The Institute for Energy Research (IER) is not an objective organization. It has been described as a front group for the fossil fuel industry. Even if they were objective, this argument against solar is distorted and against free market principles.

Yes, it's true. Solar ITC is important to corporate investors. However, that credit does not work as many believe. Specifically, I'm guessing Mr. Trump may lack understanding of how environmental, energy and tax policies work together.

Let's begin with tax policies. It turns out; solar ITC's net cost to taxpayers is zero. It's less than zero. It's zero for two reasons. Companies claiming ITC must reduce their asset's tax basis by half the ITC's value (to 85%). Since solar qualifies for five-year ACRS, taxpayers retrieve half their ITC almost immediately.

Recovery from basis adjustment is half the story. Because of ACRS rules, after four years of operations, solar owners find they have almost zero tax deductions. Their largest expenses are land leases and interest payments. The lack of deductions is because depreciation expenses have been consumed and production costs are nil. At year five, solar farm owners jump to the maximum federal and state income tax brackets. Consequently, federal, state and local governments have a new tax base and new tax revenues, which are so large that they cover any remaining ITC payouts and more. Thus, if ITC stimulates new investment, taxpayers fully recover their ITC and earn additional tax revenues year after year for 20 years.

While the federal ITC may be an incentive, it's not enough for most businesses. If it were, solar would be deployed in all 50 states. It's not.

As evidence, consider North Carolina. This state has massive investments in business-owned solar farms. Compare North Carolina with Virginia, South Carolina, Georgia, Florida, and Mississippi. The differences are significant.

The reason ITC helpful but not sufficient is because of environmental policies. The primary incentives to build solar is provided by individual states. If a state declines to offer incentives, no solar will be deployed.

Solar's main driver is state environmental and energy policies. State's primary motivation is the Clean Air Act. Many states are non-compliant with National Ambient Air Quality Standards. Other states are in violation of cross-border pollution policies. In either case, non-compliant states cannot offer businesses new air permits. Without new permits, it's difficult for a state to grow their economy.

If mitigating pollution is not enough, states have other motivations. It turns out solar power will reduce states' electricity prices. Solar reduces the need to build new transmission lines across the state. Solar also reduces the need to construct more central power plants. Considering everything, some states find solar brings more winners than losers. Free markets win, consumers win, politicians win, local distribution utilities win, and businesses win. Generating utilities lose, coal miners lose, and rails lose.

Mr. Trump may find revoking solar tax credits has unforeseen consequences. Should he convince Congress to move in this direction, they may be surprised by bipartisan pushback from key states. Should Trump and Congress persevere, they may be forced to revoke coal credits, nuclear credits, and do away with all other energy development incentives.

Mr. Trump may have cross-threaded his goals. He wants to develop more energy from all sources. At the same time, he's advocating the removal of costless incentives that stymie energy development, business growth, tax bases, and new jobs. He should ignore any advice from IER. They appear to have an agenda.





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1 Comment so far

  1. FTR on November 7, 2016 11:44 pm

    “Solar reduces the need to build new transmission lines across the state.”

    Not really. There’s a few very isolated exceptions. By and large load in the south/west regions (ERCOT, CAISO) peaks around 5-7 PM in the summer; not high solar hours (12-20% CF expected) so solar isn’t useful for distributed peak shaving. Moreover, large scale solar facilities are located far from load which requires…transmission lines! It’s hard to build 200+ acre facilities near urban centers, which requires big transmission upgrades (e.g. CREZ in ERCOT/CAISO). The rooftop solar industry loves the transmission savings theory for why it deserves gooey subsidies even though the quantifiable benefit is essentially $0 in almost all cases.

    “Solar also reduces the need to construct more central power plants.”

    That’s not the case in any market that I’m aware of. Solar has minimal value for reserve margin purposes which ultimately drives capacity margins.

    “It turns out solar power will reduce states’ electricity prices.”

    Wholesale prices? Sure. Retail rates? Absolutely not. Fairly obvious why that’s the case (or one can ask why California has such high retail rates if solar actually reduced retail rates). You’re shifting compensation out of energy markets and into utility PPA’s, which “reduces wholesale prices” because you’re dumping zero marginal cost supply in, with the cost recovered out-of-market.

    “Free markets win”

    I can’t believe someone uttered “free market” and “solar” in the same sentence with a straight face. If solar made money in a free-ish market, energy traders (Mercuria/Glencore/Vitol…) would be going merchant long. They aren’t.


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