Daniel Sutter: Sustainable solar energy

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Daniel SutterOregon recently took back $13 million in tax credits awarded to SolarCity based on inflated costs reported on 14 solar projects. This is just the latest in a long series of legal issues for renewable energy companies. Our governments have encouraged solar and wind energy through tax credits, subsidies from tax dollars, and mandates. But perhaps letting markets and entrepreneurs work might be a better way to develop renewable energy to truly benefit America.

One billion in tax dollars were spent on Oregon’s Business Energy Tax Credit program, which the state’s Department of Energy badly mismanaged. SolarCity (now part of Tesla Motors) was allowed to report costs far in excess of amounts paid for the 14 projects, receiving tax credits which were then sold to businesses with tax liabilities. Selling tax credits is a common practice; the legal concerns arose from the overstated costs.

Unfortunately, this sounds like yesterday’s news. In 2017, SolarCity paid almost $30 million to the U.S. Treasury for employing the same accounting move rejected by Oregon. Solyndra received $535 million in Federal loan guarantees and was prominently promoted by the Obama Administration before going bankrupt in 2011. The U.S. Department of Energy Inspector General concluded that Solyndra officials deliberately overstated sales to secure the loan guarantees. And this year, solar panel installation company Legend Solar, which ranked 27th on Inc. magazine’s list of top startups for 2016, has failed to deliver new panels for customers or perform repairs on panels under warranty.

Do these cases mean anything other than that some shady characters have run some solar power companies?  I think so. First, government subsidies and mandates likely slow the detection of poor quality and fraud. Customers (which might be businesses themselves) provide the main line of defense against fraud. Homeowners who paid deposits for Legend Solar’s panels, for example, alerted state officials. And yet customers subsidized by tax dollars or forced by rules to use solar power may not discipline a failure to deliver products of expected quality.

More significantly, subsidies and mandates may adversely impact technology. The transcontinental railroads illustrate the potential danger. In 1869, the Central Pacific and Union Pacific Railroads met in Utah, with a golden spike symbolically linking the nation. The transcontinental railroads were mostly built with generous government subsidies and large land grants and were an economic waste. The subsidized railroads went bankrupt and had to be rebuilt. Only, the Great Northern Railway built by entrepreneur James J. Hill without government subsidies, avoided bankruptcy.

Government assistance affected railroad construction. The subsidized railroads were built on steep grades through the mountains, making the hauling of trains very costly; Mr. Hill selected more favorable grades and invested in spur lines to collect freight from surrounding communities. As economic historian Burt Folsom explains, this should come as no surprise. The Union Pacific and Central Pacific were in the business of collecting government subsidies, not railroads; they laid track to collect handouts, not to create a profitable business.

The interjection of politics could additionally affect the individuals who become entrepreneurs and start businesses. As my Johnson Center colleague G. P. Manish and I explored in a 2016 paper, many of America’s great market entrepreneurs appear to have been motivated by what psychologists call the mastery motive, meaning the desire to excel at tasks; making money was almost secondary. Each purchase of a product by consumers in the market validates entrepreneurs’ desire to know they have mastered their business. Politicized markets offer a very different form of validation and may draw a very different set of entrepreneurs into an industry.

From the energy shortages of the 1970s to concerns over fossil fuels’ greenhouse gases, politicians have seemingly had good reasons to encourage renewable power. Economically viable renewable energy would be a boon for America but will require solar and wind systems capable of creating value, not merely collecting government subsidies. Perhaps government should step aside and let market entrepreneurs develop renewable energy in an economically sustainable manner.

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Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.

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