Federal funding helps make technologies ready more quickly. If subsidies can help make renewables more cost-effective earlier, this will incentivize energy companies to switch sooner.
Government funding has almost always played a part in the U.S. energy industry. It played a central role in kick-starting the renewable energy industry and still plays an important role in the sector today. Most other forms of energy, including fossil fuels, also receive subsidies.
There's a lot of debate around whether the government should continue providing subsidies for renewables and other forms of energy as well as about the impact government funding has.
To help makes sense of these discussions, let's take a look at the current and potential impacts of government funding on the renewable energy industry.
What types of government funding are currently available for renewable? Here are the main ways in which the government provides funding for renewable energy.
The federal investment tax credit, or ITC, is an important direct subsidy for renewables. The Energy Policy Act of 2005 initially established the ITC. It was originally scheduled to expire by the end of 2007, but it was extended it until 2016.
The spending bill Congress passed in December 2015 extended the credit through 2021, although it will end down over the years. For systems bought in 2016 through 2019, you can get a tax credit worth 30 percent of its cost.
In 2020, you can deduct 26 percent of your system's costs. In 2021, you can deduct 22 percent. In 2022, the credit will expire for residential customers. The owners of commercial systems will be able to deduct 10 percent.
There's also the production tax credit, which is based on the amount of energy your renewable energy system produces. It applies to the first 10 years of the project's operation. In 2016, the credit began to be phased down, and it will permanently end in 2020.
Products that may be eligible for the ITC and PTC include solar energy systems, small wind turbines, solar water heaters, geothermal heat pumps and fuel cells. The ITC most often applies to solar systems, and the PTC most often applies to wind projects.
Another way the government provides funding for renewables is by investing in research and development (R&D). This can come in the forms of grants, loans and loan guarantees. This type of funding helps researchers create new technologies and bring them to market.
A leading reason that government may want to invest in renewables is what is often referred to as market failures. The price of renewable energy does not include the environmental and social benefits it provides.
These benefits are not accounted for by the market. Meanwhile, fossil fuels have negative environmental and social impacts that are not accounted for. To obtain more of the benefits of renewable and avoid the harm caused by fossil fuels, the government may use funding to make up for these disparities.
R&D is also typically quite expensive while obtaining the financial rewards of such work takes a long time and is not guaranteed. For these reasons, the government often provides grants and loans for R&D. When fossil fuels were in the early stages, they received large amounts of federal funding. Renewables recently went through a similar phase.
One impact of federal funding is that it could enable the energy sector to more quickly move away from fossil fuels and toward renewables. Federal funding helps make technologies ready more quickly. If subsidies can help make renewables more cost-effective earlier, this will incentivize energy companies to switch sooner.
There are many reasons why we may want to move away from fossil fuels and toward renewables. Climate change is a leading reason. Reducing greenhouse gas emissions from the energy sector is crucial for meeting climate goals, and exchanging fossil fuels for renewables is one of the most efficient ways to do that.
Avoiding the worst impacts of climate change and improving air quality could also significantly improve public health. One analysis found that monetizing the environmental health benefits of solar energy could add about 3.5¢ per kilowatt-hour (kWh) to its value.
Using more renewables also has some purely economic benefits. The renewables sector is a major job creator. According to a recent report from EDF Climate Corps, wind and solar are creating jobs 12 times faster than the rest of the U.S. economy. Avoiding climate change impacts would also save the U.S. economy huge amounts of money.
Government funding has long been important to many different types of energy from coal to natural gas to nuclear to renewables. They help to fund R&D, incentivise companies to make investments and make certain forms of energy more affordable for consumers.
Today, renewables receive a significant amount of government funding, although the amount is starting to lessen as various incentives are phased out. While some are worried about this fact, many others note that the renewable sector is now mature that renewable energy is cost-effective on its own.
A 2016 analysis by financial firm Lazard Ltd. found that solar and wind energy is now cheaper than electricity from coal, natural gas and nuclear over the lifetime of a generation facility. According to the study, the cost of solar fell by 85 percent between 2009 and 2016, and the cost of wind energy decreased by 66 percent.
Of course, the price of energy varies from time to time and place to place, but in some cases, renewables may be more cost-effective even without subsidies.
Even if the government cuts funding for renewable energy, many customers may still opt to use it. Some may choose it because it's more cost-effective.
Another draw is that installing renewable energy equipment on your property allows you to own your own generation resources. People and corporations alike may also choose renewables because of their environmental and health benefits, especially as more companies aim to become more socially responsible and meet their sustainability goals.
Of course, receiving more funding would always be useful for the renewables energy sector — or any sector for that matter. It could help researchers develop new technologies more quickly and increase the deployment of renewable resources.
However, as renewables continue to become more cost-effective, government funding will become less critical to the sector's success.
Emily Folk is a conservation and sustainability writer and the editor of Conservation Folks.