&state=OR&page=1.

[11] California Division of Apprenticeship Standards, Data available by request.

[12]> Betony Jones, Peter Philips, and Carol Zabin, UC Berkley Labor Center, “The Link Between Good Jobs and a Low Carbon Future,” July 12, 2016, https://laborcenter.berkeley.edu/the-link-between-good-jobs-and-a-low-carbon-future/.

Thumbnail photo by OregonDOT on Foter.com / CC BY