How We Can Improve Government Policies to Drive Innovation and Investment

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The anti-clean-energy echo chamber has been publicizing the bankruptcy of Solyndra, a manufacturer of solar energy panels, arguing that the President’s clean energy job creation program is ineffective. But most of this criticism is just political posturing and not really trying to learn from these failures, which importantly have not prevented solar energy from growing dramatically while reducing costs.

One direct source of the problem is that China has succeeded in reducing the cost of manufacturing first-generation solar panels to such an extent that many companies around the world cannot compete. Notwithstanding this success, most American solar companies remain ahead of their overseas competition, as I illustrate below.

The  issue of American industry remaining competitive with China is, of course, not unique to clean energy: many American producers are challenged to keep up with Chinese competition.  But with solar, the Chinese government has been particularly effective in developing an industrial policy that provides Chinese manufacturers with a number of advantages in the global solar industry, including access to lower cost capital, subsidized electricity rates, free access to land, cheaper labor, domestic manufacturing requirements, and a much shortened permitting process for factories.  

America, in contrast, has generally avoided industrial policy. Opponents of industrial policy argue that the market can pick winners better than government can, and I believe that this principle is generally correct, but I also think that innovation needs government support.  The lesson from China is not to tremble and retreat in the face of its challenges.  We are a great country of innovators and we need to support that. 

While we at NRDC would not support the Chinese approach to industrial policy, nor would its approach work in America, there are certain smart policy approaches we can use that leverage America’s strengths in private sector innovation, investment, and job growth.  We would do well to focus on the success stories in our domestic solar industry, which include American companies like: First Solar, which are producing next- generation solar panels cheaper than their Chinese competitors;  SolarCity, which is using an innovative business model to bring hundreds of megawatts of solar to military bases; and Amonix, which is developing innovative high concentration solar photovoltaic (HCPV) technologies. These are only a few of many examples of success in the made-in-America solar industry.

Such vigorous competitive forces are good for the consumer. They bring prices of solar—and other clean energy and energy efficiency investments—down over time while product quality improves.

However, when developing policies to support emerging industries, the details are critical. So some closer examination of the issue of government support for clean energy can be helpful. One existing challenge with energy incentives for maturing technologies occurs when they don’t reward production, but rather focus on cost.

Cost-based incentives are employed by lots of governments around the world, probably because they are so simple to administer. This can make some sense for very early stage energy technology companies, which pose a real risk of not performing and thus are much more likely to receive financing when incentives are tied to cost instead of production.  But solar energy has been in existence for decades, and no longer falls into this category: the challenge for solar is to ramp up production and cut costs through greater deployment. As technologies mature, we should promote best-in-class products, and incentivize improved performance.

 An example of how not to do it is the 1978 federal tax incentives for both efficiency and renewable energy, which were found to have cost billions of dollars but had minimal effect in improving efficiency beyond what was already occurring. This failure is not surprising: if the incentive encourages people to spend money on solar (or efficiency), they may spend more but they may not produce more power (or savings). Incidentally, the last sentence is a paraphrase of the remarks that Congressman Phil Crane, one of the most conservative Republican members of the House, made to me when he decided to co-sponsor a bill on which NRDC had worked that provided performance-based incentives for solar and efficiency.

But unfortunately, when Congress adopted solar incentives in 2005, they chose (over the recommendations of the industry as well as NRDC) to create cost-based incentives. These could well have been a major contributor to the imperfect results of the incentives. So if there is political blame, those responsible are both Republicans and Democrats.

When I say that the results are imperfect, this is because on one hand, some big companies did not succeed, but on the other, since 2005, total solar capacity has grown over 45% every single year.  Last year the amount of solar installed in America doubled from the previous year, and growth hasn't slowed even in a tough economy.  Meanwhile, the cost for solar power continues to fall at an incredible pace.  According to the Lawrence Berkeley National Laboratory, the price of solar installation dropped 17% from 2009 to 2010, and another 11% in the first half of 2011. Perhaps this generally favorable outcome is due to the fact that some large states structured additional non-federal incentives into their solar programs and effectively overrode the cost basis of the incentives for installations in their states.

The failure of a few solar companies has to be placed in the context of the explosive overall growth of this sector of the clean energy industry. The right response to these few failures and to general fiscal concerns is not retreat from innovation and healthy competition with China; the right response is to make sure we’re using the right policies for the right stages of technology development and generally have a much greater emphasis on performance-based policies. 

NRDC believes that government support for emerging technologies in clean energy plays a critical role in advancing innovation and bringing the costs of these innovations down (that ultimately benefit consumers), and that the long-term effects repay the Treasury hundreds of dollars for each dollar spent on incentives. But the structure of incentives must be compatible with market forces: incentives for commercialized technologies—including most of the solar market—must be based on performance, not cost. And it is important to track what works, and recreate or expand successes while avoiding a repeat of failures.