Sensible Incentives For Solar Energy

Thanks to a post by Michael Giberson at “Knowledge Problem”, I discovered a great discussion of solar policy initiatives. In “Doing Solar Incentives Right” Tom Conrad provides one of the clearest summaries I have seen yet regarding the advantages and disadvantages of various ways that government policy has been tried to encourage the development of solar energy.

But I don’t fully agree with the conclusions of Conrad’s analysis in a presentation to the recent conference of the American Solar Energy Association, in which he suggests that “in a perfect world” he would like to see a combination of:

“Investment (not production) incentives (ITC, etc.)

Time-of-use pricing (not flat or demand-charge based) (Peak)

Incentives for Distributed installation based on existing T&D infrastructure

Carbon Pricing”

My own strong opinion is that if we really want to see solar reach grid parity soon and want the solar industry grow profitable and sustainable businesses, then near term subsidies should focus on production incentives like Renewable Energy Portfolio Standards,  while the long term (and more politically challenging) answers lie in a combination of:

1) simple, high and universally applied carbon taxes reflecting the “economic externalities” of our fossil fuel addiction.

2) time of use electricity pricing providing real price signals to the market.

3) utility price decoupling that eliminates the perverse incentives for utilities to pump more electricity from centralized generators to consumers and instead pays them to keep the network operating.

4) requirements that utilities pay the cost of infrastructure and information systems upgrades necessary to enable the distributed, multi-directional energy and information flows of the “smart grid” of the future.

It should be noted that this combination of policies does not require direct subsidies, can have neutral impact on government revenues and expenditures and provides universal comprehensive incentives for energy conservation, smart grid solutions and a broad range of distributed generation solutions without the need for the government to pick winners and losers in the race to a sustainable energy future.

It should also be noted that because it will eliminate all the counterproductive  incentives currently embedded in utility regulations, these policies will be generally opposed both by business and consumer groups who would see their current subsidies altered. Long term, such policies would be advantageous for both business and consumers, but unfortunately despite the rhetoric, real legislative politics rarely addresses either long term issues or common sense solutions, especially when they involve substantial change impacting powerful entrenched interest groups like utilities.

There are many reasons it will be very hard politically to enact sensible regulation. Not the least of these challenges is that politicians tend to like policy solutions in which they can support their political supporters or those they perceive to have aligned interests. In a more sensible policy environment, politicians would avoid picking winners and losers and instead create a more sensibly designed economic playing field and  allow economics and market forces sort out the successful solutions.

And it is important to recognize that some of these policies are best implemented at the national level while others require changes in state utility policy. Perhaps the biggest challenge is developing plans at the state level that enact these critical reforms while not putting the leading states at perceived short term economic disadvantages compared to those slower to adopt progressive energy policy.   In the near term holding out for idealized coordinated state and federal policy will be impossible if solutions like solar are to overcome embedded obstacles to the biggest advantages of the technology.

Some practical examples of policy implications are in order. Solar production is c0incident with maximum peak demand and maximum wholesale energy costs, thus making a real time retail electricity pricing environment a critical policy support for the very real economic advantages that solar can offer as an economically competitive generation solution today. Consumer groups wedded to outdated policy solutions will fight against real time pricing for consumers which are not subject to strict utility commission regulation. At the same time, in most states, residential rate payers actually pay more for both electricity  and for transmission and distribution charges than business and industrial users on a unit cost basis and thus subsidize the costs of electricity for those larger users. Businesses will fight against changing those rules and threaten to move to more “business friendly” states.

Even though the combined policies would ultimately reduce and stabilize energy costs for both business and consumers, overcoming existing policy preferences will be politically challenging at best. Thus it is important that state level leaders focus attention at least as much on coordinating regional and nation policy solutions as they do on trying to solve the problems on a state level.

It is important that policy makers think clearly beyond whether to encourage clean energy solutions to thinking much more clearly about how they encourage clean energy if these industries are really going to be sucecssful and create all the new green jobs everyone seems to want. Every policy choice has consequences and as with all policy, many of the consequences can be unintended if not carefully thought through.

The  solar subsidies of the Carter administration did far more net harm than good regarding the long term development of renewable energy. Through their naive overly generous investment subsidies, the Carter policies set back the solar industry by a generation. We should be more thoughtful and careful this time around.

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Filed under Economic Policy, Energy Policy

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