Green

Why incentives and rebates work better than ‘government-backed green’

Image Credit: White House web site (official White House photo)

Remember Solyndra? The thin-film solar cell company, founded in 2005, won $535 million from the government under the Department of Energy’s  loan guarantee scheme in 2009 for being an innovative new solar tech company that could create jobs and help make America’s future green. Two years later, when its technology was beaten by a cheaper competitive technology, it filed for bankruptcy and laid off 1,100 people.

Solyndra’s failure to deliver raised questions about whether the government’s green policy based on loan guarantees was sound, and, if not, what approach the government should take to make America green.

Investing in startups is inherently a risky business. Loan guarantees take taxpayers money and places it in the hands of private company owners by guaranteeing that the government will pay if the business defaults. In essence, this reduces the risk to business owners. But with reduced risk, and a lower stake, as was the case with Solyndra, business executives tend to make questionable decisions, such as wasting money on state-of-the-art equipment that remains unused, or missing insights into the market – insights such as how prices of competitive technologies will impact the business. The argument given in defense of Solyndra was that no one could have predicted the fall of PV panel prices, a technology competing with the company’s CIGS thin-film. In fact Solyndra was hemorrhaging cash since its inception because of a bad business model, and the plunge in prices was predictable to anyone who studied the industry closely.

A better investment option than loan guarantees is to further develop tax incentives and rebates. The rebate system combined with the federal tax incentives works because it makes renewable energy affordable, thus creating demand. Spotting the opportunity, companies invest in the supply side, creating jobs, and pushing the economy forward. This is the 101 of economics: Increase demand and the supply side will respond. The competitive nature of the industry nurtures the creation of partnerships for service delivery, financial and process innovation for better products, and the creation of a skilled cleantech workforce. It also pushes companies to reach operational efficiency. The rebates and tax incentive system also returns taxpayer money to the taxpayers.

It’s not that loan guarantees don’t work, rather, that their use should be selective. Solar technology is relatively mature compared to electric vehicles or fuel cells; mature technologies don’t require heavy upfront cash because they are sellable. They can generate positive cash flows through sales but require support to sell products. Immature technologies have little or no market and therefore require investment, which can come in the form of loan guarantees.

An obvious concern with the current rebate and tax incentive system is that it creates demand for the existing technology but does not lead to innovation. One way to address this issue is to have better rebate and tax credit options for more expensive but better performing, high-efficiency panels. Such a system would lead to increased demand and would reward companies willing to invest in improving their panel efficiency. Similarly, another concern is the dependence of an industry on “subsidy”. The solution in California’s rebate system has been a phased reduction in incentives.

The push for green technologies under the current administration reflected the need of the hour. Investment in green technologies has not only created jobs but also promises to reduce dependence on foreign oil by revolutionizing energy production and consumption. By far the most important aspect is that, to meet local demand, companies have innovated engineering and management best practices, laying the groundwork for future technological leadership in this industry. The question now is, how will the next administration approach green energy?

Nabeel Hussain is marketing manager at ClarySolar and is based in the renewable energy company’s Pakistan offices. He has over five years’ experience in product management and marketing strategy as well as a passion for technology and renewable energy.