The Boom-Bust Tax Cycle

While most attention today is being paid to the launch of the Nissan Leaf the question of supplying long term renewable power to it is getting less attention.

One of the most frustrating problems is a boom-bust cycle driven by tax incentives, not just in America but even in China. It's tough for the industry to do any long-term planning when politicians blow hot-and-cold. Look carefully at China's latest plan, offered in conjunction with the Cancun climate conference. Most if it is short-term money tied to specific projects.

Right now federal aid is blowing hot but may soon turn cold. Construction grants worth $6.7 billion expire this month so savvy investors are shorting the solar sector. The Obama Administration is fighting an uphill battle to continue its ARPA-E program, begun under the stimulus, which wants to become the DARPA of alternative energy, funding cutting-edge research.

Politically these battles leave the impression that solar is entirely tax-dependent, that the industry would not exist without government support. That's no more true than the claim that oil and coal would not be extracted without government support, as our editors note.

Politicians supporting coal, oil and natural gas seldom have to defend below-market lease rates, depletion allowances, or direct expensing of long-term costs. The headlines generated when they do beat back attempts to reduce subsidies are few.

One reason resource companies may continue to succeed is many of the benefits they have come to depend upon are indirect, including grants to deal with health costs, and written into the tax code.

Equal treatment for all energy would be a net gain for solar and cut the deficit at the same time. But the key to resource subsidies is they're permanent features of the tax code, not short-term. This is not just an American problem. The French face it as well.

There is state and local aid for solar projects, like Long Island's $1.75 per watt solar rebate, but such aid can also bring local problems. Take San Francisco. Despite government support for solar and wind, neighbors have frustrated wind power plans and a labor dispute is holding up the city's own solar plans.

When policy makers consider solar, they have a bad habit of thinking it's just like coal or natural gas, rather than more prosaic systems that, say, heat water. Money goes to enormous projects far from any city, which lose half their yield as high-power lines move that electricity countryside to city. Like this 1 megawatt solar project going into Abu Dhabi.

Despite all this there are analysts who are bullish on solar for 2011 You may not be surprised to find that I am one of them.