Bootleggers and Baptists Win on Renewables

To get Democrat agreement to repeal the 40-year old ban on the export of US-produced oil, Republicans had to agree to extend dubious and wasteful tax credits for wind and solar power. 

Was the trade worth it? Probably not. While it may be easier to repeal these tax subsidies in coming years, it will not get easier to rein in crony capitalists, the bootleggers, who benefit from them. No, bootleggers are not illegal sellers of liquor; they are companies that embrace special interest agendas and then benefit from government actions in support of those agendas that stifle competition. Baptists, in the case of renewable subsidies, are the environmental advocates that overlook the consequences of their agenda.

Take solar power. It has been pursued for decades without becoming commercially viable. Today, its life support is firms who live by subsidies and Wall Street banks who have figured out how to turn the pursuit of green energy into a money making proposition. 

Firms like Solar City make clear in public filings that they need subsidies, loan guarantees, and mandates to survive. In other words, they are only commercially viable when market forces are distorted. In a 2012 filing with the SEC, Solar City stated, “Our business currently depends on the availability of rebates, tax credits and other financial incentives.… The expiration, elimination or reduction of these rebates, credits and incentives would adversely impact our business.”  Solar City “is following the same business model that Solyndra outlined in its own IPO filing in 2009, which stated that the now-defunct firm planned to achieve profitability in part by “strategically aligning our products with key government programs that provide financial incentives, export credit and project finance.” 

Propping up companies such as Solar City not only distorts market forces and capital investments, it promotes more lobbying to maintain subsidies and for actions that exploit the lack of competition. For example, SolarCity is under investigation by the Treasury Department to determine whether the company misrepresented the fair market value of the solar systems it installed, leading to greater payments from the government. 

Support for the tax credit is not limited to the manufacturers of solar panels. Wall Street firms such as JP Morgan and Goldman Sachs set up limited liability corporations to purchase home solar systems and then lease them to homeowners. In exchange, the homeowners give up the tax benefits for a monthly power cost that is less than their utility bill. The leasing company can also sell excess generated electricity to the local utility under the “net metering” regulations that have been put in place to encourage the use of solar power. When the system is paid off, which is well before the expiration of the lease, the LLC profit skyrockets. As the systems' age, firms offload the LLCs by marketing solar backed securities. 

Even Warren Buffett, the Oracle of Omaha, has invested $15 billion in the renewable energy business. Several analysts have pointed out that his investment is not driven by his belief in solar energy as much as his understanding that he can lock in good returns. Michael Horwitz, a solar analyst, told the Financial Times, “Let’s be clear, this is not Warren Buffett taking a bet on solar technology. This is Warren Buffett investing in a power plant that is guaranteed to yield large cash flows for at least 20 to 25 years.” 

The Bootlegger–Baptist theory demonstrates that politically successful legislation, like the renewable tax credit, will continue to be supported by an implicit alliance of zealots and crony capitalists. The Baptists give politicians a moral justification for their actions and the bootleggers will publicly commit to help save the planet because they can profitably exploit constraints on competition. They will also help their political benefactors through fund-raising contributions. 

While, consumers will bear the direct costs of higher utility bills, the economy bears the larger burden. It becomes less robust and able to produce the benefits that come from true competition.

William O'Keefe is the President of Solutions Consulting. You can follow him on Twitter here.

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