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Subsidies and Costs in the Solar Industry

Posted By David Kreutzer, Ph.D. On February 27, 2012 @ 2:30 pm In Energy,Featured | Comments Disabled

According to Germany’s environment minister, Norbert Roettgen, “Solar is a success story made in Germany.” “Success” appears to mean having the world’s largest amount of ridiculously overpriced electricity. (The German subsidy for solar energy is up to five times the actual wholesale cost in the U.S.)

But even Roettgen realizes that affordability matters: “The cost factor has to be at acceptable levels.” So Germany is cutting subsidies to solar power [1].

It shouldn’t be too much of a surprise that shares for solar-panel makers worldwide tumbled when Germany announced the new lower subsidy rate. But those outside the industry should be surprised that new, lower, subsidies are still up to five times the actual wholesale power price in the U.S [2].

If subsidies of 500 percent of our cost of production are such bad news for the solar industry, how can anyone believe the claims of imminent cost competitiveness we keep hearing from the solar lobbyists?

Let’s run through that in a little more detail: Realizing they could not afford to keep subsidizing solar power at the same level, Germany announced looming cuts of 20–30 percent in the subsidy rate last year. In an attempt to head off a last-minute surge in installations—which would qualify for the old, higher subsidy rate—the German government moved the cut-off date forward three weeks. This three-week shift by itself was enough to drop the share price for First Solar (based in the U.S.) and Suntech (based in China) by another 5 percent on top of the losses they had already suffered.

However, after the cuts, the subsidies will still be up to 19.5 euro cents per kilowatt hour (kw-h), which at current exchange rates is a little over 26 U.S. cents per kw-h. Even the lowest subsidy rate, paid to the largest installations, will be over 18 cents per kw-h.

The U.S. Energy Information Administration’s data for 2011 indicate that wholesale prices in the U.S. were about five cents per kw-h. So far this year, the U.S. prices are even lower. It is clear that the new, lower subsidies, which are imposing such hardship on the solar industry, are still astronomical—at least three to five times the wholesale price of electricity in the U.S.

Further, this cost differential gives solar electricity a pass on its problems of unpredictability—which requires additional backup power at additional expense.

The solar power industry makes the internally inconsistent case that they need extended subsidies [3] while solar is virtually cost competitive with conventional power [4]. This inconsistency may be resolved if the solar industry agrees with Roettgen that an “acceptable” cost is 200–400 percent above the cost of conventional electricity. If so, we need to be very leery of the industry’s definition of “cost competitive” as it lobbies for extending subsidies here in the U.S.

But there is a bigger lesson here as well. Other countries are demonstrating that subsidized alternative energy is not affordable, is not a job creator, and is not a tool for economic development. Just as the Obama Administration pointed to Solyndra as the model to follow toward the new-energy future only to have it collapse spectacularly, so too was Spain identified as a role model [5] for green development. The long-term impacts of Spain’s subsidy scheme threatened to destroy the government’s finances. As a result, Spain eliminated subsidies [6] for new renewable energy projects. Other European countries realized that the subsidies were unaffordable and also cut back to protect their economies.

Maybe the first lemming over the cliff felt like a leader, but there is absolutely no virtue in being the 10th lemming. Let’s learn from the mistakes of others and put an end to subsidies for unaffordable energy.

Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2012/02/27/subsidies-and-costs-in-the-solar-industry/

URLs in this post:

[1] cutting subsidies to solar power: http://www.reuters.com/article/2012/02/23/us-germany-solar-incentives-idUSTRE81M1EG20120223

[2] wholesale power price in the U.S: http://www.eia.gov/electricity/wholesale/index.cfm

[3] they need extended subsidies: http://cnsnews.com/news/article/solar-energy-lobby-calls-extending-obamas-stimulus-grants-solar-power

[4] virtually cost competitive with conventional power: http://www.bloomberg.com/news/2011-04-05/solar-energy-costs-may-already-rival-coal-spurring-installation-boom.html

[5] Spain identified as a role model: http://www.economist.com/node/13404568

[6] Spain eliminated subsidies: http://www.reuters.com/article/2012/01/27/spain-renewables-idUSL5E8CR2B620120127

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