Friday, March 22, 2013

Do We Need Subsidies for Solar and Wind Power?

At a time of intense debate over the federal budget, government subsidies for wind and solar power are more contentious than ever. The question of whether those subsidies are justified has taken on fresh urgency with the looming expiration of a major wind subsidy.

The federal tax credit for wind-power producers will expire at the end of this year unless Congress extends it. There is widespread agreement that pulling the plug on the subsidy at this point could hobble the wind-power industry. Meanwhile, the biggest federal subsidy for solar power, a tax credit for 30% of the cost of installed equipment, is set to drop to 10% at the end of 2016. A cash grant for up to 30% of solar equipment costs expired at the end of last year.

Proponents say wind and solar subsidies are needed for a few more years to allow these clean, renewable sources of energy to develop to the point where they can compete on price with electricity produced from coal and natural gas. But opponents of the subsidies say that they simply cost too much, and that the supposed benefits of wind and solar power are overstated.

Mark Muro, a senior fellow and the policy director at the Metropolitan Policy Program at the Brookings Institution, argues in favor of the subsidies. David Kreutzer, a research fellow in energy economics and climate change at the Heritage Foundation, presents the case against them.

Yes: They Are Doing Their Job

By Mark Muro

Federal subsidies for wind and solar power production are working. In fact, they're working so well that they don't need to continue much longer. But we do need to extend them for a few more years so that they can fulfill their purpose.

Mark Muro
Let's remember the point of these temporary subsidies: to help emerging clean-energy technologies gain toeholds in challenging markets and advance toward unsubsidized price-competitiveness.

The ultimate reward is cheaper, cleaner energy and greater energy diversity, which will help guard against price shocks, keep energy costs down through competition and lessen the damage our energy consumption does to the environment, among other things. The benefits are well worth the cost of temporarily extending these subsidies, which are a trivial portion of the federal budget.

Getting Close

Wind and solar need the help because the barriers for new technologies in the energy industry are tougher than those in any other industry in this country. Fossil fuels, with the help of their own government subsidies over the years, are thoroughly entrenched, with trillions of dollars' worth of infrastructure in place. At the same time, utilities tend to favor established business models and are required by regulators to provide the lowest-cost power, all of which steers them toward fossil fuels.

Against this background, providing temporary support for wind and solar technologies so they can gain the level of scale and efficiency necessary to compete is one of the few ways the nation can reasonably hope to promote energy diversity.

Is it working? The evidence is overwhelming that it is: Supported by subsidies but also by rapid technical advances, onshore wind and solar photovoltaic installations are way up, and the price of delivered renewable energy is way down.

Onshore wind power is on track to reach grid parity—the point where its cost equals the base-line price of power on the grid—starting in 2016, according to estimates from Bloomberg New Energy Finance, a research arm of Bloomberg LP. Solar photovoltaic energy will be largely cost-competitive at the residential level in California without the current subsidy by 2017 and in many other states shortly thereafter, according to Shayle Kann, a vice president at the GTM Research unit of Greentech Media Inc.

In sum, onshore wind is likely just a few years away from true subsidy independence, while several forms of solar aren't far beyond.

So Congress should finish the job it started by extending the present subsidies. But it shouldn't just extend them for a year or two and then stage yet another politicized, all-or-nothing confrontation when the next expiration dates near.

A New Kind of Extension

Instead, Congress should provide a predictable, continual prod toward innovation and cost reduction by extending the subsidies further than it usually does but at the same time establishing a cutoff date. For example, the subsidy for wind power could be renewed and then phased out over four years or so. Key members of Congress already are discussing this "extend but discipline" approach.

Meanwhile, to help wind and solar meet new subsidy-independence deadlines, more attention should be given to expanding the opportunities for private investment. Currently, solar and wind infrastructure can't be financed using master limited partnerships or real-estate investment trusts, two powerful tools. State governments also could pitch in by ratcheting up the requirements for utilities to generate a certain amount of their power from renewable sources. They could also dedicate some of the significant funds they manage through state energy offices to financing renewables, and establish clean-energy-finance banks.

It all starts, though, with a new approach to subsidies. When key wind and solar supports come up for renewal, Congress should extend them so it can then end them.

Mr. Muro is a senior fellow and the policy director at the Metropolitan Policy Program at the Brookings Institution, which is based in Washington, D.C. He can be reached at

No: The Benefits Are a Myth

By David Kreutzer

David Kreutzer
The problem with subsidizing wind and solar power is that subsidies don't make these unaffordable energy sources affordable, they just change who pays. Taxpayers foot a large part of the bill, instead of the producers and consumers of wind and solar power. And the costs that imposes on the economy aren't justified by any of the supposed benefits of these energy sources.

The argument that wind and solar energy are on the verge of being cost-effective is an old one, dating at least to the early 1990s. And yet we are still handing out subsidies that supposedly will push them over that line in just a few more years. It's time to stop. With a phaseout or not, extending subsidies is just more of the same.

Economic Myths

Numerous studies purport to show that energy subsidies will stimulate the economy by creating jobs. But these studies consistently ignore the fact that draining taxes out of the general economy to pay for those subsidies runs the broader job-creating mechanism in reverse. The net effect is to shrink the economy, not grow it.

Another myth is that we need subsidies to stay competitive with countries whose economies will increasingly be propelled by wind and solar energy. That argument needs to be written on a dry-erase board, because the country that is supposedly outcompeting us on this front keeps changing. That's because our competitors keep bailing out of their subsidy schemes. The purported European models, such as Spain and Germany, have drastically cut their subsidies, because they were unaffordable and unworkable.

The current name on the board is China. This is an economic role model? China's per capita income ranks 92nd in the world. Yes, China's economy has grown dramatically in recent decades, but only because they moved toward freer markets—that is, toward an economy a little more like ours. In any event, China's total carbon-dioxide emissions are skyrocketing. Whatever they may be doing with wind and solar power pales in comparison with what they are doing with coal-fired electricity.

No Need

A third myth asserts that these subsidies will save the planet. Broad agreement that man-made carbon-dioxide emissions warm the Earth doesn't mean we are headed to environmental catastrophe. Even the Intergovernmental Panel on Climate Change, for instance, projects a sea-level rise of about seven to 24 inches over the next century—not 20 feet. Recent trends argue more strongly for the lower end of that range.

There is nearly universal agreement that an all-out carbon-cutting policy in the U.S.—of which wind and solar subsidies are only a small part—would do next to nothing to moderate any global warming. This is because future carbon emissions will come overwhelmingly from the developing world, which shows little appetite for squeezing economic growth to cut a few inches from sea level.

Yet another myth is that we need subsidies to move us toward the energy of the future before we run out of fossil fuels.

Once again, the Malthusians are wrong. Thanks to technological advances in recent years, the world has centuries of untapped natural gas and coal at its disposal—much of it relatively cheap and right here in the U.S. It's simple: We don't need wind and solar to keep the lights on.

Surely some alternatives to fossil fuels will be developed, but they will only work if they are affordable. Wind and solar aren't, and that isn't changed by shifting the costs from consumers and producers to the taxpayers.

Bureaucrats and politicians shouldn't be the ones deciding which technologies are the most promising or what timeline is too long or what losses are too deep. The market will do a much better job of answering the question: Are wind and solar power really viable?

Let's get rid of the subsidies and find out.

Dr. Kreutzer is a research fellow in energy economics and climate change at the Heritage Foundation, which is based in Washington, D.C.


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