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Regulation | Peer-Reviewed Research

Sun Struck

How Governments Shape The Solar Energy Industry

Based on research by Douglas A. Schuler and Usha C.V. Haley

How Governments Shape The Solar Energy Industry

  • Governments around the world promote the solar power industry with subsidies.
  • Different countries have different schemes for subsidizing solar power, some more effective than others. Even within countries, not all solar strategies dovetail each other.
  • The different approaches create a range of uncertainties in the market.

In the Spanish region of Aragon, known for livestock, barley and rye, a vast tapestry of solar panels shimmers on the sun-drenched landscape. The panels angle toward the sky in much the same way that sunflowers shift position in nearby fields.

But none of these photovoltaic arrays (the technical term for solar panels) would be there without government intervention. As with many other countries, Spain encourages solar power with subsidies. Around the world, such efforts to push photovoltaic power are more successful in some countries than in others.

To understand how policy shapes the solar power market, Rice Business professor Douglas A. Schuler and colleague Usha C. V. Haley, now at West Virginia University, created a global map of these relationships. In the process, they found a market replete with unintended consequences.

Take Spain’s pell-mell dive into solar energy. In 2007, the Spanish government set such a high rate for feed-in tariffs — payments to households or businesses that generated their own electricity — that it sparked a solar gold rush. When the government restricted the policies the following year, the solar market crashed.

Around the world, the researchers found, policies to promote solar production derive from a maze of strategies and pressures, including subsidies, feed-in tariffs, tax credits and other formulas. The greater the number of elements, of course, the more unpredictable the outcome.

In general, unsuccessful policies fail for two major reasons, the researchers found. First, it’s chancy trying to predict how government policy will change from one year to the next. And second, it’s even harder to guess how those changes will affect the market.

Some countries offer more certainty than others. Germany, for example, finely tuned its feed-in tariff to dovetail with the European Union’s 2020 goal of 20 percent renewable energy in electricity. Yet uncertainty clouded the German market as well. In 2010, budget constraints and competing interests pushed the country’s solar subsidies down by 9 percent for roof installations and 11 percent for ground-mounted installations.

Elsewhere on the map, China’s ambition for solar power is epic. Government targets for non-fossil fuel use call for 15 percent solar and other renewables by 2020. China also opted against paying private citizens for generating excess electricity, instead promoting solar production on the state level by choosing the lowest bidder. The resulting bids were so low that they effectively priced foreign firms out of the market.

U.S. solar policy, meanwhile, is dogged by inconsistency. States including California, Texas and New Jersey even have their own energy policies. This regulatory confusion is a key reason that Germany, Japan and China have now overtaken America as global leaders in solar production and deployment.

In the United States, as Shell Oil’s former President and CEO John Hofmeister puts it, “energy is politicized.” Just as China bolsters its solar market with production subsidies, the U.S. requires the Defense Department only to buy American. As a result, even the most carefully conceived market strategies can turn into a train wreck if they run into political opposition and regulatory uncertainty.

No matter the country, though, dynamics governing solar policy are byzantine. Consider what happened in Spain, when it belatedly scaled back on feed-in-tariffs.

As it happened, the new policy occurred at the same time that China decided to support the price of polysilicon, a key component of solar panels. As a result, Spanish panel production using polysilicon shot sky high, while demand tanked. Suddenly, Spanish solar panel makers were left with warehouses full of excess inventory. The stock of one of China’s biggest solar firms, Suntech, plunged by 90 percent, and others followed.

So the next time you spy a solar array in Aragon or Amarillo, see it as the fruit of a regulatory ecosystem that’s as delicate as the interplay of soil, sun and water. Those panels are there because of government action, and their fate sways and bends like sunflowers on a summer day.

Douglas A. Schuler is an associate professor of business and public policy at Jones Graduate School of Business at Rice University.

To learn more, please see: Haley, U. C. V. & Schuler, D. A. (2011). Government policy and firm strategy in the solar photovoltaic industry. California Management Review, 54(1), 17-38.

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