Thursday, April 26, 2012

Solar Incentives

Proponents of solar power just can't wait for the day when solar energy will be competitive.

So they'd like to bring that day forward.  An ideal way to do this is to subsidize solar power.  Or is it?  Like most well-intentioned ideas, solar subsidies have unexpected consequences.  But one of those consequences is the stifling of improvement of solar technology.

People respond to incentives.  This is the great forgotten law of economics.  Solar subidies make people want to buy solar, because it artificially lowers the cost of solar.  But subsidies also harm the creation of new technologies, or improvements on old technologies, by de-incentivizing research and development.

Imagine you have a great idea for an improved solar technology.  If the true current cost of an installed solar watt is $5, then your technology need only cost less than $5 to be an improvement.  If you can hit $4/watt, then you're going to be rich.

But the subsidized cost per watt is $1.  Now, in order to be competitive you have to beat $1.  Of course, your technology is nowhere near that good yet.  And neither is anyone else's.

One might argue that the answer is to also subsidize solar research and development.  And indeed, this is being done.  However, when your goal is to generate additional grant funding rather than to compete in a real marketplace, you're unlikely to actually change the world.  This also places the government in the position of picking winners and losers - and the government has a very poor history as entrepreneur.

It all comes down to price signals.  When something is expensive (and in demand), it creates pressure to lower the price - ideally through innovation.  If you cut off that price signal, you remove the incentive to innovate.  Subsidies are a great way to cast today's technology into stone, making sure that it moves forward much more slowly than it would otherwise.