My title is taken from the subtitle of a story in the Arizona Republic, the headline is: “Solar supporters link future to subsidies.”
The “solar supporters” and “industry advocates” referred to are the Solar Energy Industries Association and the American Wind Energy Association, both actively lobbying Congress for extension of the so-called 1603 grants that were part of the 2009 stimulus bill. The main point of the story is, however, that the renewable power industry in Arizona doesn’t much care about the extension.
National advocates for wind and solar power contend that if their federal subsidies aren’t extended in Congress’ tax package, tens of thousands of U.S. jobs will be lost as renewable-energy projects slow down.
But the assertion seems at odds with news from Arizona, where two new solar-power plants were announced last week, one new plant broke ground and several others are planned – all without the expectation that the subsidies will be extended.
Be careful in leaping to conclusions here. What the article means is that the plants are planned “without the expectation that the [1603 grant] subsidies will be extended,” but it looks like the plants are planned with the expectation that production tax credit subsidies (PTC) will be available. In addition, the Arizona Corporation Commission has directed the regulated utilities in the state to build renewable power and bill ratepayers for it; most of the projects mentioned are to be owned or sponsored by regulated Arizona utilities, funded by captive ratepayers. It isn’t as if these projects will be entering the world naked before the market. (The Goldwater Institute has been trying to get courts to strike the Arizona Corporation Commission’s renewable power program, so far unsuccessfully)
But the “1603 subsidy vs. PTC subsidy” question is interesting. The 1603 subsidy acts like a one-time lump sum subsidy, while the PTC is a per-unit of production subsidy. Per-unit subsidies are generally considered to be more distortionary (that is to say, more costly or leading to more waste). One way this manifests itself in power markets is in more frequent negative prices when high wind power output is up against transmission limits, low load conditions and relatively inflexible baseload power plants. The (private) marginal cost of operating a wind power plant is very low once the power plant is built, but it is positive. Wind power plants built with 1603 subsidies will be more likely to bid this positive marginal cost into power markets (unlike PTC-subsidized plants preference for negative price bids), leading to more efficient market outcomes.
On the other hand, a PTC does have the nice feature of rewarding subsidized developers who build in areas of good resource supply. The better the actual production from wind or solar projects, the better the subsidy payoff. The 1603 subsidy is a grant based upon the size of the investment. Subsidizing inputs rather than outputs seems like an invitation to waste.
(If the PTC subsidy at the margin was related to the approximate marginal net positive externalities from renewable power production, then it would improve rather than distort market outcomes. However, there is little reason to believe the PTC subsidy is at all correlated to marginal benefits. In fact, the question of whether or not renewable power yields net social benefits remains contested.)
In any case, industry doesn’t seem too concerned about the form of the subsidy. Maybe it cared last year when financial markets dried up and the tax-subsidy-financing opportunities gone with it, but financing is available again and the industry is moving on. The only jobs threatened by lack of Congressional-responsiveness to lobbyists’ demands may be those of the lobbyists themselves.
I’m not so worried about them, however. Government is growing so fast these days that opportunities for experienced lobbyists are manifold.