Solar Subsidies

We are installing over 30 solar panels on our roof. The City of Austin currently offers a rebate up to \$15,000 for 60 per cent of the cost, and the federal government gives a 30 per cent credit on the remainder. With those subsidies, the rate of return on our own investment is 17 percent — making this is a superb deal for us.

A neighbor in the Netherlands has 4 solar panels on his roof, a strangely small number.  I asked why.  His answer:  The Dutch government pays up to €1500 if you install a solar installation.  Each solar panel costs him €450, with a fixed cost of about €200 for the installation. Thus his average rate of return on his 4 panels is about 25 percent, a great investment.  He would get no subsidy for a 5th panel, so the marginal rate of return on it would only be 4 percent for him. Small wonder that my neighbor has his unusual solar installation.

Both my Dutch neighbor and I benefit from the subsidies–but should our governments be using taxpayers’ money for this, especially since I bet that most of the beneficiaries are well into the upper part of the income distribution?

Francis

If we are talking about energy subsidies, I guess you could ask the same question about the Government paying huge subsidies to oil and gas companies. I think you are missing the point slightly about upper income levels (which is a guess by you anyway). This isn't about subsidizing people's income, its about reducing the dependence on fossil fuel. Think how much energy could be saved if even a small percentage of homes in the US harvested free, renewable energy from the sun. Huge opportunity in sun-belt states. Worth susidizing? I think so.

WebMonk

The reduction in fuel consumption is absolutely miniscule compared to the cost to taxpayers. Let's check the numbers to see.

Let's say the solar panels provide half his power, and he consumes \$250/month in electricity in his home. That's a savings of \$125 per month, which comes to \$1500 per year. Taxpayers paid \$18,000.

The cost of fuel (coal being the largest fuel for electricity production in the USA) is around 18% of the total cost of the electricity.

That means the fuel savings is \$270 per year. Taxpayers just paid \$18,000 so that \$270 less coal is used each year. That's a PHENOMENALLY bad deal. Let's say taxpayers pay 2% interest on the bonds used to pay that \$18,000. Each year, the interest alone is \$360 to pay for \$270 less coal. The numbers are very, very much not in favor of this sort of subsidy being a good idea.

Frank Warta

Given that larger homes and higher income earners tend to use more energy, incentives to offset energy use even if it generally benefits those who "need" less benefit may not be bad. The thing it makes me wonder though is if lowering the absolute cost of high energy consumption activities may lead to worse behavior and higher total consumption. If someone with a large home realizes a measurable decrease in their total monthly expenses will they be likely to run their A/C more often or less likely to worry about turning off lights and other devices? Do we accidentally reduce a disincentive of bad behavior? I guess part of the answer would lie in why we make the consumption choices we do regardless of income, but for people with greater sustained wealth the psychology of this kind of decision making could be very telling.

Allen

You're welcome. Instead of sending my kids to college, I'm paying for your solar panels. Or, more accurately, my kids are paying for your solar panels, since they will inherit the deficit.

With respect to the other comments about "huge subsidies of oil and gas companies" and "energy independence", bull hockey. Oil and gas companies pay a billion times more (literally) in taxes than do solar. You can argue they should pay more, but there's no subsidy. More importantly, energy independence built on a transfer of wealth from middle-class to upper-class Americans is not energy independence at all. It is perverse.

kilroy

I dont want to sound like a filthy hippie here, but isn't at least SOME of the cost of everything we do in the Middle East an indirect oil and gas subsidy when you get down to it.

Sam Devol

"but should our governments be using taxpayers’ money for this, especially since I bet that most of the beneficiaries are well into the upper part of the income distribution?"

Regardless of the income level, the individual requires less electricity from the grid, so it effects society as a whole...

Rick

Since the public benefits from home solar installation, it does not seem unreasonable that the public (government) encourage their use. Solar panels on a house reduce the load on the electric infrastructure, reduce demand for coal and gas energy sources (lowering their cost to the public that does use them), don't release pollution into the envronment (that would be a public health hazard) of the forms of CO2, NOx, mercury, arsenic, lead, etc.

WebMonk

So, there were about \$18,000 worth of taxpayer money going toward the project. I don't know your specific house's power needs, but let's say you have a pretty good sized house (which might fit with 30 panels being able to fit, depending on the size of the panels)

If you normally consume \$250/month of energy, and the panels can cut your outside power consumption by 50%, then that's \$125 of energy per month (\$1500 per year). Taxes paid \$18,000 to save \$1500 per year.

That takes 12 years to recoup costs. More if you consider that time cost of the \$18,000 - at a 3% interest rate they pay on the bonds covering the solar panel subsidies. If that is taken into account, then the panels take just over 16 years to repay the taxpayer cost.

But, it gets more complicated still. The taxpayers don't exactly recoup costs - power companies will need to produce less power, the individual solar panel owner pays for less power, but the taxpayers in the community never actually recoup costs, at least not directly. It's possible that power companies might receive less in subsidies from taxpayers, but that's a very uncertain and diminished savings.

Frankly, the taxpayers are getting screwed, based on the taxpayer directly recouping costs.

The argument FOR such subsidies is that the ancillary savings to the community are worth the \$18,000: reduced CO2 emissions and reduced consumption of scarce resources like coal/oil/natgas. (I'll mention, but not pursue the environmental costs of solar panels - rare earth metals are notorious pollutants at every stage of development from mining to manufacturing to disposal.)

The CO2 emissions savings are phenomenally miniscule, so I'm going to drop them from consideration. That leaves the reduced consumption of scarce resources. Given current prices and projected prices of said resources, I have a very, very hard time imagining that the reduced consumption of a household is worth \$18,000 to society. The cost of the coal (the largest single source of power in the USA) for a plant is only 18% of the total cost of the energy.

Of the \$1500 per year in reduced (coal) power consumption, only 18% (\$270) is reduced fuel consumption.

So, that \$18,000 of taxpayer money is gaining the taxpayers around \$270 per year of reduced fuel consumption.

NOT EVEN CLOSE TO BEING WORTH IT!

Mark West

The short answer? No......the subsidies only go to those wealthy enough to pay for a solar installation.

This is Obamanomics at its worst. If the government was not handing over other taxpayers money you would not be getting your "great investments" and you would not be buying the panels. The money has to come from somewhere. But then you already know that.

More power to you for being able to exploit this loophole but don't look for forgiveness on your blog.

Mike Barone

You may disagree with the policy, but to call it a "loophole" is a little disingenuous. It's a direct subsidy for a specific item.

And while I agree it's not directly cost effective policy, it's also a minuscule expense, relatively speaking. Anything to get people thinking about alternative energy is a positive in my book. Plus, the easiest way to get the alternative energy industry to a financially sustainable place is to spur investment so more research can happen.

I always felt that one of the government's most important functions is to incubate unprofitable industries that may benefit humanity into profitable ones because there's little incentive for private industry to do so. Sometimes it works, sometimes it doesn't.

No.

164

Did I miss something by not understanding the whole "neighbor" in the Netherlands thing?

Quentin

The correct way to handle this from an economic point of view is for the government to tax various forms of energy use depending on the externalities they create. Fossil fuels would be taxed based on carbon emissions. Coal would probably get some extra tax because of the heavy metals, acid rain, and such. Gas would be taxed based on whatever costs are caused by fracking. Solar would be taxed based on the environmental costs of mining whatever materials went into it. If solar is the cheapest source of power after all of those costs are added, then people should install it.

From a technical point of view, getting the correct taxation levels correct would be a challenge, but doable. From a political point of view, I'm not going to get my hopes up. There was a post here last week about "spending" through the tax code, and this is a classic example. As long as subsidies are characterized as "tax cuts", they will get enough bipartisan support to pass. And so, we get weird situations like this.

Ian Woollard

The thing is that the cost of the solar panels are subject to significant economies of scale, so if the governments give rebates now, then even if only the well-healed people take up the offer now, then the much less well-healed people do much better in the long run.

There's always early adopters and late adopters, and the early adopters are mostly well healed for many technologies.

Malcolm

That is a pretty massive subsidy, the usual payoff for solar panels is pretty poor. But the truth is that right now without subsidies the solar industry would not exist. So the question really is, "should we, as a nation, invest in solar energy now or not?" The straight financial return to taxpayers isn't going to look good for many years but if you look at the big picture of the value of the US increasing renewable energy production having a competitive solar manufacturing industry. If we wait until solar is cost-competitive with coal, a fuel that we (in)conveniently don't pay the true cost of counting all the externalities, we're going to be in an awful lot of environmental trouble. We're also going to be buying all our solar panels from overseas, because other countries (China) are investing in the technology with the understanding that the future of energy is going to be necessitate a massive shift away from fossil fuels.