Why Shouldn't We Subsidize Solar Power?

You don't have to be an energy policy wonk to know that the past few months have been unkind to solar companies, as they struggle to compete against mature energy entities, cheap imports and one another. Since the infamous bankruptcy of Solyndra last summer, going down with over a half-billion dollars in government loan guarantees in its maw, solar has been characterized by many as unworthy of subsidies. If solar can't make it on its own, the thinking goes, then let it fail. But why should solar be left to twist in the wind when other energy industries have enjoyed robust subsidization, even to this day?

Industry subsidies are as American as apple pie
We all know that certain industries, as a matter of public policy, have been given a leg up via U.S. government intervention. For example, the railroads were given the land upon which train tracks were laid, and tax money built the highways and byways that allowed the automobile industry to market their products. Energy is no different. A report from the Texas State Comptroller's office lists some of the biggies: tax incentives for the oil industry dating back to 1916, government financing for hydroelectric dams in the 1930s, and many subsidies for nuclear power, beginning in the 1950s.

A pie chart in the report shows that, in 2006, the federal government allocated $13.6 billion in subsidy money in the following percentages to these specific energy industries: 25.7% to oil and gas, 20.2% for coal, a whopping 34.6% for ethanol, 8.7% to nuclear, and a pittance to solar -- 2.8%. According to the U.S. Energy Information Administration, the percentages attributed to each energy source used that year were 62.2% oil and gas; 22.6% coal; 8.2% nuclear energy; and 6.8% total renewables, from which solar was not teased out.

This is not the end of the story, either. The conventional wisdom goes that subsidies should be the greatest during the first 15 years of an industry's life, when the need is the greatest. However, research shows that government support of nuclear, oil, and gas per year was much higher during those industries' lifetimes than it ever was for renewables' first 15 years: $4.86 billion for oil and gas and $3.50 billion for nuclear, compared with $0.37 billion for renewable energy.

What about the loan guarantees?
Now that we are clear on the subsidy issue, it's time to take a look at the loan guarantee program, the same one that guaranteed the Solyndra loan. The reason for the program's existence is simple enough: to help nurse new, innovative businesses through the difficult first few years so that they can survive and contribute to society. For energy companies, the compelling reasons to encourage and nurture any new source of power are clear. For renewable energy, whereby power may be obtained or harnessed without drilling and fracking, the support of the program seems a virtual no-brainer.

So, has this fund been depleted due to bad loans made to the likes of Solyndra? To the contrary, a report released earlier this year by a team of independent investigators led by John McCain's former finance chairman found that the fund will actually cost less than originally thought -- $2 billion less, in fact. This is because the auditors looked at the fund in its entirety, not just specific loans. Overall, the loan portfolio was managed so well that the Solyndra loan had little impact on the health of the fund itself.

Tax breaks are subsidies, too
The tax breaks and deductions that the fossil fuel industry enjoy are a form of subsidy, as well. Last spring, a bill to close these loopholes for the oil and gas industries failed to pass Congress; if it had, it would have netted the federal government an additional $21 billion in tax revenue over 10 years. To illustrate how well these subsidies work, I took a gander at the website of Bernie Sanders, U.S. Senator from Vermont. According to Sanders' well-documented findings, ExxonMobil (NYSE: XOM  ) paid nothing in federal income taxes on $19 billion in income from 2009, plus received a $156 million rebate.  For Exxon, which has the distinction of being the second-largest domestic company listed on the stock market, this kind of public support hardly seems necessary. Similarly, Chevron (NYSE: CVX  ) received a check from Uncle Sam for $19 million after making $10 billion in 2009. Chevron is the fifth-largest company on the exchange, and the third on the list of the Fortune 500.

On the nuclear side of things, Southern Company (NYSE: SO  ) was recently awarded a federal loan guarantee to the tune of $8.33 billion for the construction of two new nuclear reactors in Georgia. As MarketWatch.com states, private investment was nil due to the expense and risk inherent in the project. Kind of makes Solyndra's $500 million look insignificant, doesn't it?

Meanwhile, First Solar (Nasdaq: FSLR  ) , once the darling of solar investors, has lost 85% of its stock value over the past year, the victim of expiring subsidies here at home and in Europe -- as well as of the falling price of silicon, against which its thin-film product can no longer compete. The company recently announced a restructuring and the layoff of 2,000 workers as well as the closing of a plant in Germany.  I can't help but wonder whether this situation could have been avoided if it, and other solar companies like it, had access to the same levels of subsidies bestowed upon the more mature energy sectors.

Unfortunately, a new study from the Brookings Institution notes that clean tech subsidies, which include solar, are on the decline -- and may nearly disappear within two years if the government doesn't step in. Though Congress obviously does not have the stomach to end or reduce subsidies to entrenched energy sectors, it seems unwilling to sponsor and support new ideas in the same manner. If this mind-set fails to change, chances are slim that solar will shine as it did just a few short years ago.

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Fool contributor Amanda Alix owns no shares in the companies mentioned above. Motley Fool newsletter services have recommended buying shares of Chevron, First Solar, Southern, and ExxonMobil. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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  • Report this Comment On April 23, 2012, at 12:50 PM, FlatRockStan wrote:

    Sanders' findings on XOM income taxes are 'well-documented'?? Bernie did not understand that SEC 10-K form does NOT reflect actual taxes paid (he's a politican). See http://www.forbes.com/sites/energysource/2010/04/07/exxon-sa...

  • Report this Comment On April 23, 2012, at 1:22 PM, sailrick wrote:

    Direct subsidies to fossil fuels are the tip of the (melting) iceberg

    total $594 billion for fossil fuels 1950-2010

    total $74 billion for renewables

    total $73 billion for nuclear

    total $7 billion for geothermal

    total $90 billion for hydro

    "Obviously fossil fuels have gotten the bulk of government help --

    70 percent to renewables' 10 percent"

    The first and greatest indirect subsidy is the tab that the public picks up for the external costs fossil fuels impose"

    (which includes a big part of the estimated $3 trillion cost of the Iraq and Afghanistan wars

    The second big indirect subsidy is to demand for fossil fuels, which has been locked in by a century's worth of massive and ongoing infrastructure spending.

    {from Grist}

    Oil has been subsidized since 1918

    Coal has been subsidized since 1932

    -------------

    subsidies for renewables?

    What do you think subsidies are for? They are for helping new technology and new industries get a head start in their early difficult growing stage.

    We have used them for all kinds of industries to help them get started, or to accomplish a public good like rural electrification of the country, the Internet, bitotech, railroads, and many many more. all have gotten subsidies.

    The question is why is the fossil fuel industry getting subsidies they DONT NEEED?

    They are mature industries, not emerging industries.

    The oil industry has the biggest profits of any industry in history.

    And they need subsidies??

    Why?

  • Report this Comment On April 23, 2012, at 1:23 PM, sailrick wrote:

    87% of government clean energy loans are very low risk.

    Most are actually for energy projects, not manufacturing.

    If you build the projects, which are a sure thing, because utilities pay for them, or have agreed to pay for the energy from them,, the demand for the manufactured products will be there.

    So most of this has nothing to do with "picking winners".

  • Report this Comment On April 23, 2012, at 1:48 PM, fearandgreed2005 wrote:

    The reason not to subsidize solar energy is that it is a big loser. I did my masters in solar. The sun only puts out 1000 W/m2 when it's bright and sunny. The theoretical limit for the efficiency of silicon solar cells is <30% and that's when they are not sitting in the sun and getting hot. After all the conversion losses, silicon solar cells will get you 100 watts for every square meter of collection area in bright sunlight. That stinks.

    You get zero when it's night or cloudy. That means you need some other power plant to fill the gap so you still need to build the other power plants.

    If you're going to subsidize energy, put the money into something that has a chance. Solar and wind are big losers that are just a sinkhole for tax dollars because they make people feel good.

  • Report this Comment On April 23, 2012, at 8:20 PM, jerryguru69 wrote:

    Wait a second. FSLR is firing 2,000 employees, because there is way too much manufacturing capacity in the industry. How will pumping more $$$ into the industry help? By building yet more manufacturing capacity?

    Solyndra was involved with an innovative thin-film cylindrical modules (copper indium gallium diselenide) and FSLR is using cadmium telluride thin film, both technologically superior (I think) to standard polysilicone modules, but this does not seem to be much of an advantage for either company.

  • Report this Comment On April 23, 2012, at 10:54 PM, CaptainWidget wrote:

    A) No energy company should receive subsidies.

    B) Solar is the LAST energy idea that should receive subsidies.

    Oil and coal have very powerful lobbies, and do receive a lot of handouts. But they don't need it. Oil and coal would be economical with zero market intervention. Nuclear, solar, and wind also have powerful lobbies and receive lots of handouts. The difference is that without direct interference in the market, they would not exist. Period. They are economically unfeasible.

    Diverting resources away from productive means and into unproductive means REDUCES the total amount of resources. As in, subsidizing solar is KILLING the planet quicker than NOT subsidizing it. If you want to make an environmental argument, the argument should center on wasting the least amount of natural resources on things that produce no net benefit for humanity.

  • Report this Comment On April 25, 2012, at 10:15 AM, OCMAN08 wrote:

    The difference the writer fails to note is that in the case of Solar the government is acting as a venture capitalist. Subsidies to more proven energy producers are much less risky.

    I don't think it's appropriate for the government to make large loans to supporters of politicians currently in office.

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