The Earth is blessed with a limitless source of free energy ― the sun ― that is accessible to everyone. By harnessing solar electricity, we help create a more environmentally friendly solution to our planet’s ever-growing appetite for power.
However, solar power generating systems are not accessible to everyone. Our current national policy incentivizes solar installations by granting tax credits based solely on the initial cost of the system. There are many problems with this policy.
First, it works only for a small group of people or corporations with an appetite for lowering their tax burden. Second, the tax credit rises, in dollars, with the purchase price of the system ― a bizarre incentive for a policy designed to make solar energy more affordable. But worst of all, this system disrupts market forces that would otherwise ensure the continuous improvement of solar technologies over time.
A Closer Look at US Solar Policy
Through 2016, the U.S. offers people who install solar power a 30 percent federal tax credit on the cost of their systems. Many states offer an additional tax credit, and some buyers can take advantage of both. Consequently, the U.S. entities most likely to install solar power are utilities, regulatory bodies and corporations that install massive systems and reap enormous tax benefits.
Unfortunately, the current tax incentives pay no attention to system performance, longevity or solar power production over time. Because of this, we’re being outpaced by other nations ― and our solar market is actually experiencing unhealthy growth.
Tax credits can be helpful, but the current model ignores the fundamentals of the energy industry and does nothing to help consumers analyze crucial questions of value. Is the solar installation a good long-term investment, delivering a reliable supply of power for two decades or longer? What is the value of the investment over time, both in money and power generated?
Under the current incentive system, solar power adopters and investors need to be savvy to avoid the pitfalls of second-rate technology from unproven suppliers. Rising demand for solar energy has recently brought hundreds of start-up manufacturers into the market, mainly from China, and most without long-term field testing. Yet buyers receive the same tax credit for installing one of those systems ― even if it lasts only a few years ― as they would get from a field-tested solution that operates reliably for decades. Why should U.S. tax credits subsidize the former?
FIT for Solar
An alternative approach is being used successfully in more than 75 countries, states and provinces around the world. Instead of rewarding higher purchase prices, it rewards people in direct proportion to the amount of solar power they generate. This creates stronger demand for solar energy products that truly deliver ― those that generate the most electricity, at the lowest cost, for the longest period of time.
This kind of policy is known as a Feed-in-Tariff (FIT). It essentially represents a contract between the government or utility and the solar system owner. The FIT pays a set price per kilowatt hour produced over an average 20-year term. Consequently, FIT incentives reward better solar technologies and more reliable solar power products.
A FIT makes the investment more attractive to both consumers and lenders, who see an opportunity to earn money based on the amount of renewable power they generate – not on their system’s cost. This also compels manufacturers continuously to provide higher performing, more reliable products.
Success Around the Globe
With an effective FIT policy, everyone wins ― citizens, governments, utilities and the environment. In FIT-driven markets such as Germany, the world’s leading adopter of photovoltaic power, up to 80 percent of solar projects are installed on home rooftops which generate energy for the local community and individual homeowners. Natural economic forces thrive, as underperforming products get squeezed out of the solar energy market and replaced by better performing, more reliable competitors.
In examining this, it is clear that any effective incentive to adopt renewable energy must reward performance instead of investment.
The good news is that the U.S. has developed some successful performance-based initiatives of our own. The California Solar Initiative rewarded early adopters with the highest price per kilowatt hour over a sliding scale during the life of the program. This proven, performance-based model also included budget safeguards for the state of California. So why isn’t our federal government following this model?
If we’re serious about alternative energy, we should investigate the best practices for rewarding solar performance ― and stop trying to encourage solar energy investment through tax credits.
Solar energy offers incredible promise that we can help fulfill by incentivizing performance. By its very nature, FIT policy removes incentives from solar products that fail, and rewards those that succeed. It’s as simple as that.
Tom Dyer retired recently as Senior Vice President of Government Affairs at Kyocera Solar, Inc. of Scottsdale, Ariz., and plans to extend his 40-year career in solar energy as a consultant.