Solar bailout? Don’t bet on it
Is the U.S. solar energy market in a bubble? Analysis suggesting that the burgeoning industry is overvalued certainly aren’t new, and the list of observers who have deigned to call the purported bubble’s pending pop include e21 in 2014, The Wall Street Journal in 2013, CBS News in 2012, the Freakonomics blog in 2011 and even CNet all the way back in 2008.
In a July 9 piece, the Washington Times‘ Drew Johnson joins this chorus of solar bears, but adds a new twist. Likening the solar industry and related financial instruments to the 2008 housing crisis, Johnson asserts that when the solar asset bubble does pop, it will put taxpayers on the hook for billions in bailouts. There are many potential lessons one can draw from the financial crisis, its causes and the government’s response.
The lesson Johnson seems to have drawn is that securitization – the process by which assets are turned into tradeable financial instruments and sold to investors – can be a dangerous proposition. While it is not without its own unique challenges, the process of securitization can help unleash private capital for investment and more equitably spread risk. Bundling the income streams associated with a given asset (in this case, solar equipment leasing) allows risk to be distributed across a wider pool of investors.
It’s a market innovation about which most conservatives are cautiously optimistic, not reflexively skeptical. And while Johnson is not alone in taking a bearish position on the solar industry’s prospects, other talented industry watchers disagree. Major Wall Street players like Goldman Sachs have invested significant sums in various solar-related securities. Johnson argues those investments are likely to fail if the 30 percent solar investment tax credit expires as scheduled at the end of next year, leaving taxpayers holding the bag for the losses.
But there’s simply no evidence that, even if the solar industry collapsed catastrophically, any sort of 2008-style bailout would be forthcoming. The scale of investment in solar-related securities is small enough that it would barely amount to a ripple in the broader economy. While the fledgling industry has been growing rapidly and estimates of total solar market size vary widely, the U.S. market is likely less than $100 billion.
Housing finance, by contrast, accounts for as much as $21 trillion. Widespread failure of solar-backed securities would be an annoyance to investors, while widespread failure of mortgage-backed securities – particularly when multiplied by thousands of bets bundled as synthetic securities – was the kind of systemic threat the nation faced down in 2008. In economic terms, the comparison isn’t apples and oranges; it’s more like a single apple and Apple Inc. Furthermore, the prospect of the tax credit ending is hardly some closely guarded secret.
Wall Street is well aware that it could disappear, so the risk to income streams from the underlying assets is surely priced into the securities in question. In that way, it’s no different than investing in Boeing when there’s a possibility that the misguided Export-Import Bank from which it benefits might finally end for good. If the investments were to fail, it’s difficult to see Washington responding with much sympathy in any case, given tight budgets and Republican control of the House and Senate. The chances of a solar bailout are approximately equal to the chances of a Bernie Sanders-Donald Trump presidential race: zero.
To be clear, solar power should be asked to compete on its own merits and without the benefit of taxpayer subsidies. The same should be asked of every energy source, a process that will keep legislators busy dismantling our stupefying array of subsidies, tax preferences and accounting gimmicks granted to both traditional and emerging energy options. A truly level playing field is the only way to ensure that markets are free of distortion and taxpayers are free of unnecessary burdens. Regardless of solar’s prospects, however, the safe bet is that taxpayers won’t face any additional exposure associated with securities.
