TODAY’S STUDY: SOLAR GETTING YET CLOSER

Assessment of Incentives and Employment Impacts of Solar Industry Deployment

David P. Vogt, Susan M. Schexnayder, Tom N. Yoder, Edward J. Lapsa, Alexandra T. Brewer, May 1, 2012 (Howard H. Baker Jr. Center for Public Policy, The University of Tennessee, Knoxville, and The Solar Energy Industries Association)

SUMMARY

A mixed portfolio of energy options has allowed Americans to enjoy long-term economic growth and prosperity. The federal government has engaged directly in developing each energy resource in the mix, although the dollar value estimates of this federal support vary considerably. In this report, we focus on a relatively new addition to the energy portfolio—solar power. This assessment considers the diffusion of solar energy technology in the United States in the context of the technology adoption process and federal engagement in developing energy options. We examine historical and current federal incentives in energy markets, focusing on incentives along the energy value chain and by stage of technology adoption. Considering the growth expectations for the domestic and international solar markets, we analyze the solar industry’s U.S. job creation and solar power’s potential contribution to addressing peak-demand period power needs and other benefits to the energy portfolio. We find that solar energy is following the same incentive-driven path as other traditional energy sources before it, consistent with the government’s decision to incentivize energy production for a variety of policy purposes. We also conclude that the federal investment in solar energy could bring about a number of tangible benefits, including increased employment, global business opportunities, and energy supply diversity.

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TECHNOLOGY ADOPTION AND LEAPING THE CHASM

Diffusion of solar energy technology in the energy markets is consistent with the less-than-smooth paths that many American industries have traveled as they entered the mainstream of commerce. The traditional technology adoption model labels early entrants into the solar market as innovators and early adopters. These individuals and firms enter for reasons that are not purely economic or based on a long-term strategy. One need only look to the early history of the automobile industry in the United States to realize that not all companies that enter the market early flourish, yet the industry itself can succeed. There is a “chasm” over which the industry must leap to expand to majority adoption. Depending on the type of industry, the propulsion for this leap can be demand-side factors, such as when General Motors made loans to automobile buyers in the 1920s, or supply-side factors, such as Henry Ford’s assembly lines. When benefits accrue broadly, rather than to investors alone, a federal role exists, such as the defense and energy industries’ benefits from NASA’s funding the man-on-the-moon mission. Solar energy technologies are currently in the rapid growth stage between early adoption and the chasm that comes before majority adoption where government incentives can be most critical in helping new energy technologies become significant sources of energy production.

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FEDERAL INCENTIVES FOR ENERGY PRODUCTION DESIGNED FOR PUBLIC POLICY PURPOSES

Historically, each energy resource had approximately a thirty year period of innovation and early adoption before beginning rapid growth that brought it across the chasm and into the phase for early majority adoption. The Chief Strategist for Shell echoed this finding recently saying, “It takes about 30 years for any new energy source to attain 1% market share.”1 Each traditional energy source has been developed with significant government engagement, which has included market control measures for oil, making pipelines available for natural gas, the construction of flood control dams that provide the fuel for hydropower and states surveying their coal resources.

Looking back to traditional fuels, we see multiple intentions for the federal government’s engagement. During the pre-embargo period, federal energy policy was in effect industrial and economic development policy applied to energy industries to:

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• Maintain competition by breaking up monopolies and holding companies, regulating interstate commerce and prices.

• Provide for national security by addressing potential domestic resource depletion with incentives for domestic production, leasing or directly investing in federally-owned natural resources, and a beneficial import/export policy.

• Promote economic development by stimulating growth and providing tax incentives to build a productive and competitive America through low cost energy.

Following the oil embargo, the Federal government engaged more explicitly in energy policy formation to:

• Maintain competition by deregulation.

• Assure worker safety, public health, and environmental quality.

• Provide for energy security by adding renewable energy options to the portfolio of energy resources, encouraging demand in specific markets, and discouraging demand in others.

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FEDERAL INCENTIVES IN EXISTENCE FOR DECADES FOR ALL ENERGY SOURCES

Various estimates show that the federal government currently incentivizes every major energy production market. Energy agencies, the Government Accountability Office (GAO), industry groups, national laboratories, investment funds, and policy-watchdog groups have all issued estimates of federal incentives in energy markets. Information is now widely available, but the estimates vary significantly and conclusions conflict. A detailed analysis of the variables that contribute to the divergent estimates of federal incentives is outside the scope of this work, but the following important variables contribute to the variance.

• Methods, such as price gap analysis vs. budget analysis

• Time frames, including “snapshots” of a particular period; all-encompassing from the inception of each incentive; or during an initial period of incentivization

• Definitions and interpretations of incentives through including or excluding tax treatments that are not specific to a particular fuel type, regulatory costs, risk management costs or other incentive elements.

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INCENTIVES: A THREE-DIMENSIONAL VIEW

Federal incentives to energy markets exist along three key dimensions:

• Incentives can be applied at every stage in a given fuel’s adoption process (technology adoption stages are shown in Figure 1).

• Incentives can be applied along each step of the energy value chain.

• Incentives can be applied for different purposes.

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Technology issues can be found in each of the links in the energy value chain: resource production and refining, fuel transmission and distribution, electricity generation, electricity transmission, and consumption. Fossil fuels, biofuels, and nuclear power have had significant federal engagement in the resource production, refining, and transportation steps. Solar energy resources, which are widely distributed and are not transported, will not require government engagement in this part of the industry—a potentially significant savings.

Figures 2 and 3 show the energy fuels according to their position in the adoption process, from innovation through maturity. Figure 2 shows the portfolio of government incentives for energy sources for the past 60 years and their position on the adoption curve. As can be seen, federal investment in solar technologies has been modest in a long-term historical context relative to other energy technologies. As expected, the largest cumulative incentives during this period have been associated with mature energy technologies that have been receiving incentives for the longest periods of time and are still supported through federal incentives. Figure 3 shows the value of federal incentives for each fuel in 2010 according to 2011 estimates from the Energy Information Administration (EIA). These tallies include investments made through the American Recovery and Reinvestment Act, which in terms of energy investment focused primarily on renewables. The graphic shows the results of policies that are consistent with the current era in which economic development depends on efficiency and sustainability, along with incentives related to industrial and economic development policies from the past based on mature fuel technologies.

In 2010, biofuels have the largest incentive cost. The pattern of incentive costs is consistent with expectations along the adoption curve. If the goal of incentives is to bring a resource to the point of full market penetration, one would expect larger incentives for fuels that have not reached maturity. Incentives in the mature industries effectively raise the overall cost of government incentives needed to bring new resources up the adoption curve. Solar, which is early in the adoption process, has a lower total incentive cost than the wind, ethanol, or energy efficiency industries that are further along the adoption path.

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EFFECTIVE INCENTIVES

Effective incentives are long-term instruments that remove specific barriers, level costs to encourage long-term private investment, and/or offer stability during the adoption cycle that allows the new technology to “cross the chasm.” Incentives provide opportunity for technology development that introduces economies of scale or production or conversion efficiencies that allow price-points attractive to adopters for whom price is the primary consideration. Ideally, incentives have a schedule built in to allow gradual reductions in the incentive as the industry matures. The antithesis of long-term, stable instruments are the production tax credits for wind power that have existed on one- to five-year cycles and twice expired, creating uncertainty and a choppy adoption path, or the Section 1603 Treasury program that operated on only a short-term basis.

Ideally, incentives for a market, such as electric power or transportation fuels, are developed in a coordinated fashion without introducing conflicting or cross-purpose policy inefficiencies. In the U.S., the umbrella for all energy incentives has been security and economic development, so that all energy sources are incentivized. The increasing complexity of the portfolio of federal incentives across energy sources has created situations in which incentives for one energy source are unintentionally countered by incentives in competing markets.

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From an economic development perspective, a portfolio of incentives weighted towards mature industries will tend to insulate and maintain those profitable industries and suppress new industries, while a portfolio weighted towards industries in the adoption stage will tend to advance adoption of new industries. Since history shows that new industries are the source of growth in an economy and mature industries tend to either maintain or lose jobs over the long term, effective incentives from an economic standpoint are those that address industries in the early adoption stage.

Figure 4 shows the dramatic growth rate in installed solar capacity over the last five years. This 77% annual growth occurred during a period when State Renewable Energy Standards, less-expensive PV, and the federal investment tax credit (ITC) were in place. The ITC, passed in 2006 and scheduled to remain in place through 2016, is an example of a long-term stable instrument that could help solar energy cross the “chasm” to early majority adoption.

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SOLAR INDUSTRY BENEFITS EMPLOYMENT

With the significant recent increases in annual installed solar capacity—a near doubling between 2009 and 2010 and a further doubling in 2011—and long term annual cumulative growth projections for solar that range from 4.8% to 25%, the growing solar industry will be a boost to employment in the U.S. It should also be noted that the solar industry has historically produced more jobs per megawatt-hour than any other energy industry. Depending on the assumed growth rate in solar deployment, we estimate between 200,000 and 430,000 total jobs related to domestic growth in the solar industry (direct, indirect and induced)2 in 2020 (Figure 5).

The export potential for U.S solar manufacturing and materials is also growing with the rapid increase in installed capacity that has occurred in Europe. A Pew Center brief on job opportunities recently concluded that, “Fostering domestic markets will create jobs and give lead industries the initial foothold they need to ultimately better compete in rapidly expanding international clean energy markets – and the sooner these industries can be established, the larger the share of these global markets they stand to gain in the decades ahead.”

To understand the potential future economic benefits of maintaining and growing the positive trade balance, we used the estimates of expected worldwide installed solar capacity and the Solar Census employment estimate to project potential employment in the U.S. from future exports. Maintaining our current share of the export markets, the U.S. could add by 2030 another 67,700 direct, indirect and induced jobs to the existing solar industry employment.

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SOLAR POWER BENEFITS THE U.S. ENERGY PORTFOLIO

As economic growth becomes ever more dependent on abundant, affordable, and sustainable energy supplies, solar energy offers secure hedging value to a diversified energy portfolio. Rooftop solar power alone could provide 20% of our electricity needs. Recent estimates of the solar resource show that capturing the solar resource using photovoltaic and concentrating solar power could provide even more. Expanding the use of solar energy would decrease the energy sector’s overall sensitivity to supply disruptions and price volatility of other fuel sources.

Solar power also has the benefit of greatest availability during peak demand times. Adding low marginal cost renewable energy to the front of the dispatch curve shifts the curve out and provides cheaper peak rates, benefitting all consumers.

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CONCLUSIONS

Experience from other fuel sources and non-fuels industries in the United States shows that stable, long-term programs that smooth the development and adoption process have contributed to the development of the portfolio of fuels in the United States. Incentives provided to the solar industry are consistent with those provided in the developmental stages of all other energy sources that the federal government has chosen to incentivize for public policy purposes. Evidence from recent years’ deployment of solar power suggests that solar incentives are working. Under these circumstances, the solar power industry can provide employment benefits, global market opportunities, and a resource to meet peak power demand at minimal marginal cost.

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