A New Look at Federal Subsidies

There is a lot of whining from the Koch brothers and their friends at the Edison Electric Institute about subsidies for renewable power.  Well, here’s the picture:

Energy_Subsidies_Black_Not_GreenNote that the disastrous ethanol boondoggle has received more federal subsidies than all real renewable power combined, and, of course, fossil fuel subsidies dwarf them both.  So much for claims that renewable power subsidies are the only thing that stands between the US electrical system and the “free market.”

So now that we have the facts about the relative size of subsidy out of the way, let’s take a look at the ever informative John Farrell’s plan to phase out the federal 30% tax credit for small scale solar investment.

Eliminating solar subsidies makes little sense as it could severely constrain the expansion of solar just as it becomes grid competitive. It will mean short-term grid parity for the sunniest (or most expensive electricity) regions and leave the rest of America out in the cold for many years, hardly a prescription for increasing clean energy and democratizing the electricity system. It could also severely damage the domestic solar industry with a boom and bust cycle, a poor return for one of the few growth industries in the recent economic downturn. It also makes little sense for Americans to be providing incentives for established fossil fuel industries that make billions in profits each year.

But keeping solar subsidies — like the 30 percent federal tax credit — unchanged after its 2016 expiration date also seems senseless. Solar developers in sunny regions like California or high electricity price areas like New York will get out-sized returns from installing solar even as solar reached grid parity in the rest of the country. Furthermore, the tax incentive system continues to create friction by preventing cities, schools and other non-taxable entities from using federal incentives.

The guiding principle for solar subsidies should be to continue the enormous strides toward democratizing the electricity system by maintaining the growth of distributed solar while maximizing local ownership and economic benefit.

No More Taxes!

One strategy would be to shift away from the tax code. The use of the tax code for solar incentives has long discriminated against solar for schools or libraries (and other public buildings) because these entities don’t pay taxes. The public-private partnerships required to make use the tax credits have inevitable transaction costs that mean public solar can never quite compete with private solar and that also water down the value of federal money for solar.

One option is to shift to a refundable tax credit, allowing those who are eligible for tax credits to take the full value whether or not they have sufficient tax equity. A better step would be to shift away from tax credits entirely, using cash payments. Research has shown that federal taxpayers can get twice the solar for each dollar of solar subsidy given in cash rather than credit.

The solar subsidy level should also be reduced (assuming costs continue to decline) when the current tax credit expires in 2016. Reducing the 30 percent incentive by 3 percentage points per year would allow moderately sunny areas to continue solar growth without over-rewarding the sunniest regions. The incentive would expire fully at the end of 2026 (the year before Seattle finally reaches grid parity). The following chart shows that even with exponential growth in solar installations, a phase out would cap the impact on taxpayers.

Farrell advocates for a shift away from government tax credits to the successful variations of feed-in tariffs that have been so successful in leading solar power countries around the world.  His article paints a clear picture of how the US can, as he puts it, “transform the grid to a decentralized and democratized electricity system.”

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