Subsidies Solar Panels

The United States has been giving billions of dollars as subsidy to the clean energy industry to lower the price and increase demand for them. However, these subsidy programs are mostly scheduled to expire by 2014, and as of now, there is little support to keep these programs alive, because oftentimes even with the subsidy, clean energy technologies were too expensive to compete with their cheap substitutes from China.

Because renewable energy technology isn't nearly as efficient as energy from coal or gas, the cost of production for renewable energy is much higher than that of conventional energy. Furthermore, the equipment used to produce renewable energy such as solar panels or windmills are much more costly than conventional powerplants. Thus, supply, or the willingness and ability of a producer to provide a good or service at a given price of renewable energy, is lower than that of conventional energy, and it is underprovided.

(Fig 1.)

So, in 2011 alone, the government spent 24$ on subsidies, or money paid by the government to producers per unit of output, for renewable energy sources such as wind, solar, and biofuels, because the government considers them merit goods (goods that benefit the consumer and the society as a whole). S1 is the initial supply curve of renewable energy. Then S1 shifts down to the S+Subsidy curve after the 24 billion dollar subsidy, lowering the equilibrium price Pe to Psub and increasing the equilibrium quantity Qe to Qsub. After such subsidy, the supply for renewable energy equaled that of conventional energy such as gas or coal in many cities, as seen in the overlap between the S+subsidy curve and supply curve of conventional energy.

However, when the subsidy programs expire the supply curve for renewable energy will shift right back up to S1, decreasing equilibrium quantity to Qe and rendering it unable to compete with conventional energy.

Now, the many politicians support the expiration of these subsidy programs because even with billions dollars of subsidy, the renewable energy technologies have not been able to gain a foothold in the market due to cheap substitutes, especially from China. This was especially the case with solar panels, a market booming in China.

(Fig 2.)

(Fig 3.)

In figure 3, the initial demand curve for Chinese solar panels, D1, shifts upwards to D2 as the solar panel industry in China booms. This increase in demand lowers the equilibrium price from P2 to P1,

This drop in price for Chinese solar panels, a substitute for American solar panels, shifts the demand curve for American solar panels down as seen in Figure 2, from D1 to D2. This decrease in demand decreases the equilibrium quantity for American solar panels from Q1 to Q2, rendering