President Obama proclaimed in his 2014 State of the Union address that his “all the above” energy strategy is working. He then directed the focus to one specific renewable energy source, stating the following:

“Now, it’s not just oil and natural gas production that’s booming; we’re becoming a global leader in solar too. Every four minutes another American home or business goes solar, every panel pounded into place by a worker whose job can’t be outsourced. Let’s continue that progress with a smarter tax policy that stops giving $4 billion a year to fossil fuel industries that don’t need it so we can invest more in fuels of the future that do.”

Let’s dissect this statement and add some background on solar energy. Solar power held just a minuscule 0.11 % share of U.S. electricity generation in 2012, according to the EIA. Even wind farms ‘outperformed’ solar, capturing 3.46 % of the U.S. power generation market. Note, the percentage share for solar energy includes both big commercial solar farms in California, Nevada and Arizona that feed into the respective power grid and solar panels distributed on commercial and residential rooftops. However, industry analysts expect growth in the sector to accelerate. According to a Deutsche Bank (DB) research report, solar is already at or below grid parity in various electricity markets.

Markets at Grid Parity

The chart above illustrates that solar power can produce electricity at the same cost level or even below the cost of electricity available on a power utility’s transmission and distribution grid in those markets. LCOE (levelized cost of energy), according to Renewable Energy Advisers, is used as primary metric unit in order to calculate the cost of electricity produced by a generator, thereby accounting for all of a system’s expected lifetime costs – including construction, financing, input fuels, maintenance, taxes, insurance and incentives – adjusted for inflation and discounted to account for the time-value of money. These lifetime costs are then divided by the system’s lifetime expected power output in kWh. Note, there are no input costs for solar energy. It is also important to understand that grid parity for solar – and, for that matter, any other renewable energy source – differs widely from location to location for various reasons.

One of the reasons is simply the amount of sun a location gets. The Arabian Peninsula, for example, is placed in a virtually rainless sunny belt with a typical daily average solar radiation exceeding 6 kWh/m2 and 80-90 % clear skies throughout the year. In contrast, despite Germany’s very low solar intensity, it managed to generate in total more than 200 GWh in a single day in the summer of 2013. Germany has an installed solar power capacity of about 30 GW. Yet, the Deutsche Bank research identifies the U.S., China and Japan as the world’s three biggest future and currently booming solar markets. This is in line with President Obama’s remarks. Moreover, the report predicts “that 46GW of solar PV will be installed across the world in 2014, before jumping by another 25 per cent to 56GW in 2015.” The following graphic shows that the expected growth in the U.S. will most likely take place in Western states with or without new subsidies for renewable sectors in the U.S.

U.S. Annual Average Solar Radiation

The installation of solar panels is also used by corporate America to display its commitment to sustainability and a renewable future in an age of global climate change.

Corporate America’s Power Capacity from Solar

As for incentivizing and further supporting this nascent U.S. solar boom, President Obama talked about a shift in tax policy toward favoring renewables – in particular solar energy – that would lead to a further reduction in carbon dioxide emissions, while stimulating additional cost reductions in renewable energy technologies. Currently, only fossil fuel producers (primarily oil and gas companies) have $4 billion of annual subsidies permanently written into the U.S. tax code. The tax code provides in twelve tax provisions tax preferences for oil and gas producers, thereby subsidizing fossil fuel extraction since 1913. This preferential treatment meant to encourage drilling activities in the U.S. and meant, at the same time, to mitigate the risk of such investments in oil and gas exploration. Meanwhile, today’s technological advances – in drilling techniques with the help of powerful computers and geologic 3D mapping – have “lowered” the risk to investors in oil and gas exploration endeavors. Joseph E. Aldy elaborates in a Brookings Institution policy proposal on this:

“Since 1913, firms have been able to expense so-called intangible drilling costs, which are drilling-related expenditures that do not have salvage value such as labor and drilling fluids, in lieu of depreciating them over the economic life of a well. This policy differs from the depreciation rules that cover most capital investments in other industries of the American economy. By allowing an oil and gas firm to expense these costs instead of depreciating them over the economic life of the well, the firm benefits based on the differential between the expensed costs and the present value of the costs depreciated over the typical economic life of such a project. These intangible drilling costs represent about two-thirds of U.S. drilling costs.”

The following table lists the twelve provisions in the tax code that subsidize activities associated with the production of fossil fuels. Their estimated ten-year $41.4 billion – i.e. about $4 billion a year – revenue loss on the U.S. Treasury is based on a score by the Office of Management and Budget (OMB 2012) from the FY 2013 Obama administration budget proposal. Meanwhile, Jack Gerard, president of the American Petroleum Institute, wants the public to keep in mind that “the oil and natural gas industry already contributes $85 million a day to the federal government – a larger contributor of government revenue than any other industry in the United States.”

The real question here should not only be whether it is smarter to subsidize renewables instead of fossil fuels, but how to ensure renewables make the investments necessary to upgrade and maintain our energy infrastructure – i.e. transmission and distribution grids. Regulated utilities pay their fair share of grid maintenance costs, which the solar power sector relies on when the sun isn’t shining. Still, given that all energy forms are subsidized in one way or the other, I agree that renewables have received relatively little in comparison.