Why "less is more" when it comes to residential solar subsidies

Nearly anywhere the sun shines is a place where some degree of solar energy can be generated, like the roof of a house or an apartment building. More American homeowners are installing rooftop photovoltaic (PV) solar panels than ever, setting an all-time annual record for total installations in 2020.

The rise in residential solar, in addition to commercial and utility-scale arrays, has grown total U.S. PV capacity from 0.34 gigawatts (GW) in 2008 to 97.2 GW today. PV technology is now more affordable in the United States, dropping in cost by 36 percent over the past five years.

Cheaper components, more efficient designs, and lower consumer prices have come together to bring residential solar into maturity as a viable clean energy technology. But policymakers do not believe these trends, on their own, are enough, which is where subsidies come into play.

Subsidies are a common policy instrument for addressing the environment and health impacts of fossil fuels by speeding the adoption of clean energy technologies like solar. They provide an immediate financial incentive for consumers to buy what might otherwise be too expensive. By spurring market demand, business and tech innovation moves faster until, eventually, the technology becomes mature and subsidies are no longer needed.

When should subsidies stop? 

According to Eric Williams, a professor who studies energy policy at the Golisano Institute for Sustainability (GIS) at Rochester Institute of Technology (RIT), subsidies don’t need to—and, in many cases, shouldn’t—last forever. 

“There can come a time when its objective has been achieved or experience suggests the subsidy is not working as intended,” he said.

This matters because, effective or not, subsidies are a large investment of public funds.

The American Recovery Act of 2009 marked the largest energy bill in U.S. history, committing more than $90 billion to fast-track the transition from fossil fuels to clean energy. More than a quarter of that federal funding was in the shape of subsidies to move the country ahead on solar.

In 2006, U.S. federal policymakers introduced the Investment Tax Credit (ITC). The ITC gives homeowners who install solar panels on their rooftops a dollar-for-dollar reduction in the income taxes they would otherwise pay to the federal government. Some U.S. states offer additional subsidies to the ITC program. Massachusetts includes additional tax credits and sales tax exemptions, a per-kilowatt-hour compensation scheme, and even a loan program to incentivize consumers to install solar. This has led to more than 118,000 utility, commercial, community, and residential solar installations there as of 2021. In contrast, states with no solar program beyond the federal offer, like North Dakota with just 27 installations on record to date, have seen very low adoption.

“The justification for subsidizing a given technology is that it delivers public benefits that outweigh the subsidy cost,” Williams has noted. “If a technology shows promise to become cheap enough, the subsidy can be viewed as a temporary stimulus to bring it to a point where it can stand on its own.”

Occam’s razor

As computing power has improved, the data-based models that researchers create to simulate events in the real world have become ever more complex. For Williams, this creates a problem at the policy level.  

“If models are too complex, policymakers tend to ignore them, either because the outputs are difficult to translate into action or because they hesitate to rely on a model they can’t understand,” he explained. 

Eric Hittinger and Qing Miao, two public policy researchers at RIT, worked with Williams and Tiruwork Tibebu, a student in GIS’s doctoral program, to design a framework for determining an optimal subsidy that maximizes the benefits of solar without overspending funds. Their goal was to put real numbers behind the argument that residential solar subsidies deliver direct and indirect benefits by incentivizing consumers, lowering costs, and moving innovation forward.

The current U.S. ITC solar subsidy began with a tax credit of $585 per kilowatt (kW) and was set to decline to zero within 14 years. It has been applied the same across the country, regardless of state-level incentives or whether a region’s weather and geography are well-suited to solar.

Using their framework, the RIT researchers found that, in comparison to the ITC schedule, an optimal subsidy starting in 2018 should begin with a higher investment and then decline much faster. The researchers’ optimal subsidy schedule would achieve a net benefit—where the cost of the subsidy is outpaced by the value it provides—of $1.8 billion after 2035. They predicted a 22 percent increase in residential solar adoption, a 37 percent drop in price, and a 33 percent cut in greenhouse gas emissions compared to 2018.

“An optimal subsidy starts high and tapers off quickly because the technology needs extra support in the beginning when it’s still expensive, but to save government expenditures it’s important to back off to prevent throwing subsidies to consumers who would buy solar even without government support,” Hittinger noted.

A flexible, modular solution

The researchers’ integrated framework allows policymakers to quantify the benefits of a solar subsidy, tying the immediate climate and health benefits of more PV panels on roofs with the indirect economic benefits when it comes to tech learning and innovation.

A previous study by Williams and Hittinger introduced a parsimonious model—one that is as simple as possible while still being useful—for predicting residential solar adoption. This lightweight approach led to a reliable model for forecasting how quickly a new technology might be adopted by a population.

The framework integrates Williams and Hittinger’s solar adoption model along with two long-established models, one for weighing the net benefits of solar to the social costs of fossil fuels and the other for factoring in the pace of technological progress. These three modules cover what the researchers believe are the key trends that bring new technologies to market maturity.  

The study, published in the journal Energy Policy in 2021, applied the optimal subsidy framework to residential solar in the United States. In addition to a general national subsidy like the one used today, the researchers also considered a state-by-state subsidy schedule. This looked at differences between states in terms of the per-capita net benefit residential solar would offer in light of geography, grid composition, and state-wide policies.

“We believe that this research can be useful for policymakers to plan out government support for solar by providing a quantitative analysis that compares and evaluates policies,” Qing said. “This approach can be used to select efficient levels of subsidy from a public- or social-benefit perspective for rooftop solar or other technologies.” 

Looking ahead, the researchers plan to use the framework to develop optimal subsidies for wind and other emerging clean energy technologies.  

“The method we are developing isn't limited to rooftop solar,” Hittinger pointed out. “It can be applied to any technology support policy where we want to understand the balance between subsidy cost, technology adoption, and social benefits. This includes electric vehicles, wind power, or heat pumps—all these technologies currently receive government subsidy, and we're working on analysis that helps to decide the right level of support.”