n his 1790 Report on Manufactures, Alexander Hamilton argued that America’s “infant” industries needed to be protected from competitors in Britain and France in order to achieve what we now call economies of scale. Hamilton’s report was subsequently used to justify the imposition of huge tariffs on U.S. imports, many of which lasted until 1945 well after America’s manufacturing sector had “grown up.”
The renewable energy industry is making similar arguments today, claiming that subsidies and other incentives are necessary to ensure the long-term viability of wind and solar. But market reality suggests otherwise, especially in the case of solar energy.
For a decade, investors in commercial and residential solar energy systems have received a 30 percent tax credit (ITC) that also applies to small wind-energy systems and geothermal heat pumps. Without question, the ITC has helped the industry take off, from rooftop solar systems to mega utility-scale solar farms. Over the past two years, installed solar capacity has doubled to 18,300 megawatts. Even in fossil fuel rich Texas, power generators plan to add 1,500 megawatts of solar over the next two years. Still, solar power accounts for less than two percent of America’s electrical supply.
At the end of 2016, the tax credit for solar investments is scheduled to expire for residential systems and drop to 10 percent for commercial installations. Not surprisingly, the caterwauling has already begun. Proponents of the credit argue that without it new solar investments will “fall off the cliff.” Obama administration officials claim rooftop solar installations will drop 94 percent without the ITC while utilities will completely abandon new solar projects. What’s more, argue supporters of the credit, the solar industry supports 200,000 domestic jobs that will disappear if the ITC goes away.
The reality is that the cost of solar energy has dropped dramatically over the past decade. For example, the price of solar panels per watt of generating capacity has dropped from nearly $4 in 2006 to 50 cents today. According to a recent analysis by the Institute for Local Self-Reliance, in 22 states at least one gigawatt of solar can be installed at a comparable cost to retail electricity prices even without the tax credit. In contrast to the administration’s claims, a study by Bloomberg estimates that the loss of the tax credit will cause new solar installations to only quadruple, rather than quintuple, by 2022.
Futhermore, the 30 percent tax credit is not what it seems. The largest tax credit recipients have been big businesses like Wal-Mart and Google as well as leasing companies and their investors. Most homeowners who install rooftop solar don’t realize the full tax benefits of the ITC because they’re leasing their panels from a third-party. These financial middlemen may retain up to half of the 30 percent credit, meaning the effective discount to the user is only 15 percent. Absent the tax credit, self-financing instead of leasing could actually yield greater benefits for homeowners. According to an analysis by the National Renewable Energy Laboratory, the cost of solar could drop by 23 percent for residential customers and 87 percent for commercial customers by shifting to self-financing.
Should the ICT go away, solar power will continue grow. Most states have adopted “renewable portfolio standards” that mandate increased production of electricity from wind, solar and biomass by a certain date. For example, California’s mandate requires 33 percent renewables in the power grid by 2020. Solar will also receive a boost from the federal Clean Power Plan.
Since its inception a decade ago, the solar tax credit has cost American taxpayers more than $200 billion. But today, the solar industry is no longer in its infancy. It’s time to wean it from taxpayer largess and let it walk on its own.
Weinstein is associate director of the Maguire Energy Institute and an adjunct professor of business economics in the Cox School of Business at Southern Methodist University in Dallas.