Published on October 4th, 2012 | by Jigar Shah8
Are Subsidies Holding Back U.S. Solar Deployment? (CleanTechnica Exclusive from Jigar Shah)
October 4th, 2012 by Jigar Shah
Editor’s note: While we here at CleanTechnica have focused on the ‘soft costs’ of solar making German much cheaper than U.S. solar, one of the world’s leading solar and climate change solutions entrepreneurs and investors, Jigar Shah, contends that the cost differences are actually largely due to another factor — high U.S. subsidies. Have a read and then let us know what you think.
By Jigar Shah
As the Founder of the largest solar services provider, SunEdison, I had a hand in putting in place subsidies so that we could reduce costs through scale in local markets. This strategy has resulted in an average system cost reduction of over 50% since 2008.
But today, solar subsidies in maturing markets like the United States are actually holding us back, not propelling us forward. In fact, Germany has hit an all time high for solar capacity with 30-gigawatts peak (GWp) of solar power installed. Germany has done this by installing solar at far cheaper prices than we are in the United States. That is because solar subsidies are manipulated by investors like me to maximize our returns. The truth is that installers in the United States can, and do, install solar at roughly the same cost as German installers – save for some increased soft costs. If we want to reach higher growth, we need to phase out the solar tax credits and other solar subsidies in mature markets and watch the price of solar fall.
The reasoning behind my strong stance is that, based on the cost of solar that I am personally investing in, solar is now cost-effective without subsidies for ideal customers in 300 utilities in 30 US states. Those 300 utilities account for about 20% of all of the electricity sold in the United States (using Energy Information Administration Form 861 data). Based on my experience, my thesis is that phasing out these subsidies will lead to 1) greater system cost reductions, 2) lower cost of money, and 3) greater standardization in the industry – all leading to a greater acceleration of solar PV deployment in the United States.
My conclusion is derived from the living laboratories of India, Germany, and the UK. While I was initially skeptical that the elimination of high subsidies would help lower the consumer price, my skepticism was abated through a clear review of the data. My initial feeling was that competition alone wasn’t enough to drive prices lower. But recently India, Germany, and the UK have drastically reduced their feed-in-tariffs and a curious thing happened – prices to investors came down. Most of the industry believed that this would lead to much less solar getting installed — in fact, the opposite occurred. Solar installations went up because the local solar industry cut prices to keep investors interested. While most folks would see how this might happen in a mature market like Germany that has a four-year head start, younger markets like the UK and India were also able to replicate the cost reductions. Today, the average large commercial solar installation in the UK is installed and sold to investors for less than $2/Wdc – same as Germany. In India, where the basic building block is a 5-MW utility scale project, the systems are installed in less than two months for about $1.70/Wdc.
In the United States, commercial solar prices are stuck stubbornly above $3/Wdc (although installation costs are very similar to Germany and the UK). The reason for these high prices is that for commercial companies able to install for $2/Wdc, the existing US subsidies are so rich that developers can charge more and still meet investor expectations. There is no incentive for commercial project developers (like SunEdison) to pass these savings onto investors as long as the investors are satisfied with the current returns they are receiving. Today, US solar subsidies need to be phased out so that we can complete the transition to grid parity.
Separately, solar in the United States suffers because it cannot access low-cost money, due to our reliance on federal tax credits. Even though low-risk certificates of deposit pay just 1.5%, and Canadian energy trusts just 4.75%, the US solar industry is paying in excess of 10% to investors. Why? Two words: tax equity. Most investors cannot use tax credits because of arcane passive investment laws passed in 1986 – where oil and gas are of course exempted. If the numbers work without those subsidies, why not just invest even if you can’t use the subsidies? The reason is basic human psychology — if the subsidies are available, people want to use them. If they can’t use them, investors would rather not invest then “leave money on the table.” This tax credit dilemma also prevents professional investors like Fidelity from offering the middle class investment products through which families could invest in solar in their communities.
Professional investors like Fidelity are also important because they drive standards. Today, some people estimate that 95% of solar sales efforts are wasted because they are chasing customers that are unfinanceable. Since most of these sales folks are paid on commission, they have no rational interest in wasting their time, but because of a lack of standards, they have not been given clear instructions on the ideal customer and the ideal terms of the contract.
In 2012, the solar industry will have over 100,000 employees installing over 3,000 megawatts of solar, attracting close to $12 billion in investment. The solar industry is not small. The solar industry now employs more people than the oil & gas pipeline industry, coal mining, and iron & steel manufacturing. By 2016, the last year of the 3o% federal investment tax credit, the US solar industry will be installing 4X the megawatts and employing 2X the number of people. This can only happen if we can find over $7 billion in tax equity – while the available tax equity market is around $5 billion. If we can phase out our federal tax credit from 30% to 10% by 2017, we could live below the $5 billion cap and continue our rapid growth rate.
Recently, Nancy Pfund and others made a passionate case that the federal government actually receives more benefits from the 30% federal investment tax credit over 20 years than it costs. This line of argument is as accurate as it is irrelevant. The US solar industry needs mainstream finance, lower costs, and greater standardization to reach 12,000 megawatts by 2016. Germany doesn’t install much cheaper than the US; they price less than we in the US because their subsidies have fallen faster than ours.
I get that fact that coal and gas are still subsidized and that solar shouldn’t phase out our subsidies until we have a level playing field. Everything is possible, but we need to create a roadmap to greater growth and face up to the realities of our industry. This is the largest wealth creation opportunity on the planet and it is about time that the US solar industry starts staying ahead of the game.
Jigar Shah, is CEO of Jigar Shah Consulting and a partner at Inerjys, a $1 billion fund that invests in clean energy via growth capital and project finance. Jigar is an entrepreneur and visionary committed to creating the next $10 trillion economy by unlocking capital markets that invest in proven technologies to achieve two goals: solving the biggest problems of our time and generating market-competitive, compelling financial returns for investors.
Jigar’s first foray into realizing this mission was the founding of SunEdison in 2003, today the world’s leading solar services company. SunEdison simplified solar by making it a service through the implementation of the power purchase agreement (PPA) business model. This groundbreaking model helped turn solar PV into a multi-billion dollar industry worldwide.
After successfully exiting SunEdison, Jigar served as the first CEO of the Carbon War Room, the global organization founded by Sir Richard Branson to harness the power of entrepreneurs to deploy proven climate change solution technologies at scale. Jigar’s leadership was instrumental in helping build the organization into one of global importance.