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Friday, January 17, 2014

Eliminating Energy Subsidies Will Make Solar Win

This anti-obvious statement is supported by actual experience in the UK, India and Germany, where feed-in tariff reductions actually boosted solar installation and caused prices to drop.

Are Subsidies Holding Back U.S. Solar Deployment? by Jigar Shah makes some key points supporting that assertion:

If we want to reach higher growth, we need to phase out the solar tax credits and other solar subsidies in mature markets and watch the price of solar fall.

The reasoning behind my strong stance is that, based on the cost of solar that I am personally investing in, solar is now cost-effective without subsidies for ideal customers in 300 utilities in 30 US states. Those 300 utilities account for about 20% of all of the electricity sold in the United States (using Energy Information Administration Form 861 data). Based on my experience, my thesis is that phasing out these subsidies will lead to 1) greater system cost reductions, 2) lower cost of money, and 3) greater standardization in the industry – all leading to a greater acceleration of solar PV deployment in the United States.

My conclusion is derived from the living laboratories of India, Germany, and the UK. While I was initially skeptical that the elimination of high subsidies would help lower the consumer price, my skepticism was abated through a clear review of the data. My initial feeling was that competition alone wasn’t enough to drive prices lower. But recently India, Germany, and the UK have drastically reduced their feed-in-tariffs and a curious thing happened – prices to investors came down. Most of the industry believed that this would lead to much less solar getting installed — in fact, the opposite occurred. Solar installations went up because the local solar industry cut prices to keep investors interested. While most folks would see how this might happen in a mature market like Germany that has a four-year head start, younger markets like the UK and India were also able to replicate the cost reductions. Today, the average large commercial solar installation in the UK is installed and sold to investors for less than $2/Wdc – same as Germany. In India, where the basic building block is a 5-MW utility scale project, the systems are installed in less than two months for about $1.70/Wdc.

In the United States, commercial solar prices are stuck stubbornly above $3/Wdc (although installation costs are very similar to Germany and the UK). The reason for these high prices is that for commercial companies able to install for $2/Wdc, the existing US subsidies are so rich that developers can charge more and still meet investor expectations. There is no incentive for commercial project developers (like SunEdison) to pass these savings onto investors as long as the investors are satisfied with the current returns they are receiving. Today, US solar subsidies need to be phased out so that we can complete the transition to grid parity.

Separately, solar in the United States suffers because it cannot access low-cost money, due to our reliance on federal tax credits. Even though low-risk certificates of deposit pay just 1.5%, and Canadian energy trusts just 4.75%, the US solar industry is paying in excess of 10% to investors. Why? Two words: tax equity. Most investors cannot use tax credits because of arcane passive investment laws passed in 1986 – where oil and gas are of course exempted. If the numbers work without those subsidies, why not just invest even if you can’t use the subsidies? The reason is basic human psychology — if the subsidies are available, people want to use them. If they can’t use them, investors would rather not invest than “leave money on the table.” This tax credit dilemma also prevents professional investors like Fidelity from offering the middle class investment products through which families could invest in solar in their communities.

Professional investors like Fidelity are also important because they drive standards. Today, some people estimate that 95% of solar sales efforts are wasted because they are chasing customers that are unfinanceable. Since most of these sales folks are paid on commission, they have no rational interest in wasting their time, but because of a lack of standards, they have not been given clear instructions on the ideal customer and the ideal terms of the contract.

In 2012, the solar industry will have over 100,000 employees installing over 3,000 megawatts of solar, attracting close to $12 billion in investment. The solar industry is not small. The solar industry now employs more people than the oil & gas pipeline industry, coal mining, and iron & steel manufacturing. By 2016, the last year of the 30% federal investment tax credit, the US solar industry will be installing 4× the megawatts and employing 2× the number of people. This can only happen if we can find over $7 billion in tax equity – while the available tax equity market is around $5 billion. If we can phase out our federal tax credit from 30% to 10% by 2017, we could live below the $5 billion cap and continue our rapid growth rate.

Recently, Nancy Pfund and others made a passionate case that the federal government actually receives more benefits from the 30% federal investment tax credit over 20 years than it costs. This line of argument is as accurate as it is irrelevant. The US solar industry needs mainstream finance, lower costs, and greater standardization to reach 12,000 megawatts by 2016. Germany doesn’t install much cheaper than the US; they price less than we in the US because their subsidies have fallen faster than ours.