Here's to the End of Energy Subsidies

Here is an interesting op-ed by Jigar Shah, the co-founder of SunEdison (which was bought my my company MEMC in 2009). Shah was an early pioneer in the utility and commercial scale solar market and, like most entrepreneurs and legendary visionaries, has a perceptive and enlightening personality. In the article, Shah argues that America benefits from China's support of it's solar cell and module manufacturers. I wholeheartedly agree!

For the record, America should not emulate nor envy China's mistaken policies of using government to promote certain industries. Industrial policy is a terrible idea and usually comes back to bite governments and their economies in the butt. China's industrial policy is unsustainable; their loose monetary policy and cheap debt has led to price inflation and civil unrest.

Mr. Shah also addresses energy subsidies in his op-ed and argues "[America needs] incentives to incubate new technologies to reach the scale necessary to reduce costs, we do not need to incentivize proven existing technologies."

I partially disagree with this statement because solar and wind are not "new". Both are proven technologies that have existed for decades and therefore should not receive federal subsidies or special tax treatment of any kind. Secondly, the federal government should quit subsidizing all forms of energy. Doing so would create a level playing field where energy technologies compete based on their inherent advantages (aka benefits) and disadvantages (aka costs).

If the government wanted to promote renewable energy deployment, it would be best implemented at the state level via renewable portfolio standards (RPS). Under RPS the state’s ratepayers who benefit from, for example, a large scale solar farm would see the costs and benefits of that solar farm reflected in their electricity rates, and hopefully the air they breath (although there are positive externalities since air does not adhere to artificially created state boundary lines).

Most governments promote alternative energies via feed-in-tariffs (FIT) subsidies, which, if not properly structured (an easy mistake since FIT are set by politicians/bureaucrats and not the market), can lead to unsustainable bubbles and inefficient costs for renewable electricity. Spain in 2008-2009 is a good example. The U.S. thankfully does not have a national FIT administered by the federal government. Unfortunately, we still have other energy (and non-energy) subsidies.

When the federal government involves itself in energy via FIT, investment tax credits and loan guarantees, then the taxpayers of all 50 states share in the associated costs and a disproportionate amount of the benefits. Why should taxpayers in the not-so-sunny state of Minnesota subsidize California’s alternative energy ambitions?

If you read my blog (you probably don't...nobody reads this thing) then you know I have my qualms about the federal government's one-size-fits-all/monopoly approach to governing. The federal government could do Americans a favor by ending all energy subsidies (and all other subsidies too) primarily because 1) it's not explicitly stated in the Constitution, and 2) they do a poor job executing on their strategy. State governments are better suited to pick up the slack by providing their own RPS incentives--if that’s what their constituents want.

Opponents to my anti-subsidy position may ask, “how will these technologies achieve scale and lower costs?” To that I answer: fossil fuels took off in the 19th and 20th centuries because consumers were excited about the new possibilities that were suddenly available to them thanks to fossil fuels and the internal combustion engine. The fundamentals surrounding fossil fuels enabled private investment to flow into the sector. Scale was achieved. Costs came down.

In the early 2000s, prices for fossil fuels began to rapidly increase as demand for fossil fuels exploded and supply stagnated. High energy prices, plus worries surrounding pollution and global warming, excited consumers about the prospects of alternative energy and energy efficiency. Sure enough, global investment began to flow into the alternative energy sector. Scale increased. Costs continue to fall.

Take for example Evergreen Solar's November 2000 IPO. This capital raise was, at the time, a highly successful event for the Company and their venture capital backers. Private investors took on Evergreen’s technology, execution and scale risk. Subsequent to the IPO, the state of Massachusetts offered Evergreen a low interest loan as an incentive for locating the Company's manufacturing plant in Marlborough, MA. Evergreen accepted and shortly thereafter, Massachusett's high labor costs hamstrung the Company and Evergreen eventually declared bankruptcy (but not before Evergreen's executive team desperately attempted to save the Company by raising more private capital and moving to China in 2010). Of course Evergreen's unconventional wafers didn't help their economic vitality.

Starting in 2000 and continuing to present day, private investors have taken on a great deal of alternative energy risk because the global consumer wants cleaner energy. Public entities have been less successful at creating sustainable alternative energy markets. Public entities can help deploy alternative technologies, but they should not repeat the mistakes of Massachusetts…oh wait they already did in 2009 when they gave a ~$530 million loan guarantee to risky Solyndra who, like Evergreen, attempted to manufacture in a high-wage region and also had an unconventional product. The point is that the U.S. is not a good place to manufacture low-tech products (e.g. solar cells and modules). Our workers have higher wages than Chinese workers because, on average, U.S. products and services add more value than Chinese products and services. Therefore, U.S. workers should focus on their competitive advantage, which include activities like: designing more efficient and less expensive solar technologies, installing/developing solar projects, etc, and does not include monotonous activities like solar cell and module manufacturing.

"Smart government" (translation: smart bureaucrats and smart politicians) needs to realize how difficult it is to subsidize the "right" solar company, or alternative energy technology. Let the market do that. And if citizens want to have cleaner energy, then state-level RPS standards seem like the best way to go.