In theory, subsidies for solar power and other so-called renewables were sold as a short-term measure to jump-start the transition to a clean energy future. Forget the fact that solar energy has been the energy of the future ever since the early 1970s. In theory — borrowing phrasing from Bruce Yandle, dean emeritus of Clemson University's Department of Economics — the "bootleggers" who pushed for these subsidies as a way to get rich by embracing the green energy dogma of the "Baptists," believed that subsidies begin, but never end.
It is beginning to look like what works in theory doesn't always work in practice, even though Congress, which seems immune to the pressure of fiscal responsibility, recently extended the 30 percent tax credit through the end of this year. States, which have to balance budgets, are beginning to have second thoughts about the wisdom of generous subsidies for solar. Nevada recently rolled back its generous subsidies for rooftop solar and news reports indicate that another 20 states may do likewise. States are learning that generous subsidies attract ever more rent-seekers and that drives the cost of subsidies higher. They are also learning that solar's rhetoric doesn't match its performance. Tomorrow's clean and cheap energy source is always tomorrow's, not today's.
In California, a major solar project, partially financed by federal grants and over $2 billion in loan guarantees, is on the verge of having to shut down because it cannot produce the energy that it is contractually obligated to generate. A Spanish company, Abengoa, received almost $3 billion in federal loan guarantees and over $600 million in federal grants to build two solar plants in Arizona and California but is now on the verge of bankruptcy as its financial support disappears.
The problems being encountered by the solar energy industry are just the most recent example of the inability of the government to pick energy winners and of the perverse effects that subsidies create. In spite of the fact that solar energy has received government support for decades, the state of technology is not sufficiently mature for it to stand on its own. Consumers have had to be bribed with subsidies to induce them to switch from conventional power sources to those preferred by the government.
Subsidies attract businesses that exist mainly to capture them, which has the effect of raising their costs and lowering tax revenue. They also reduce revenue that is earned by utilities because they are required to pay consumers generous fees for the excess power they generate. Additionally, utilities have to switch from lower-cost power sources to higher-cost alternatives, while the rates they charge consumers are limited by state regulations. The difference in power generation cost can be significant. One study put the cost of natural-gas-powered units at $35 per megawatt and solar between $135 and $200.
The financial challenges demonstrated by failing solar generation facilities and states like Nevada withdrawing support for subsidies demonstrate a couple of lessons that never seem to stay learned. First, as an article in The American Interest noted: "This isn't a business and it isn't a sign of a great economic shift: it's an example of how poorly-designed government subsidies divert resources and slow the march of progress. The technology just isn't there yet — the current generation of commercial solar panels don't work well enough for people to install them unless they get fat subsidies and tax write-offs." The second is that if government loan guarantees and credits are necessary for solar facilities to be built, the private market has rendered a verdict that the risk is too great.
O'Keefe is president of Solutions Consulting.