On Friday, Congress agreed to extend, for several years, a suite of tax credit subsidies designed to support the development of U.S. renewables projects. Given the current political climate in Washington, D.C., this was a big win for the renewable energy sector. Over the past few years the roles played by wind and solar in meeting our electricity needs has been growing rapidly. Combined, they now supply approximately 5 percent of all electricity, and they now account for 60 percent of investment in new generation capacity. Nevertheless, both technologies still rely on these subsidies—heavily in the case of residential solar—to buttress their competitiveness. The extension of the subsidies has provided the breathing space needed to reduce costs further, something that is absolutely necessary if a low-carbon electricity system is to be realized.

While important to welcome this subsidy extension, the nature of the extension means a big opportunity to do subsidies better, particularly for solar, has been missed. The reason for this lies with the fact that the current solar subsidy takes the form of an investment tax credit (ITC) and so is directly proportional to system capital costs. Higher-cost facilities get a higher subsidy. So why does this matter? It matters because solar facilities come in different scales—from residential rooftop units to ground-mounted utility-scale solar farms—and these come at very different costs per unit of generation capacity. Today’s utility-scale facilities cost less than half what rooftop units do per unit of generating capacity. This means that for the same investment (in the same location), you get twice the amount of solar power generated from the utility-scale as from the residential-scale, or put another way, under the ITC paradigm the taxpayer pays twice as much for a unit of solar power generated by a residential rooftop system than for the same unit from a lower-cost utility-scale solar facility.

Many argue that the distributed nature of residential-scale solar generation provides advantages relative to the utility-scale approach, and this is correct. However, the nature and scale of these benefits depend hugely on the specifics of the power system and where the distributed assets are located. An unsophisticated subsidy mechanism like the ITC is not an appropriate or efficient way of compensating for these benefits. Federal solar deployment support should be focused on growing clean carbon-free electricity generation in a manner that is as efficient as possible for the taxpayer. Providing a greater subsidy for a unit of solar electricity generated by a rooftop system versus a utility-scale system, as today’s ITC does, fails entirely to fulfill this objective, and this week’s extension of the ITC just means this inefficiency will continue for the foreseeable future.

So, given the ITC’s weaknesses, what should be done instead? Put simply, we should support solar power with a direct subsidy for generation. In this way, the playing field is leveled. Solar power, regardless of whether it comes from rooftop or utility-scale systems, or anything in between, would receive the same support. Any ancillary benefits provided by distributed units should to be compensated for through the tariff structure. Interestingly, federal support for wind generation is already structured in this manner via the wind production tax credit (PTC). Certainly, the wind PTC has its own issues, but at least it is an arrangement that focuses federal support directly toward what matters.

Shouldn’t we take the ITC extension and run, particularly given today’s political environment? The answer is, probably yes. That, however, is not the point, because we have arrived at an important juncture for our overall energy system. For years, renewables have been too expensive, and their vast potential to utterly alter the way we power our economy remained out of reach. Now, wind and utility-scale solar are approaching a point where they can be viewed as economically viable alternatives to carbon-based power generation. Helping them take the final few steps toward unsubsidized competitiveness is an important role for public policy and should be done thoughtfully and efficiently. This past week’s extension of the ITC is certainly good news, but relatively speaking the failure to move to direct production support for solar power has been a missed opportunity.

Francis O’Sullivan is a senior associate with the CSIS Energy and National Security Program and the director of research and analysis at the MIT Energy Initiative.

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Francis O'Sullivan
Senior Associate (Non-resident), Energy Security and Climate Change Program