Thoughts on Thomas Friedman’s Sept 15th Op-Ed on Solar Investment

In a September 15^th NY Time op-ed piece, Thomas Friedman makes that case that innovative solar technology is invented in the US, but only finds manufacturing customers overseas, primarily in China and Germany. 

Applied Materials, he writes, is a US company that makes the machinery that produces microchips and another silicon product: solar panels.  All 14 solar panels factories built by Applied Materials in the past two years were constructed in Europe, Asia, and “…even Abu Dhabi.”   Revenues in the last 12 months alone were $1.3 billion.

Mr. Friedman argues that Germany, for example, generates nearly 50% of the world’s solar power and in doing so is a world leader in “…solar research, engineering, manufacturing, and installations” that generated 50,000 new solar industry jobs.  I would add that US solar, by contrast, has yet to equal the kWh output of ONE typical coal-fired power plant.

He goes on to point out that Germany succeeds by allowing any business or homeowner to sell solar power to their local utility at a viable price and with reasonable access to the electric power grid.  In contrast, US solar relies on a fragmented and complex set of subsidies and incentives, many of which vary from state to state.  Ironically, he writes “…our federal and state subsidies for installing solar systems are largely paying for the cost of importing solar panels made in China, by Chinese workers, using hi-tech manufacturing equipment invented in America.”

To summarize, US financial markets favor investment in technology innovation, but do not fuel implementation of the technology.  I would add that public policy and private investment favor investment in start-ups over construction of renewable power generation plants.  Many in the solar industry believe that while innovation is always welcome, existing technology is sufficient to power US electric consumption many times over.

Financial complexity is very important factor in the rate at which the US adopts solar energy.  The technology is simple, but the money side is not.  For the most part, solar finance consists of either an all cash investment or a complicated deal where investors “exchange” project funding for access to tax credits and subsidies plus a lion’s share of revenues and incentives.  The new two-year program of 30% cash grants administered by the US Department of Energy has given rise to other equally complex finance models.

Banks are the primary source of tax-based financing.  As such, there may be an upper limit on the market for complex tax subsidies deals, especially in a recession. If so, this limits the number of potential installations and may shut new developers out of the commercial solar market.

US domestic policy has long favored tax subsidies and tax credits as a means of encouraging investment in new ideas and specific industries.  This is not new.  Oil, coal, nuclear power, and even breakfast cereal receive subsidies and/or incentives at some point in the value chain.  The best state programs tap ratepayer funds to provide cash incentives.  Each subsidy and incentive has its own set of standards and conditions.

Combining state, local, and federal programs adds another layer of complexity.  In many states, solar finance requires five separate programs (plus a construction loan on larger projects) to fund a solar facility.  Securing and managing five sources of funding is daunting and serves as a barrier to entry. 

Only major changes policy and finance will enable us to achieve widespread adoption of solar power.  Why not replace the myriad of taxpayer subsidies and ratepayer incentives with a single, simple, and accessible program that enables everyone - from homeowners to commercial solar developers - to own and operate a viable solar power system.  Whether we hide the costs in tax subsidies and incentives or pay a premium price per kilowatt-hour for renewable energy, the cost is essentially the same, and probably less without the layers of program costs.

Like health care reform, the challenge to greatly expand renewable energy requires that we interfere with current patterns of policy and finance.  Like health care reform, there will be significant opposition.