Solar Energy Flap Misses Point On Energy Subsidies

By Mark Cooper – 09/21/11 07:05 PM ET

The combination of the debt-ceiling debate and the recent bankruptcy of a solar firm with a $535 million loan guarantee is certain to give energy subsidies a leading part in the Washington budget drama this fall.

If, however, the goal is good energy policy — not just deficit reduction — the fact that solar companies are going broke could turn out to be a positive development, if it puts the spotlight on nuclear reactors rather than just solar panels.

Although the solar industry receives significant subsidies — loan guarantees among them — it still is primarily a market-driven industry. It must raise capital in financial markets. It must purchase liability insurance. It must make its sales in competitive markets. On the other hand, for more than 50 years the construction of nuclear reactors in the United States has been the recipient of an array of massive subsidies and other special arrangements that go way beyond loan guarantees and totally insulate it from market forces.

For example, the Price-Anderson Act shields firms that build and operate nuclear reactors from incurring full liability for nuclear accidents. Utilities are required to have a small amount of private insurance and create an industry-wide liability pool that is capped at about $12 billion. If a major accident were to occur, liability beyond this amount would shift to the public. That risk is not a purely theoretical one: The current estimate for the cost of the ongoing Fukushima disaster in Japan is $250 billion … and rising.

Taxpayer-backed loan guarantees and limited liability are not the only subsidies the nuclear industry is receiving today. In every state where there is active pursuit of new reactors, construction is subsidized by ratepayers with what is euphemistically known as “advanced cost recovery” (also known as construction work in progress, or CWIP). This “robbing today’s Peter to power tomorrow’s Paul” arrangement requires ratepayers to pay for reactors years before they ever generate any power. It’s caused an uproar in Florida, where many of the ratepayers who dig the deepest to pay for reactors will be dead and buried when — and if — the first electron of power is generated.

In short, this brand of American “nuclear socialism” means that the public is shouldering virtually all of the risk of new nuclear reactor construction. In contrast, stockholders of solar companies, whether they manufacture equipment or develop solar facilities, assume much more of the potential downside of solar deployment.

One can even make the case that no-holds-barred subsidies for nuclear power have the effect of crowding out solar companies. The price of solar panels has been declining dramatically over the past several years because of fierce competition and excess capacity created by softening demand for electricity. With prices falling and demand growth slowing, the higher-cost competitors are squeezed out.

In contrast to the declining cost of solar, the projected cost of nuclear reactors has been rising sharply. The federal government’s Energy Information Agency estimates that since 2008, when the current crop of new reactors was first proposed, the projected cost of nuclear reactors has increased by 60 percent, while the cost of building solar photovoltaic capacity has declined about 20 percent. If this were a truly efficient market, construction of new nuclear reactors should have been the first projects to be abandoned. But they were not.

Because utilities are not subject to effective competition, and prefer to pad their rate base with high-cost nuclear projects for which they are guaranteed cost recovery, they keep their nuclear projects going while rejecting alternative sources of energy that actually are less costly and can be brought online more quickly.

And that is how the widely publicized failure of a solar company that received a federal loan guarantee could expose the mother of all energy subsidies — the extensive array of direct and indirect support that federal and state governments provide to the far more costly nuclear power industry.

If energy subsidies that pervert market forces are really going to get the boot, then nuclear power should be the first industry required to pay its own way and compete head-to-head in a truly competitive marketplace.

On the other hand, if policymakers wish to ignore the economic fundamentals of electricity markets and treat loan guarantees as an effort to point energy policy in a new direction, solar is a much better candidate for “infant industry” support than nuclear reactor construction, which already has half a century of subsidies under its belt.

Cooper is a senior research fellow at the Institute for Energy and the Environment.