Could even higher energy prices be on the way for Americans?
During his two-day, four-state energy tour last week, President Obama reiterated his strong support for tax-subsidized solar energy. The president has repeatedly vowed the U.S. would not cede the solar industry to "China or Germany because we refuse to make the same commitment here." But with Germany's recent cuts to solar subsidies and the U.S. Commerce Department's decision to impose tariffs on Chinese solar imports, the U.S. could be headed towards higher energy prices and wasted tax dollars thanks to the very policies created to compete with these nations.
Germany is home to nearly half of the world's solar panels that only power 3 percent of the country's electricity. Solar can go weeks without producing significant amounts of energy and has cost German taxpayers more than $130 billion in subsidies, including more than $10 billion last year. These subsidies have had a direct impact on energy markets. Higher energy costs are passed on to German consumers, who pay the second highest electricity bills in Europe and can expect to pay $250 more this year. The country's vast solar facilities still produce less electricity than two of the country's nuclear plants, and despite a history of lavish subsidies, not a single German solar firm is profitable today.
For comparison, the average price that Americans pay for a kilowatt-hour (kWh) of electricity is 10 cents and rising, according to the Energy Information Administration. Germans pay a whopping 36 cents per kWh - costs that are forcing businesses out of Germany. The president of the Association of German Chambers of Industry recently said that energy supply is now "the top risk for Germany as a location for business." Bernd Kalwa, a member of the general works council at ThyssenKrupp, added that "Some 5,000 jobs are in jeopardy within our company alone, because an irresponsible energy policy is being pursued in Dusseldorf and Berlin."
It's no wonder, then, why German officials have decided to slash subsidies to solar - with a 15 percent cut earlier this year and a 29 percent cut due by the end of this month. Spending reductions will continue, with subsidies ending for some plants as early as June.
Despite this warning, Washington is starting to go down Berlin's unsustainable path. A new report from the Congressional Budget Office shows that over the past few years, U.S. subsidies for renewables have skyrocketed while subsidies for all other energy sectors have remained constant. Last year, 78 percent of federal energy tax preferences ($16 billion) went to the renewable and energy efficiency sectors. Add in state-driven renewable policies and billions in government-backed loans, like solar boondoggle Solyndra received, and there seems no shortage of handouts for solar despite its limited production value.
Standing in front of the country's largest solar facility last week, President Obama challenged those who want to end public entitlements for solar, comparing dissenters to "members of the Flat Earth Society" during the days of Columbus. But according to the Nevada Policy Research Institute, the Nevada facility is far from a pioneering, world changing endeavor. With construction costs of $141 million, it was built a year-and-a-half ago with $42 million in federal tax credits and $12 million in state tax-rebates - more than a third of the entire cost. Despite its cost to Nevada's taxpayers, most of the electricity will go to California, where utilities are required to receive 33 percent of their energy supply from renewable sources by 2020.
This policy took a predictably bizarre turn last week when California regulators forced utilities to prop up a gas plant facing closure. Their reasoning: as the state continues to scale up renewable energy, affordable fossil fuels need to be there as back up (since the sun doesn't always shine and the wind doesn't always blow). Generating 33 percent of your electricity from renewables requires a lot of backup. So, California now forces taxpayers to subsidize uneconomical forms of energy to replace less popular, more profitable forms - but at the same time refuses to allow the unpopular forms of energy to fail.
President Obama insists that "instead of investing tax dollars in profitable companies, let's invest in our future." And he implores that we should "allocate these subsidies in a smart kind of way." But it turns out that every "smart" subsidized dollar given to renewables only produces 407,000 BTUs of energy, compared to 27 million BTUs produced for every dollar given to fossil fuels, according to Steve Hayward of the American Enterprise Institute.
With 66 times the production value, renewables are far from replacing traditional fuels, despite government officials' best efforts. Yet, America is increasingly headed towards a consumer energy cost spike, as a suite of Environmental Protection Agency regulations on power plants, refineries, greenhouse gases, gasoline, and others threaten to make traditional forms of energy untenable.
If regulatory pressures on energy production continue to drive up costs - like unsustainably high solar prices - there will be nowhere for American wallets to run when it comes time to pay the utility bill. This could be a positive thing for energy companies, but would be a weight on economic growth as energy costs cut into consumption and change the spending decisions of households and businesses.
The Obama administration could continue the subsidy pressure to prevent costs from bleeding through to Americans, but Hayward also found that "[f]or renewables to match the output of fossil fuels at the current tax preference rate, the total tax preference would need to be $897 billion." You could give every American $3,000 for that amount.
The other way to keep energy prices from draining American finances would be to cut costs. But the U.S. has started down a path of protectionist measures against foreign competitors. The Commerce Department recently imposed tariffs of 2.9-4.73 percent on Chinese solar manufacturers, who have been accused of dumping cheap solar in U.S. markets to squeeze out competitors. The relatively low tariffs are only the beginning. Many analysts believe the Commerce Department is expected to announce stiffer tariffs in May.
America's solar policy is scatterbrained at best. We subsidize solar power to the tune of tens-of-billions of dollars annually, creating a bubble of unprofitable solar companies who sell uneconomical electricity at a taxpayer-backed loss. We seek to emulate countries like Germany that are running away from subsidies faster than they approved them. We create trade barriers to countries that are allegedly selling us cheap solar panels at a loss, but to the benefit of American consumers.
The president recently said "we've got to make sure that we're taking some risks... we've got to support extraordinary entrepreneurs that are on the cutting edge." Not with tax dollars. If these entrepreneurs are truly extraordinary they can raise funds in the private sector. Here's a cutting edge idea, end subsidies for all forms of energy - including fossil fuels - and leave the industry in the hands of these "extraordinary entrepreneurs" who, unlike the government, have to justify their decisions through profit and loss.
Adam Peshek is a research associate at the Reason Foundation. This commentary originally appeard at RealClearMarkets.