Solar Tax Breaks – if it were only that simple

Solar Tax Breaks – if it were only that simple

Solar tax breaks is the big talk in some parts of the country.   A new report published by the US Partnership for Renewable Finance (US PREF), a program of the American Council On Renewable Energy (ACORE), highlights the extent of campaigning to promote subsidization of the industry.   The analysis leaves much room for skepticism and criticism.  Before I delve into the depths  and details of the report, it would be easy and clean to simply say giving a tax break promotes more tax revenue – trickle down economics.   The basis of their analysis is based on trickle down economics which many have justifiably become distrusting given the economic condition of the US with the significant tax breaks over the past decades.   The theory is: in lieu of the tax credit, the company would not exist therefore no tax revenue will come from the company.  And the theory goes on to say the on-going tax revenue will make up for the initial loss.   You can note I did not have to specify an industry.   This logic could apply to about everything.  The positives about solar versus other industry is possibly it is the gift that keeps on giving via clean energy.  There are certainly externalities that exist beyond the product itself.  

However the world/US is not that simple to conclude giving tax breaks pays off – particularly when you are running deficits.   In affect a credit to any industry in the time the country is running a deficit is certainly at least valued at the interest cost to society.  Currently we are fixing our interest rate through monetary policy so the rate is quite low.   Secondly the opportunity cost to produce more debt for future growth has a full range of items e.g. autos, homes, roads, etc…  Will someone develop a capital allocation model to identify the top 10 investment that would be best for the economy?   Personally I don’t know if solar would be in that list in terms of returns for the next 10 years.   In the PREF analysis they do show positive returns (though skeptical on results), but I am sure many other industries would tout the same thing if given the chance.   Thirdly, the government policies that encourage certain outcomes are typically design and sold as social just expenses – not requiring full economic principles e.g. welfare, tax on cigarettes, home ownership etc…   Perhaps we could categorize solar/renewable policies as a social just expense.  It would certainly merit it in terms of cleaner energy and potentially long-term value if something were to happen to fossil fuel supply. 

If we were a country without much opportunity for other forms of energy I would see it easily being a top 10 investment.  However the US is the land of the bountiful not only in land, but food and energy.   We are led to believe we are short on energy.  This is not the case.  We have chosen to limit the amount of domestic energy use by creating national parks and restricting drilling.  These choices are worthwhile choices given the ability to let others pillage their resources at prices which we deem too low to think about pillaging our lands.   In addition, because of the abundance and relatively cheap cost of energy, we consume more than we “need”.   I am sure if push comes to shove we can consume much less without much change in our happiness.  This abundance of energy does put into question the motivation and the desire to advance solar for the benefit for other countries not blessed with our resources.  On a global warming basis I certainly can see the value.  But as I pointed out in my other articles , society is not ready to plan for the long-term.

In terms of the paper itself, they left out many economic and mathematical concerns.   Here are my litanies of concerns:  Why no discount rate?  At the very least should not be the value of interest?  On a nominal basis many investments will payoff in 30 year.  Another reason to do it on a real basis is they have energy price escalators all in the realm of inflation.  The study basis on generating revenue lies on the premise creating a leasing deal promotes a good tax policy since the leaseholder is seeing taxable revenue.  With this logic, the government should promote all types of leasing – why not give tax credits to lease cars.  The Excel file shows the assumption that PPA will be signed not only on premium price relative to current market conditions, but the utility would continue to pay additional cost each year via an escalator.  Most solar PPA deals I have seen are at fixed cost.  Solar does have a fixed cost component (land management, solar cleaning, inverter repair/replace) which will occur over the 30 year period and is missing in their economics.

Let me leave you saying I agree that promotion of solar could produce a long-term value for society.  I don’t have all the answers, but I don’t shy from the tough questions.  However the article and many people involved in these issues are not talking about all the facts and concerns to make a decision for the best of society for the long haul.   Without a complete discussion of the pros and cons, people end up cherry picking information to support their own internal biases which in most cases supports ones self-interest regardless of society value.

I have many years of experience in evaluating various technologies, planning, and developing an integrated resource plan.  If you are looking for some insights and or additional points of view into the future technologies and/or power markets please consider contacting All Energy Consulting.

Your Energy Consultant,

David K. Bellman



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