Many of the most successful companies in Silicon Valley can trace their origin to a garage, but for Ed Fenster, cofounder and chairman of Sunrun, it all started in the attic of his San Francisco home. The year was 2007 and Fenster, just a few months shy of graduating with a master’s in business from Stanford, had a revolutionary business idea. He wanted to make solar panels cheap enough to allow anyone to install them on their home, by leasing them to customers rather than selling them outright.
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“Solar as a service” is a business model that today dominates the industry. Now the largest residential solar company in the United States, Sunrun is a quintessential Silicon Valley success story. But when Fenster founded it with two of his classmates, nobody thought it would work. Solar panels were expensive and inefficient. In fact, in 2007 there were only 8,775 megawatts of solar energy on the US grid—less than one-tenth of 1 percent of America’s electricity supply. But Congress had just passed a bill that gave Sunrun a chance: It allowed businesses and individuals to deduct 30 percent of the cost of installing new solar panels from their taxes. The tax credit became essential to helping the company attract investors, says Fenster.
"If you want to encourage people to make the big investments like they did in Sunrun beginning in 2007, you need these long-term stable policies to encourage that,” Fenster says.
Hailed as a huge success, Congress extended the credit for another eight years. Now, however, the solar industry’s tax break may be coming to an end. Starting late this year, the value of the subsidy will fall for three years until it ends for residential solar and permanently drops to 10 percent for commercial solar. In late July, a bipartisan trio of representatives and one Democratic senator brought the Renewable Energy Extension Act to Congress, which would keep the tax credit at 30 percent for another five years. Its fate is not assured.
“The impact of the tax policy on our industry has been incredibly consequential,” says Abigail Ross, the CEO of the Solar Energy Industry Association. She cited a 10,000 percent increase in solar capacity, nearly a quarter-million new jobs, and $140 billion in investment as evidence of the subsidy’s effect.
In July, more than 1,000 solar companies signed a letter in support of the bill. Previous extensions of the subsidy received broad bipartisan support, but few presidential administrations have been as antagonistic to clean energy as the Trump White House, which makes its extension far from certain.
There is little doubt that the solar investment tax credit has done wonders to get America’s solar industry off the ground. But some experts now argue that this subsidy is not the most effective way to reduce greenhouse gas emissions and fight climate change—arguably the main reason for investing in renewable energy in the first place.
Another option is something called a production tax credit, which gives money back based on how much energy gets produced, as opposed to how much money gets invested. Wind energy companies have relied on this kind of subsidy since 1992. They receive 2.4 cents per kilowatt-hour of energy produced during the first 10 years that a wind farm is in operation. For the most part, it worked—wind now accounts for 8 percent of American’s electricity generation.
Shortly after the 2008 recession, however, wind companies ran into trouble. New projects require a lot of money up front, and investors grew scarce. So from 2009 to 2012, the government gave wind companies a choice between a production tax credit and an investment tax credit. They could get either a cash payout equal to 30 percent of the cost of the wind facility or a credit based on the amount of energy they produced for the next decade.
It was the first time in history that the US government allowed companies to choose what kind of subsidy they wanted. It was also a rare opportunity to study one subsidy versus the other in a real-world scenario. Last year, Todd Gerarden, an economist at Cornell University, coauthored a paper for the National Bureau of Economic Research which showed that, on average, subsidizing wind energy production, rather than investment in wind farms, tended to be more cost-effective for the government and produced more electricity. By extension, this means production credits are more likely to reduce carbon emissions from coal and natural gas plants.
The reason for this, Gerarden says, is that wind farms operating on a production subsidy are incentivized to produce as much energy as possible. To the extent that the amount of electricity produced by wind farms reduces the amount of electricity produced by fossil fuels, production tax credits are therefore more effective at reducing pollution. Although Gerarden and his colleagues focused on wind energy in their research, he says the same logic could apply to solar energy.
Fenster says there is still good reason to support an investment tax credit for solar energy rather than a production credit. More investors are attracted to an investment tax credit because they can see its payout the same year a solar facility is built, rather than over 10 years. Given that solar energy still represents only 3 percent of the United States’ energy production, Fenster sees investment tax credits as the more effective route.
“The real reason you’d want to extend the tax credit is we know we need more of this type of energy,” Fenster says. “It’s economics 101: If you want more of something, make it cheaper.”
But if the goal is to reduce greenhouse gas emissions, Gerarden says that subsidizing renewables is only the “second best” option. Far better, he says, to place a carbon tax on coal and gas plants. It would nudge energy producers to implement technologies like carbon capture, as well as invest in more wind, solar, nuclear, and hydropower.
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That’s exactly what the wind industry is now pushing for. Its production tax credit is also winding down starting this year. Instead of campaigning for its renewal, the American Wind Energy Association is advocating for carbon tax credits as well as subsidies that support offshore wind farms and wind energy storage technologies. The problem, of course, is that taxing pollution from nonrenewable energy is an incredibly divisive political issue. It involves overcoming entrenched political support for the fossil fuel industries as well also accurately assessing just how much that tax should be, a far from trivial calculation.
So lacking political support for a carbon tax—Washington state’s failed attempt to implement one last year was the most recent test—climate-minded politicians are left to champion the same old indirect ways of curbing emissions.
In June, Nevada senator Catherine Cortez Masto wrote a letter urging her fellow senators to support an extension of the solar investment tax credit. Cortez Masto highlighted its importance to supporting 240,000 solar jobs and its role in fueling the solar industry’s ongoing growth. But most importantly, she pointed out that it’s the only major federal policy supporting the deployment of renewable energy.
“In the absence of any other national policy or program to deliver carbon reductions that are essential to making progress on climate change, we must continue the tax incentive policies that constitute … the single most effective tool our nation has had for investing in renewables,” Cortez Masto wrote.
The solar investment tax credit may not be the best way to reduce greenhouse gas emissions, but it’s better than no policy at all—which is what we’ll have if it’s not extended.