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So What if Tax Breaks Are Cut for Wind and Solar Power?

Higher demand and other financial sources should fill the gap, eventually.

Art by Hye Jin Chung

Washington is trimming federal tax breaks for solar and wind energy, whose growth these incentives spurred. At first blush, that appears to be bad news for these renewable power sources. But in spite of the loss of federal help, which may retard them a bit, their future appears to be solid.

Thanks to a 2015 vote in Congress, production credit for wind farms will be trimmed to 10% in 2022, tapering down from the current 30% level. The tax break for solar panels also is 30% today, and will be gradually lowered, as well. In three years, it will be at 10%, too, but only for commercial facilities. Homeowners get zero.

Federal help for renewable energy has been a long-standing target for Republicans, and the Trump White House is no fan of them. Tax credits, wrote Katie Tubbs, a senior policy analyst at the conservative Heritage Foundation, is “a popular way for government to award special treatment and artificially attract private sector interest to politically connected and well-connected industries.” Result: Don’t look for a reprieve of the wind and solar tax breaks anytime soon.

That said, odds are that ever-higher demand and non-federal sources of capital will keep wind and solar expanding. Let’s look at the state of play.

Long Term Trend: Sunny

Wind and solar have made large strides in generating electricity, but still are dwarfed by fossil fuels, which as of 2018 made up 63.5% of the market, according to the US Energy Information Administration (EIA). Renewables have a 17.1% share, with hydropower the biggest contributor at 7%. Wind is second at 6.6% and solar a distant third at 1.6% (the rest is stuff like biomass and geothermal, which are tiny by comparison). Nuclear energy makes up the balance with 19.3%. Nevertheless, solar and wind power are the fastest-growing, having doubled over the past decade, by the EIA’s count.

Up ahead, there are expensive technical problems to overcome—namely, that both wind and solar are intermittent, so coal and natural gas will continue to be needed. The sun doesn’t shine all the time, nor does the wind blow constantly. And that will require fossil fuels to bridge the gap. “They cannot provide for the energy needs of modern society alone,” wrote Ryan Yonk, research director at Utah State University’s Institute of Political Economy.

Long term, though, wind and solar should be increasingly viable, and displace fossil fuels. At the moment, coal and natural gas are cheaper. Given the pace of technological advancements for both renewables, Bloomberg New Energy Finance estimates, the expense of electricity generation will fall to around $20 per megawatt hour in 2050, from $70 for solar now and $45 for onshore wind (the most prevalent). Gas and coal, which require major extraction outlays, will be slightly more costly than today.

What’s more, Bloomberg NEF projects, over the next three decades, the world will invest more than $11 trillion in zero-carbon technologies, and just $2 trillion in fossil fuels. Helping solve the sporadic nature of solar and wind power are improvements in large batteries, which utilities can use to store electricity that the renewables generate.

With price tags falling 76% since 2012, Bloomberg NEF calculates, batteries will be increasingly used by power companies. What’s more, these large, car-sized batteries now can hold two to four hours of power, a capacity that should double over the next 10 years.

Wind and Solar Now: Fits and Starts

What’s the situation in the present day? Sun and wind power have made some forward technological strides lately, although the opposition of the Trump administration and the GOP-controlled Senate have not made quick advances easy. And in investment terms, when shares in solar and wind providers are available, they are not exactly wowing the stock market. They tend to slip in and out of profitability.

Solar’s cost has dropped 70% over the past decade. Not counting tax breaks, the average residential sun-powered system goes for $18,000 now, down from $40,000 in 2010, the Solar Energy Industries Association reported.  The residential market grew 7% in 2018, and fell 8% for utilities, which receive solar-generated electricity,  thanks to the trade war and other problems. But projections are for 18% overall expansion in 2019, the Wood Mackenzie consulting firm declared. “There’s a real growth in residential solar demand,” said Bill Page, senior portfolio manager at Essex Investment Management.

Despite its growth, the solar industry—that is, the makers of panels and other components—has had a volatile time in the stock market. The tax break curtailment is part of the problem. Yet so are solar panels from China, which benefit from direct subsidies. Even with tariffs on them, they are tough competition.

Industry leader First Solar’s stock has had a good run this year, even though it is back in the red and revenue is down. Over the past five years, shares have dipped 12.4%. Meanwhile, since 2014, the Invesco Solar ETF, the exchange-traded fund that tracks the sector, is off 32%.

Wind energy output grew roughly 9% last year, adding more than 7,000 megawatts of power generation capacity, says the American Wind Energy Association. Investing in this business is harder than in solar because few pure-play wind businesses exist. Subsidiaries of the likes of General Electric or Siemens handle wind generation.

One wind-only company, Pattern Energy Group, owner of 24 wind power facilities, shows how hard the slog can be. It returned to profitability last year but slipped back into losing money in this year’s first half. The stock has fallen 15.5% during the past five years.

Sources of Funding Beyond Government

In light of the need for non-carbon energy to combat climate change, it’s notable that pension funds and other institutional investors are putting money into the endeavor. The question is whether what they’re investing will be enough, in the US at least, with federal help diminished. Some $1.7 trillion in investment is needed by 2030 to meet global renewable energy targets aimed at mitigating climate change, the International Renewable Energy Agency figures.

Institutional investors will double their renewables portfolios to $210 billion over the next five years, Octopus Group researchers found in a survey. For instance, Canada’s $230 billion pension fund, Caisse de dépôt et placement du Québec (CDPQ) has a strong commitment to renewable energy, and is helping build a $4.7 billion light rail system to open in two years in the Montreal area. The fund has a 2020 target of $26 billion invested in low-carbon activities worldwide, with an emphasis on solar.

Many large asset managers have renewable energy funds that feed solar and wind investments, like Blackstone, which research firm Preqin says is raising $40 billion for this purpose.

One approach, instead of ponying up government largess for renewables, is to mandate their use. That’s what’s happening in California, where starting in 2020, newly constructed homes must have solar panels. And that could be expensive for homeowners, tacking on $8,000 to $10,000 to the house purchase price, the California Energy Commission calculated. On the other hand, the agency figured, each home will save an average $80 monthly on lighting, cooling, and heating bills. At that rate, it would take 10 years to pay off the solar installation.

Meantime, since 2006, California has offered cash incentives to homes, schools, and businesses that put in solar panels. New Hampshire, Louisiana, and New Jersey have enacted their own tax breaks for solar installations.

So no matter what happens to federal incentives, odds are renewables will keep marching on.

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