The federal government has established a program to "commercialize" solar water heating. That jargon means the government is going beyond the funding of solar-energy research and development to the use of subsidies and other means to encourage private investment in solar water heating.
There is ample precedent for the use of subsidies to promote investment in energy production. An Energy Department studay estimates that, since 1918, the federal government has provided over $130 billion in subsidies for the production of oil, gas, coal and electricity. The result, until recently, was an energy market biased against investment in solar energy becvause it was the only unsubsidized energy source.
A key element of the program to commercialize solar water heating is the residential solar energy tax credit contained in the Energy Tax Act of 1978. It will repay 30 percent of the first $2,000 invested in solar-energy systems and 20 percent of the next $8,000.
The solar energy tax credit is aimed primarily at encouraging the purchase of solar water heaters, the most economically practical solar-energy systems. Since solar water heaters usually range in cost from $1,500 to $2,000, they benefit from the larger 30 percent tax credit. Nonetheless, solar-energy advocates and solar water heater manufacturers who expect the tax credit to stimulate widespread consumer investment probably will be disappointed. The residential solar energy tax credit is flawed in a way that drastically limits its potential.
The problem is that the tax credit is available to consumers who want to buy solar water heaters but not to consumers who would prefer to rent them. This is a case of inverted priorities, since the number of consumers who are potential renters of solar water heaters is far greater than the number of potential purchasers. House and apartment renters, for example, are not likely to buy solar water heaters, though they might rent them, and they make up 40 percent of the housing market nationally (65 percent in the Washington area).
As for the remainder of the housing market, most homeowners are not likely to buy solar water heaters, even with the aid of the tax credit, because of three barriers to consmer investment. First, many homeowners are unable or lunwilling to pay the high initial cost of a solar water heater in return for long-term savings on their energy bills. Second, others will not risk their money on an unfamiliar product, which they fear might not perform as advertised. Finally, some don't want to cope with the maintenance requirements of a solar water heater.
Although the tax credit lowers the cost of a solar water heater by 30 percent and thereby reduces the financial risk, the initial cost and the risk are still substantial barriers to investment. A consumer who pays $2,000 for a solar water heater, for example, receives a $600 tax credit (at tax-payment time), but still risks $1,400.
The unhappy truth is that the residential solar energy tax credit is a somewhat regressive subsidy that will be used by only a small fraction of the public, primarily homeowners with substantial incomes.
If the tax credit is to be used by a large number of consumers, it must be made available to consumers who cannot or will not buy solar water heaters but will use the tax credit to rent them. It should be given to business firms that buy solar water heaters for leasing to residential customers. Consumers will receive the tax credit indirectly, as the leasing firms provide solar water heaters for a monthly fee that is competitive with other energy sources. The solar leasing firms must pass the subsidy on to consumers in the form of a competitive rental fee or they will not find a market for their solar water heaters.
Since most lenders are probably too cautious to loan money to a venture as novel as leasing solar water heaters, solar leasing firms would need a government loan guarantee to help raise the capital to buy their first batches of solar water heaters. After a successful trial period, loan guarantees should not be needed to raise capital.
Instead of paying the purchase price for solar water heaters, consumers would pay a monthly rental fee equal to or lower than their displaced monthly utility bills for water heating. As for financial risk and maintenance, if a solar water heater performs unsatisfactorily or is not maintained properly by a leasing firm, a consumer can simply quit paying the monthly rental fee and have the solar water heater removed or replaced.
Another advantage of promoting solar leasing is that renters of solar water heaters are less likely than purchasers to become unhappy customers who might generate a consumer backlash that would delay development of the empryonic solar energy industry. According to a recent report by the House subcommittee on oversight and investigations, such a consmer backlash is a real danger. In the subcommittee's words, "if the first family on the block has a bad experience with solar, it is unlikely that other systms will soon be installed in that neighborhood." The subcommittee urged that "effective consumer protection mechanisms be developed with all practical speed."
Solar leasing provides the needed consumer protection. Consumers who rent solar water heaters risk only some inconvenience and a small monthly rental fee, not the purchase price.