Why Subsidies Ultimately Suck

Think of how subsidies come about.  Bob comes up with a product that no one wants.  Let's say it's useful but the price is too high.  Still, he wants to produce/sell it.  So he funds some lobbyists, who dropped $3.47 billion on Congress in 2010, and gets government to spend our money (tax credits, direct grants, other forms of subsidies like loan guarantees) to bribe us to buy it, no matter how ridiculous the cost.  

I lived this with my solar array -- I made my fellow citizens eat 65% of its cost via tax credits.  Otherwise, I wouldn't have bought it.  Why?  Because it costs too much!

Look what happened when a company called Range Fuels came to Georgia.  No one wanted its product, and private investors would not 100% fund it (which is telling you all you need to know) so "W" and Congress forced us all to invest (buy) a product that never made any economic sense and no one believed in (at least, not enough to put their own money at risk).  The resulting
Range Fuels Fiasco, as additionally detailed here and here, and defended (sort of) by its owners/operators here, sears a painful lesson into our brains -- let the free market decide what goods and services survive, not politicians and government bureaucrats.

Yes, brown power's been subsidized.  But two wrongs don't make a right, and as the WSJ points out, oil and gas get $4 billion/year in subsidies as tax breaks while actually producing income, while green is a net tax beneficiary.  Brown power got 64 cents of subsidy per megawatt  hour in 2010, while wind power received $56.29 per megawatt hour.

Subsidies also distort pricing.  I'm suffering this with my local utility, which by Georgia law must pay me for my solar power only what I enable it to avoid paying brown power (coal, nuclear) sources -- hence, its "avoided costs" (wholesale costs).  But take away the direct and indirect billions in subsidies from brown power and my utility's claimed "wholesale" price (hence, its "avoided cost") from the browns is more misleading than real (i.e., brown power costs more than what my utility's paying, it's just that those costs are hidden via subsidy-deflated pricing).  More importantly, it's not fair to me and to solar power, thus the industry and jobs/prosperity that could come from it, much less our chance to fit into a larger, more positive picture.  So now we've got one subsidized (brown) market distorting fair market pricing for another subsidized market (green). 

Such is the perverting effects of government interference with the free market, as painfully re-illustrated with the federal housing credit.

Subsidies also foment
market bubbles, political corruption of the free market place, and preference distortions (fresh fruits and vegetables, which are good for us, are unsubsidized and costly compared to grains and corn, which are heavily subsidized). More on this point here, in response to the first comment.

In short, subsidies suck.  A good example: Chevy Volt.
  Want more?  From that same article: "Recently, President Obama selected [GE] CEO Jeffrey Immelt to chair his Economic Advisory Board. GE is awash in windmills waiting to be subsidized so they can provide unreliable, expensive power.  Consequently, and soon after his appointment, Immelt announced that GE will buy 50,000 Volts in the next two years, or half the total produced. Assuming the corporation qualifies for the same tax credit, we (you and me) just shelled out $375,000,000 to a company to buy cars that no one else wants so that GM will not tank and produce even more cars that no one wants. And this guy is the chair of Obama's Economic Advisory Board?"  $50,000 lost on every Volt sold.

All of this, of course, with a projected $16 Trillion deficit.  Sheer madness?  You bet.

And yet, greenies, who themselves can be bought off with money, keep coming up with nutball stuff like this: "The 2012 Green Budget." This "hey, let's spend even more money we don't have" document revels in rosey, subsidy-based projections and lofty promises -- if "only" we throw yet more public money at the cleantech sector. 

Money quote: "As the American Solar Energy Society estimates, “renewable energy industry can generate up to 4.5 trillion in revenue in the US and create 40 million jobs by 2030.”  Id. at VIII.  Sheesh!  It's always the same with welfare-state Greenies: jobs, jobs, jobs (but don't bother to measure what each job costs in tax dollars, and thus even question whether public spending makes "jobs-creation" sense).  By that logic, the government can just give away $10 trillion and presto!  Instant prosperity and full employment!  Read the "budget" at p. 4-4 to see where these greenies are going with this: They want to increase public subsidies from $225,000,000 to $450,000,000 for Solar PV programs "[t]o fully maximize our domestic solar energy potential[.]"

These guys don't even mention the possibility of a free-market method of encouraging Solar PV growth, much less where the government's supposed to find $450,000,000 (print yet even more money?).  They live in a world where what is "green" is too heavily driven by media-manipulating Corporate Solar Welfare Queens.

Tragically, the Green Budget recognizes that Solar PV's are simply overpriced:  "A key barrier to the wide-scale adoption of solar is its cost relative to other technologies. . . ."  Id. at 4-5.  It's solution?  "We strongly support this commitment to boost funding...."  Id. 

In other words, hey no problem if the product's so expensive that no one wants it, just throw more tax dollars at the industry and create yet even more corporate welfare queens like Evergreen Solar, which sucked $43 million out of "Taxachussetts" then fell to penny stock status and
sold out to the Chinese. At the same time, these greenies express not one thought about how to lower trade barriers and open the way for countries with the comparative advantage to bring lower-cost Solar panels and inverters to our market.  Nor is there any effort to examine other, recent subsidy-driven failures and maybe learn from them. 

Just sad.


Of course they mean well.  But the road to hell is paved with the best intentions, and adding to a $14 trillion deficit  is  hell, n'est-ce pas?


Note, by the way, the sophistication greenies use to make us all pay for stuff we don't (because it's priced too high) want.  Again, Solar PV's wonderful, but not at its current price. Big Solar Corporate Welfare Queens know this, but force us to buy their products anyway. How? By infecting government and getting it to enact things like Renewable Portfolio Standards (RPS) legislation (an unfunded mandate on utilities, and thus their rate-payers, to buy energy from green-energy producers who charge more than brown-power producers), or simply mandate inflated Feed-In-Tariffs (when my utility pays a Solar PV array owner an above-market price for power, whose pocket is ultimately picked to cover that extra expense?), not to mention tax credits (taxpayers' pockets) and, in some places, utility rebates (ratepayers' pockets again). Check out these "Subsidy Farms" in Georgia.

Seriously, is that underlying dynamic any different than what's described in the snarky "Atlas Shrugged Motors" car column linked above (see also this)?  And yes, of course, de-subsidize brown power, as urged here and here.  And don't claim two wrongs make a right by insisting that since brown's subsidized so should green.  That's just compounding the problem. Nor should de facto subsidies be tolerated, such as in the form of Renewable Portfolio Standards and Feed-In-Tariffs to bolster them.  As NJ's governor's office in 2011 said, that's just tapping my pocket to fill someone else's: "“The Christie Administration does not support the unreasonable transference of wealth from ratepayers at large to solar developers as well as residential, commercial and industrial participants. . . .”  (Source).

Here's an opposing point of view.  
This, too.

A very bright fellow delves even more deeply on the corrupting effects of subsidization, in response to this pro-subsidization article:

The [Loan Guarantee (LG)] program helped get the nuclear plant in Georgia off the ground. That plant is a terrible investment that is going to force ratepayers in Georgia to shell out about (I'm guessing here) 10+ billion more than they would have with an alternative portfolio of plants. The project is already several hundred million dollars over budget and way behind schedule. I think the US should build a new nuclear plant but you only need to build a single unit plant and we could use an 800 MW design rather than a 1200 MW design to help contain costs. Had the LG program helped get an 800 MW single unit plant off the ground it would have my full support. The reckless support of an overly expensive plant doesn't have my support. 

The solar projects the article mentions are going to force ratepayers in California and Nevada to shell out billions extra for electricity. The projects are backed up by Power Purchase Agreements (PPAs) that were signed years ago at inflated rates (15+ cents/kWh).  What I mean is that the projects were several years in the making. The costs of solar came down considerably during that span. Had the PPAs be negotiated at the time the DOE approved the projects they would have been much lower. The DOE approved projects that were guaranteed to overcharge ratepayers. 

Additionally, many of the projects the LG program supported weren't innovative. The 1000 MW windfarm in Oregon for example should have been broken into smaller projects and privately funded. Wind is an established technology. Pork. 

Also, the DOE approved parallel prototypes rather than giving out a loan on a single prototype plant and then waiting for the results like a strategic investor would. 

Make sense? The remaining LG portfolio of projects may be safe but there's little strategy to the projects and there are huge losses to the public downstream that all these assholes are blithely overlooking. 100% bullshit if you ask me.

Here's more from him (lifted directly from his site):

Scams, Frauds and Screws

Charity Scam

A charity scam works like so: Bob gives Acme Aid Association a $100 donation. Acme Aid then gives Bob a receipt for $500. When tax time rolls around Bob then uses his inflated receipt to take a tax credit that's greater than the original donation.

Mortgage Fraud

Step 1. Bob buys a property for $50,000.
Step 2. Bob gets an exaggerated appraisal on the property from Neil, his co-conspirator, for $100,000.
Step 3. Bob creates a fictional buyer (poof) and uses the fake appraisal to obtain an 80% loan to buy/sell the property to/from himself.
Step 4. Bob and Neil then split $30,000 and head down to the Castro District for some fun. The fictional buyer defaults and the bank is left holding an $80,000 loan on a $50,000 property.

What are the red flags?

"An official with the Texas Department of Savings and Mortgage Lending notes that inflated appraisals and the constant use of the same appraiser are two of the most common signs of mortgage fraud. Agents acting in dual roles such as real estate agent and mortgage broker are another indicator."

The Solar Screw

The Solar Screw shares many things in common with charity and mortgage frauds. The screw starts off when Bob signs up for a PPA deal with 3rd party financing company Solar Credit R' Us. Bob gets a photoelectric system and a lower monthly electricity bill. The photoelectric system costs $20,000 but SCRU uses a collection of smoke, mirrors and incantations to raise the Fair Market Value of the system up to $40,000. The $40,000 bill is then submitted to the US Government who subsequently gives SCRU a 30% tax credit on the inflated price. Jigar Shah talks about the practice here.

Who is doing this you ask? Who isn't is a more appropriate question.Johnathan Bass provides some delicious food for thought with this quote.

"SolarCity is unique in that it is both the developer/financing company and installer of its projects, while the vast majority of the other installers offering leases and PPAs use a 3rd party for financing."

Sound familiar? Remember the Red Flags? 

"An official with the Texas Department of Savings and Mortgage Lending notes that inflated appraisals and the constant use of the same appraiser are two of the most common signs of mortgage fraud. Agents acting indual roles such as real estate agent and mortgage broker are another indicator."

Rhone Resch recently made some interesting comments regarding this issue. The comments are especially interesting because he's talking about business practices back in the mid-eighties.

"Solar marketing firms that were using solar financing arrangements for systems were suspected of inflating the prices of solar equipment way above the fair market value and abusing the basis on which the tax credit was calculated."

He had this to say regarding the collapse of the solar industry in the mid-eighties.

"So we had a confluence of events: tax reform and companies getting greedy. Sound familiar? This cannot be allowed to happen again."

I don't know where Resch is coming from here. Maybe he thinks an appeal to the conscience of the offending crowd is going to work. But come on... that doesn't have a shot in hell. The real way to fix this problem is through tax reform. I'm personally a fan of phasing out the Investment Tax Credit (ITC) altogether but a second best measure would be to cap it. Strangely enough there's already a precedent here as the ITC for small wind projects has a cap at $1000 per KW. Why not just carbon copy the wind legislation, CTRL+F, replace wind with photoelectric and get it stamped? Badda Bing...

If fixing the ITC isn't possible there's always the Nuclear Option.

--------------------------------------------------------------------------------------------------------------------------