Solar Panel Subsidies Have Un-Intended Consequences

As a society, we spent $6 Billion in government subsidies for solar cell installations in 2010 1. Subsidies include tax credits, rebates and the requirement power companies buy the power at inflated prices which, combined, can total well over the installation cost. Are we getting our money’s worth? Let’s take a closer look. These cells don’t produce much electricity over the expected twenty-five year life for the $25,000 to $35,000 cost of a typical residential installation 2. Although the cost of solar cell installations has been reduced since the 1980’s, without extensive subsidies, hardly anyone would buy them. Here are some key findings that introduce common sense economic practicalities to the subject:
• Further reductions in the cost of solar panels will be marginal as a growing portion of the installation cost lies in materials, labor, and overhead. These costs are unrelated to the cost of the solar cells themselves. Solar cells will not survive in the foreseeable future without massive government subsidies.
• If greenhouse gas reduction is the ultimate goal, nuclear energy has been proven to have ten times the impact for the same cost.
• Solar and other “green” energy subsidies will increase the price of electricity 20%. Other countries, further along on the “green” road such as Spain and Germany, are experiencing resistance to government subsidies when electric power prices increase between 5% and 10%.
• Subsidies have kept solar panel prices artificially high and have become a disincentive to investment in research and capital for improving efficiency and reducing cost. Thus, subsidies played a major role in the loss of the U.S. solar panel global market share from 70% in 1980 to 4% in 2010.
• Solar and wind receive thirty (30) times the subsidies of conventional power sources.
Proponents list the benefits of these solar subsidies as:
1) Solar will lower air pollution and greenhouse gas
2) Solar will stabilize and lower electricity prices
3) Subsidies provide investment assistance for research to improve the product and lower cost
4) Subsidies provide investment assistance to keep the US a world leader in market share
5) Subsidies for solar just equalize the subsidies for other energy sources
They are wrong on every point.

Myth 1: Solar will lower air pollution and greenhouse gas
Solar cells do deliver electricity without air pollution although the need for backup power reduces the benefit. However, they must be compared with other available options that do the same thing to determine if the cost is worth the pollution savings. One dollar invested in solar cells produces about 275 watts a year of electricity. Compare this to annual production per dollar invested for the following; offshore wind produces 390 watts/$, onshore wind 775 watts/$, and nuclear power 3000 watts/$ invested. If reducing greenhouse gas emission and other air pollution is the goal, nuclear power does at least ten times more with the same investment.
Myth 2: Solar will stabilize and lower electricity rates
The US Energy Information Agency recently published a forecast for electric rates for conventional power sources through 2035. They expect rates to fall over the next several years because of lower natural gas prices from vast new production fields. Longer term, prices will only edge up slowly because of the resurgence of nuclear power. By 2035 rates will still be lower than 2009 in constant dollars. Some states, such as Delaware, have passed laws requiring significant use of expensive renewable power sources, such as wind and solar, and have placed a carbon tax on carbon dioxide through a regional cap and trade program, RGGI. We estimate Delaware electric rates will increase 20% because of this legislation. It is ironic the only de-stabilizing force for electric rates is this misguided “green” energy policy.

Myth 3: Subsidies provide investment assistance for research to improve the product and lower cost
The United States government has been spending hundreds of millions of dollars a year on basic research on solar cells to improve efficiency. The budget for 2010 was $300 million. It is likely a high efficiency panel will be invented someday but invention cannot be scheduled. In twenty-five years the efficiency of current generation production solar cells have only increase from about 12% to 15%. Some modified cells have been able to reach 20% but the cost is higher than the savings are worth. The theoretical efficiency level for the current widely used technology is only 25%. This intractable problem has also withstood private research efforts by companies such as General Electric, Exxon, and Shell Oil who have all abandoned the market. Attempts to develop new materials for lower cost and higher efficiency, lenses and reflectors to concentrate sunlight, and mechanisms to allow the panels to track the sun across the sky have all failed to provide enough benefit for the higher cost. Module prices may come down a bit further but they only represent part of the cost of installed systems. Permits, engineering, inverters, installation labor, other materials, and overhead will result in installed cost of at least $3.90/watt 3. At that price and assuming cell efficiency increases to 20%, even in a high sun area like the southwest, the return on investment without subsidies is only 1%. At this rate, there is no incentive to invest in solar.

Myth 4: Subsidies provide investment assistance to keep the US a world leader in market share
In 1980 the US produced 70% of the world’s solar cells. By 1997 US share had dropped to 40% and by 2010 share dropped to 4%. This occurred despite billions of dollars per year spent in subsidies and research. What went wrong? The crutch of consumption subsidies has stunted growth. Solar module prices dropped from $10/watt in 1980 to about $4/watt in 1997 and remained steady throughout 2008 in constant dollars (see Chart 1). Module prices dropped in 2010 to about $3.25/watt (note there is a difference between module prices and installed cost of modules) because of the recession and cheap Chinese imports. High cost, low volume plants in the U.S and Europe are closing. Module prices may go back up after capacity and demand come back into balance. The industry can charge more for their product domestically because of subsidies and government enforced purchase requirements so they don’t invest to lower cost or to improve the product. Meanwhile, China adopted production subsidies such as land cost discounts, loan discounts, and used currency manipulation to allow their manufacturers to be competitive in the world market. Chinese companies concentrated on lowering prices using the economies of scale of higher production volumes. The developed nations’ consumption subsidies kept prices high while China’s production subsidies reduced cost. In seven years China has moved from essentially no market share to 50% of the global market! Our subsidies caused the loss of US global market share.

Myth 5: Subsidies for solar just equalize the subsidies for other energy sources
This claim usually comes with no specifics and is taken as an article of faith. The claim also assumes there is a large, but undocumented, cost for greenhouse gas induced global warming. The US government is doing research on ways to burn coal cleaner and is offering loan guarantees for the construction of nuclear power plants. Coal is still the largest fossil fuel reserve within our borders and nuclear power needs a kick start after three decades of neglect. A study was conducted of the relative value of federal subsidies for various power sources4, and solar, wind, and refined coal received over 30 times the support of conventional fuels.

David T. Stevenson
Director, Center for Energy Competitiveness, Caesar Rodney Institute

Notes:
1- CRI study showed recent Delaware solar installation proposals had an effective total subsidy of $6/watt considering rebates, tax credits, and SREC’s. The average price of the proposals was $5.75/watt. US 2010 solar panel sales totaled about 1 billion watts of capacity.
2- Certain materials absorb light and release electrons using the photoelectric effect. Most of the solar arrays used today are made of semi-conductor, multi-crystalline silicon, encapsulated in durable materials. They only receive enough sunlight to work about 5 hours a day in mid-latitudes and only convert about 15% of the incoming sunlight to electricity. There are further efficiency losses using an inverter to convert from the direct current produced by the cells to alternating current used in our electrical grid.
3- The cost of installation labor, inverters, and other materials cost about $1.73/watt and it is unlikely those costs will come down. The lowest module cost predicted is $1/watt and solar panel gross margins have been 30%. ($1.73 + $1)/0.7=$3.90.
4- Federal Financial Interventions and Subsidies in Energy Markets 2007, US Energy Information Agency

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