The Truth About Solar Subsidies

In a column for Bloomberg earlier this week, Nathan Myhrvold, former chief technology officer at Microsoft, wrote that renewable energy was being hindered by government support in the U.S. and around the world. In short, he believes we are pursuing technologies that are never going to compete with fossil fuels and should instead focus on a small number of promising technologies currently in the laboratory. Essentially, we should move the money from the field to the lab.

As the resident renewable Fool, I will periodically respond to such articles to help educate our readers about what the media have right and wrong about renewable energy. As is usually the case, Myhrvold's opinion comes from the viewpoint of another industry -- this time, technology -- not the oil industry that so often gets renewable energy wrong. Below, I clear up some assumptions that I feel Myhrvold was misguided on in relation to renewable energy.

Not all renewable energy is created equal
It's true that not all renewable energy is worth pursuing, especially with government support. At the risk of offending my Midwestern corn-farming neighbors, corn-based ethanol is not and will never be a viable energy alternative. I hate to make a broad generalization, but the same can be said for nearly all biofuels.

As Myhrvold points out, solar thermal is in the same boat as biofuels. There has been very little cost reduction in solar thermal, and as currently designed, I see little room for improvement on the scale that is necessary.

But wind, both on and offshore, and solar photovoltaics are viable fossil fuel alternatives that require more insight to understand than a few Energy Information Administration charts can show. Yes, they're currently more expensive on the surface, but as many analysts have done before him, Myhrvold glosses over some of the biggest advantages that renewable energy presents and makes assumptions that don't hold true in the energy industry.

The three things I will cover in this article is how solar is different from tech, how competitive renewable energy is today, and how subsidies actually help innovation.

Silicon vs. silicon
Where Myhrvold goes way off track is trying to fit renewable energy into an existing mold. In this case, he tried to equate renewable energy to the early days of tech and the electronics boom. This industry built itself without government help and cut costs quickly.

But where Myhrvold gets it wrong is that the solar industry can flourish without any subsidies the way electronics technology did. They simply aren't the same.

Electronics in the '70s and '80s had no feasible alternative for comparison. There was no "low cost alternative" to an early computer, except maybe an abacus. The electronics industry grew because it made people more productive. There was value even though it was expensive.

Solar and wind power do have alternatives, and they're entrenched both economically and politically in our energy industry. They're also selling power to utilities, which are monopolies that don't necessarily play by the same rules as a completely free market. One of the few ways to overcome this entrenched industry is to give an industry like solar and wind power an advantage to become cost-competitive.

Solar isn't competitive
I've dedicated numerous articles and thousands of words in an effort to explain how competitive solar power is. I've explained what costs really mean to solar buyers, how much power we can generate from solar, how reasonable feed-in tariff rates are, and how quickly costs are falling.

But the biggest thing analysts like Myhrvold overlook in analyzing simple charts like the one below is that solar should not be compared to coal or base-load natural gas costs. It should be compared to peak power rates, which are much higher than the average rate paid by ratepayers.


Source: U.S. Energy Information Administration.

A graph like the one above also doesn't consider how fast the cost of solar power is falling or the externalities of natural gas and coal on workers and the environment. When all of this is considered, renewable energy doesn't look nearly as expensive and in many cases is actually cheaper.

Subsidies stymie innovation
The idea that subsidies have stymied innovation in solar is almost laughable at this point if you know the history of solar. After the oil crises in the '70s and early '80s, there was a solar boom driven by subsidies. But between the mid-'80s and early 2000s, there were virtually no subsidies for solar power around the world, and as a result, there was next to nothing installed and no innovation. When Germany decided to support the solar market with a generous feed-in tariff, manufacturers like First Solar (NAS: FSLR) , Trina Solar (NYS: TSL) , and Yingli Green Energy (NYS: YGE) were born to fill the demand.

Innovations at companies like GT Advanced Technologies (NAS: GTAT) have also helped lower costs to the point we're at today, even though we're using some of the same technology that was developed in the '80s.

Manufacturers across the board are working to make modules not only cost-effective but more efficient. SunPower (NAS: SPWR) has exceeded 20% efficiency for modules, and while a 40% efficient cell in the lab looks attractive, until it can be mass produced in a cost-effective manner, it's just a talking point for researchers.

It's true that not all subsidies help
I don't want to suggest that all subsidies help. I've been critical of loan guarantees to manufacturers, but subsidies such as feed-in tariffs and loan guarantees to renewable power plants are helping both the wind and solar industries grow and fuel innovation.

Innovation is happening
If you don't think innovation is indeed happening in solar, look no further than the earnings reports of high-efficiency manufacturers such as SunPower versus lower efficiency manufacturers such as LDK Solar (NYS: LDK) and Renesola (NYS: SOL) to see how important efficiency and innovation are. Despite any subsidies China may be giving, the U.S.-based SunPower still led the other two in gross margin by a wide margin.

Innovation in renewable energy may not be happening as fast as the early days of the electronics boom, but to claim that subsidies aren't helping the industry is misguided, in my opinion. As costs continue to fall and efficiency continues to improve, subsidies will play a smaller but still important role in helping renewable energy pass fossil fuels as our main energy source.

At the time thisarticle was published Fool contributor Travis Hoium owns shares of First Solar and SunPower. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.The Motley Fool owns shares of First Solar. Motley Fool newsletter services have recommended buying shares of First Solar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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