Why Have Solar Power Subsidies in the United States?

Does the US still need solar power subsidies when solar is so popular?

Without getting into too many of the nitty gritty details, energy subsidies exist in order to help get new or struggling technologies off the ground and able to compete on their own, and solar power subsidies are no exception. The reason new technologies need help is simple: money.

According to a recent study, energy subsidies have been around since at least 1789, when our country placed a tariff on the selling of any British coal entering America. Since that time, federal money has flowed to industries such as coal, natural gas, oil, nuclear, and renewable energy.

How Do Subsidies Help New Technologies?

Keeping within the context of energy, let’s imagine a simple scenario back in the day, living in a town with one source of power: a coal-burning plant. In order to power your home sufficiently, you’ll need to pay the operators of this plant about $100 per month to use their energy. Everything is great with this arrangement except for the fact that you only live a few blocks away from this plant and it produces a horrible amount of thick, black smoke all day. You hate the smoke, but you also love your lights.

Suddenly, a scientist shows up and says that they have a way to make cleaner energy without all of the smoke but it will cost you $1000 per month. You love the idea of cleaner energy, but where will you get $1000 per month to pay for it? It’s expensive because this scientist will have to build a plant, hire and train operators, and potentially run new power lines or dig up whatever resource the plant uses. No matter how much you want it, that clean power will be out of your grasp without that money.

Here’s where the subsidy comes in. The government could pay that scientist a bunch of money to build his plant, lowering the price to $300 per month. Then, the government could pay the consumer of that new energy $200 per month to purchase the energy. This would bring both forms of energy onto a level playing field economically, and allow the cleaner version to “catch up” to the dirty one. This all works great as long as the government has extra money and the industry will eventually be able to survive without help!

Federal Solar Power Subsidies

At the time of this writing, there are dozens of federal programs meant to help bring solar energy onto a level playing field with other energy providers. These financial incentives cover everything from corporate tax credits and exemptions, grant programs, loan programs, and personal tax credits and exemptions. Let’s look at some of these high-impact subsidies to see how businesses and residents are able to take advantage of these government subsidies. Keep in mind that this list is by no means exhaustive!

Personal Tax Credits

Firstly, tax credits. Credits such as the residential renewable energy tax credit are the big dogs of the solar energy subsidy world. It currently provides a 30% tax credit for both corporations and residents who purchase and install solar photovoltaics on their businesses or homes. Basically, this takes 30% off the cost of any investment in this technology, which can make purchasing decisions much more economically attractive.

Looking back at our earlier example, this would be the government essentially paying the consumer to use the new form of technology. It gives the average consumer 30% more financial incentive to choose solar over their current utility company, all other things being equal.

Corporate Tax Credits

Much like their consumer-level counterparts, corporate tax credits exist in order to spur investment in the renewable solar energy space. The business energy investment tax credit allows a 30% incentive for any solar cell production related to solar water heat, solar space heat, solar thermal electric, and more.

This tax credit was initially created back in 2005, and since that time the yearly installed solar capacity has grown from around 100 megawatts to more than 7,000 megawatts in 2015 alone. Quite a huge difference! Supporting that huge increase is a solar industry that currently fields about 260,000 jobs and is on track to reach 360,000 workers by the year 2021. Solar power is definitely not a cottage industry any longer.

Federal Programs for Funding Clean Energy Initiatives

Along with the typical tax credits, the federal government also likes to create initiatives that compel the market to speed up the adoption of certain technologies by setting new standards or targets for the industry as a whole.  One such program, the SunShot Initiative, outlines goals for solar energy to become cost-competitive with more traditional methods of producing electricity by the year 2020.

This means that solar energy would need to cost around $0.09 per kilowatt hour for residential systems, $0.07 per kilowatt hour for commercial systems, and $0.06 for utility-scale solar systems. As of May 2016, the solar industry had already reached 70% of the stated goals, which prompted the department to consider raising the targets even higher for their next milestone. By 2030, they are looking for costs as low as $0.05 per kilowatt for residential systems!

State Solar Power Subsidies

While having the power of the United States government backing the solar industry is certainly not a bad thing, only so much can be done at the federal level because they must please a much wider segment of the population in order to stay in business. This is where states come in.

States have the power to supplement the federal incentives with their own if they so choose. After all, they control their own set of taxes, regulations, and local utilities. It is interesting to see how different states react towards solar power, but most tend to offer at least some type of program for their citizens.

To highlight as many state subsidies as possible, we’ll turn to a place that has a very favorable landscape for state solar subsidies: New York. Keep in mind that this is not an exhaustive list as there are simply too many unique programs and incentives to talk about here!

State Tax Credits

In New York, the government offers a generous tax credit for new residential systems that fall under the 25kW mark (this easily covers most residential systems). It allows residents to get up to $5,000 back for your solar system providing that it aligns with all of the local utility regulations. Another benefit is that this credit can roll forward for up to five years if you have extra while filing taxes!

State Rebates

Solar rebates allow a buyer to get some of their money back straight from their solar purchase without having to wait for their taxes to be filed and returned. Rebates are not extremely common at the state level, but New York allows for a small rebate of $400 per kilowatt hour of solar installation. Although this doesn’t seem as impressive as the huge tax credits, this rebate is on top of the other two credits and can really help lower the overall cost of a solar system.

Sales Tax Exemptions

If you’ve ever seen one of those “tax-free” holidays that usually come around during back-to-school shopping, you’ll be familiar with how this works. Basically, equipment purchases and installation fees could be considered tax-exempt depending on where you live. In the case of New York, they allow a 100% exemption!

Property Tax Exemptions

A hefty solar panel installation for your home, even with subsidies, is not exactly cheap. Just like remodeling the bathroom, putting a new roof on the house, or digging a pool, adding those expensive solar panels would ordinarily increase the value of your home. This isn’t a bad thing, but remember that property taxes can go up as the value of your home increases. To eliminate this hurdle, many states allow for any value added to your home from the solar system to be exempt for the purposes of property taxes. In New York, you’ll be able to enjoy that increased property value without paying a cent more in taxes!

State Renewable Portfolio Standard

Although not a subsidy in the strictest sense, a renewable portfolio standard (RPS) is a wonderful gem of legislation that outlines how a state wants to manage its energy production in the future. They could, for example, say that they wanted to generate 20% of their power from renewable sources by a certain time. This could provide a huge incentive (or mandate!) on local utilities to help speed up adoption.

In New York’s case, the state government wants an incredible 50% of electricity to come from renewable energies by the year 2030. Talk about a commitment!

Viability Without Solar Power Subsidies

According to studies, the first 15 years of any new technology are critical to them finding success in the marketplace. Historically, fossil fuel-based technologies such as oil and gas received five times more subsidies than solar power, while nuclear got the lion’s share with 10 times the support of solar. It should come as no surprise then, how those fuel sources have overwhelmingly become the source of this nation’s electricity supply.

So although solar has received subsidies since 1954, it has only been in the recent past when subsidies increased substantially that huge leaps have been made in its viability.

With that being said, solar power is well on its way to becoming a viable energy source on its own!

How Subsidies Change Over Time

Looking back at our earlier dirty coal example, you might have been left wondering if the government will be forced to continue to pay those huge sums of money in order to keep clean energy solutions in business. If all goes according to plan, the answer is no.

Subsidies are only intended to get a new technology off the ground by providing initial support. They aren’t usually designed, from an economic perspective, to keep going forever. As that first scientist begins to pay off his initial investment in the plant, materials, training, etc he will start to bring more and more money to his bottom line. At that point, he could start pocketing the profits, but the government should also start to wean off their support as the technology takes hold. The tech will become more efficient as advances are made, more competitors will enter the marketplace, and the price will be driven lower and lower over time as more supply is created.

Of course, there could be random price spikes if there were material shortages or something like that, but in general, technology improves over time so much that it will either get cheaper, more efficient, or some combination of the two.

How Have Other Energy Sources Changed?

With coal, in particular, its early days at the end of the 19th century saw a dismal efficiency level of about 1%. Fast-forwarding to today, the world average of all coal-fired power stations are around 31%. Quite a huge increase in efficiency over the years!

This dramatic increase was spurred by years and years of favorable terms for the coal industry from a financial and regulatory perspective. Eventually, coal became so cheap that many people basically worked themselves out of the job as the growing trend among environmentally-friendly people shifted to cleaner fuel alternatives.

How Has Solar Changed?

Looking at the evolution of solar panel efficiency over time, producers were able to:

• Squeeze about 4.5% of the available energy from the sun to electricity in 1953
• Increase to 15% efficiency in 2012
• Reach up to 23.5% efficiency in lab settings as of 2015!

As you can see, efficiency more than tripled in the first five decades of the technology from 4.5% to 15%.  Then it only took another 3 years after that to increase another 56% from 15 to 23.5 percent!

These efficiencies are very promising, but solar still only provides about 1% of global energy production. In order to gain more ground, production will have to continue to increase in order to lower prices even further for installing solar panel systems. At this point, subsidies are still a huge factor, because without those big tax credits most consumers would find that solar power just isn’t that economically viable.

Yet.

Some studies point to solar power reaching what is called “grid parity” within the next five years in many states. Grid parity is the point at which generation from solar panels is cheaper than retail electricity. It’s at this point that many think solar will start to have dramatic, widespread adoption. The only issue is that those studies are still factoring in those government subsidies when looking at the math, so it’s still a bit difficult to say when solar energy won’t need subsidies to compete.

Conclusion

As you can see, the world of solar power subsidies in the US are a bit complicated. It is definitely worth doing your homework if you are thinking about investing in a system of your own; in many cases, there are many financial incentives available for you to take advantage of.

It is impossible to say how the landscape of subsidies will change over the coming years, but the groundwork has been laid for a strong future for solar energy in the United States at the federal level as well as the state level. It’s very possible that solar energy could overtake a more traditional fuel source, such as coal, one day in the not-too-distant future!

What are your thoughts and experiences with solar power subsidies? How do you think they could be improved? What frustrates you?

Let us know in the comments!

Image Credit under CC License from Pixabay – 1