Over the next decade, solar electricity will let consumers get cheaper energy from their rooftop than from their utility. Among the upheaval in the electricity system, the coming of solar "grid parity" means re-thinking incentives for solar energy.
The success of solar is remarkable, no less because the amount of federal subsidy in absolute terms has been far less for renewable energy than for fossil fuel resources (see graphic below). As the cost of solar drops toward — and below — grid parity, the question is how to adjust solar subsidies appropriately. Should they be eliminated immediately? Phased out? Or shifted from reducing the upfront cost to some other solar-boosting strategy?
Credit: Tommy McCall
Strategies for Shifting Subsidies
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.
Cost of Federal Solar Subsidy with Phase Out
Shifting from Tax-Based Incentives to Cash Means More Solar
The phase out could be further enhanced by linking the subsidy cuts to the number of solar installations, price indices or the local solar resource. Strong market performance could reduce prices faster while slow growth could mean slower price decreases. Flat electricity prices or a plateau in solar costs could slow the phase out, while high price inflation or large decreases in the cost of installing solar could accelerate it. Sunny areas like Los Angeles could have the tax credit immediately cut to 10 percent in 2017, while less sunny areas like Ohio could keep the 30 percent credit a bit longer.
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