When solar tax incentives overheated, the residential solar market became scorched

By Steve Swedberg of CEI.

"Residential solar has long been sold as a win-win for consumers and the environment. It was marketed as an affordable way for homeowners to reduce energy costs and support clean energy goals. What’s not to like? Yet the latest Solar Market Insight Report shows US residential solar installations slowed by 2 percent in 2025, which reveals that the market is not immune to economic and policy pressures.

At the same time, some Republican lawmakers are now pushing to reinstate federal clean energy tax credits. This sign of political uncertainty underscores how reliant the residential solar market has been on government incentives.

In a previous piece, I covered how the Residential Clean Energy Credit (RCEC) and related financing structures spurred rapid market growth alongside unintended consequences. Introduced under the Inflation Reduction Act, the RCEC was intended to jumpstart the residential solar market with a substantial federal tax credit for installing panels. By lowering upfront costs for homeowners, it created a strong financial incentive for consumers and developers to invest in residential solar at an unprecedented pace.

While the credit expanded solar panel adoption, it also accelerated bankruptcies, contributed to at least one alleged fraud case, cost taxpayers millions, distorted energy markets, and funneled investment into subsidy-driven projects rather than economically efficient ones. Because residential solar economics have been tied more to federal incentives than to market fundamentals, these vulnerabilities are now impossible for policymakers and investors to ignore.

Why residential solar is vulnerable without subsidies

Incentives to maximize the fair market value and favor certain financial instruments over others shape how residential solar companies operate, as recent solar industry bankruptcies illustrate.

Sunnova and Mosaic, for instance, grew rapidly using heavily leveraged financing structures. Sunnova carried over $10 billion in debt at the time of its bankruptcy, while Mosaic built its business on long-term loans for residential solar installations. Similarly, SunPower was structured on a loan-based business model, whereas PosiGen focused on no‑upfront-cost leases or loan‑based financing.

These strategies reveal a pattern of overvaluation and aggressive expansion. By structuring operations to maximize RCEC benefits, companies were incentivized to overvalue systems, take on excessive debt, and chase growth divorced from economic reality. Such models leave residential solar particularly vulnerable when interest rates rise, consumer credit tightens, or the RCEC expires and the easy money disappears.

The RCEC’s influence on upfront costs and financing structures means the residential market likely would not have reached its current size without this federal incentive. Its expiration is therefore expected to have significantly adverse effects on the US residential solar sector.

Residential solar is less economically efficient than advertised

Financial advisory firm Lazard’s 2024 report shows that rooftop residential solar has a higher levelized cost of electricity (LCOE) than utility-scale solar and many conventional generation options. LCOE averages total costs over a system’s lifetime electricity output. While a higher LCOE does not automatically mean higher consumer prices, it signals that rooftop solar is less economically efficient per unit of electricity produced.

As my colleague Paige Lambermont pointed out, the RCEC rewards upfront capital investment over efficient or economically sound energy production. Lazard’s findings illustrate how subsidies can distort investment incentives and encourage deployment that may not follow the lowest-cost or most efficient path to meeting US electricity demand.

How the RCEC reshapes capital markets

The RCEC affects more than electricity costs; it also distorts energy finance. As a large, upfront, non-refundable tax credit, it incentivizes solar developers to prioritize projects that maximize tax benefits.

Because developers and homeowners cannot use the RCEC directly, projects rely on tax equity investors, which are large corporations or banks with substantial tax liabilities, to provide the upfront capital in exchange for credit. These investors use financing structures such as partnership-flips, sale-leasebacks, and inverted leases to convert future tax benefits into immediate funding.

Without the RCEC, tax-equity investors would likely have directed capital to other tax-advantaged opportunities or conventional energy projects. The RCEC therefore does more than subsidize residential solar. It channels investment toward projects that maximize subsidy capture, illustrating how federal incentives can reshape financial markets and capital allocation in ways that do not necessarily produce economic efficiency.

Time to test residential solar’s viability

In summation, the RCEC has highlighted the financial vulnerabilities and structural challenges within the residential solar sector. From overleveraged companies to misaligned investment incentives, the program illustrates how federal subsidies can reshape markets in ways that do not always promote economic efficiency.

Whether it is residential solar or the Trump administration recently giving a $625 million subsidy to the struggling coal industry, the RCEC is a fine reminder that the government should not pick winners and losers.

If solar power can succeed in the residential sector, it should be able to do so on its own merits and without government assistance. If subsidies are the only thing keeping residential solar market solvent, then the RCEC is less a bridge for a clean energy revolution than a taxpayer-funded crutch. It is time to see if residential solar can survive without a government handout."

A Look at Our Material Progress

Modern life is more affordable and abundant than nostalgic claims suggest

By Alex Tokarev. He grew up in Bulgaria. He teaches Economics and Classical Liberal Philosophy at Northwood University. Excerpt:

"Imagine having to sweat on an assembly line or in a dangerous mine for three or four hours every day just to cover your grocery bills. Not excited about this prospect? Sorry, but that’s probably what you’d be doing if you were born a century ago. Today? The typical jobs are not only better, but you can earn the same amount of calories in just 30 minutes. Affordability, baby!

For most of humanity, the historical pattern was daily malnourishment interrupted by periods of starvation. Today, we have an epidemic of obesity. A hundred years ago, Americans fared better than most. Yet, compared to you, they were appallingly poor. In 1925, meat was expensive. The produce was seasonal. There was no refrigeration, no global supply chain, no high-yield farming.

Despite our government’s “food pyramid” propaganda, diets are now much healthier. Despite our government’s theft of 99% of the purchasing power of the U.S. dollar (through unconstitutional Fed policies that cause inflation), I can now grab a pint of fresh blueberries from Chile at our Michigan Kroger store for just $1.99, even though my backyard is already frozen. Unaffordable?

Capitalist competition, free enterprise, profit maximization. These pursuits led to the age of plenty that you enjoy. CATO’s scholar M. Tupy and BYUH professor G. Pooley have estimated (read their 2022 book Superabundance) that even the unskilled American workers can afford dozens of common food items by working 10 times less today than a century ago. Some crisis!

My son loves Universal Orlando’s parks. As a student, he works as a lifeguard, a minimum wage job. Even that pays enough to cover his round-trip to Florida by working just 8 hours. A hundred years ago, that travel would have taken three days and cost a weekly salary. Today, he leaves home after breakfast and eats dinner at the Islands of Adventure after swimming at Volcano Bay.

Our cars are faster, safer, more comfortable, last longer, pollute less, need less maintenance, and cost less in real terms. An unskilled employee needs to work only half as much today as 50 years ago to buy a pickup truck. Most vehicles on the road today come with safety features, entertainment options, and navigation controls that were science fiction to drivers in the 1920s.

Average Americans take vacations that their grandparents couldn’t have dreamed of. Alternatives to hotels have multiplied. Competition has lowered travel costs for everyone. Climate control, clean water, countless restaurants serving exotic foods from around the world, and limitless recreational options. These are no longer luxuries. I still marvel while my kids take those things for granted.

Debt? When your parents were your age during the fall of the Berlin Wall, the average, inflation-adjusted net wealth (assets minus liabilities) per household in the bottom 50% was $33,000. Today, it’s almost double: $60,000. Homes too expensive? Today—perhaps. Blame government restrictions on the supply. Price per square foot between 1975 and 2015? Almost no change.

College tuition rising faster than inflation? Blame the government for messing with that market. When taxpayer money is channeled to consumers of goods or services, higher demand means higher prices. Econ 101. Do you need two salaries to raise two children? We saved enough on one modest salary in 7 years to buy a house in Midland, MI. We paid it all with cold, hard cash.

The world isn’t getting worse. Your spending habits might be. In every measurable way, life is getting better. No previous generation has had more physical comfort and such amazing chances to develop productively and prosper. Study some history. If you stop moaning about decline and start noticing the progress, you might even enjoy your lives as Gen X is enjoying ours."

The Washington consensus works: Causal effects of reform, 1970-2015

By Kevin B. Grier & Robin M. Grier. From Journal of Comparative Economics.

"Abstract

Traditional policy reforms of the type embodied in the Washington Consensus have been out of academic fashion for decades. However, we are not aware of a paper that convincingly rejects the efficacy of these reforms. In this paper, we define generalized reform as a discrete, sustained jump in an index of economic freedom, whose components map well onto the points of the old consensus. We identify 49 cases of generalized reform in our dataset that spans 141 countries from 1970 to 2015. The average treatment effect associated with these reforms is positive, sizeable, and significant over 5- and 10- year windows. The result is robust to different thresholds for defining reform and different estimation methods. We argue that the policy reform baby was prematurely thrown out with the neoliberal bathwater." 

Highlights

         Sustained economic reform significantly raises real GDP per capita over a 5- to 10-year horizon.

         Countries that had sustained reform were 16% richer 10 years later.  

        Despite the unpopularity of the Washington Consensus, its policies reliably raise average incomes."

Also see What is the “Washington Consensus?” by Douglas A. Irwin and Oliver Ward. Excerpt:

"The main Washington Consensus policies include maintaining fiscal discipline, reordering public spending priorities (from subsidies to health and education expenditures), reforming tax policy, allowing the market to determine interest rates, maintaining a competitive exchange rate, liberalizing trade, permitting inward foreign investment, privatizing state enterprises, deregulating barriers to entry and exit, and securing property rights."

Liberalising reforms have more often than not delivered medium-term growth improvements

See Big reforms, big returns? Evidence from structural reform shocks by Alessio Terzi & Marco Pasquale Marrazzo. From the journal Economic Modelling.

"Abstract

Following a series of disappointing outcomes in Latin America and Sub-Saharan Africa, traditional structural reform shocks, of the type advocated under the ‘Washington Consensus’, came to be widely viewed as unsuccessful. This paper revisits that conclusion by applying a novel generalised use of the non-parametric Synthetic Control Method with multiple treated units to estimate the impact of 23 policy reform shocks (spanning both real and financial sector measures) implemented globally between 1961 and 2000. Our results suggest that, notwithstanding a muted short-term impact, wide-reaching reforms on average raised GDP per capita by around 6 percentage points over a decade. These findings are robust across alternative specifications, placebo and falsification tests, and different reform indicators. While outcomes were heterogeneous, the results indicate that broad liberalising reforms have more often than not delivered medium-term growth improvements, underscoring the importance of understanding the conditions under which they succeed." 

Also see What is the “Washington Consensus?” by Douglas A. Irwin and Oliver Ward. Excerpt:

"The main Washington Consensus policies include maintaining fiscal discipline, reordering public spending priorities (from subsidies to health and education expenditures), reforming tax policy, allowing the market to determine interest rates, maintaining a competitive exchange rate, liberalizing trade, permitting inward foreign investment, privatizing state enterprises, deregulating barriers to entry and exit, and securing property rights."

AI, Unemployment and Work

By Alex Tabarrok.

"Imagine I told you that AI was going to create a 40% unemployment rate. Sounds bad, right? Catastrophic even. Now imagine I told you that AI was going to create a 3-day working week. Sounds great, right? Wonderful even. Yet to a first approximation these are the same thing. 60% of people employed and 40% unemployed is the same number of working hours as 100% employed at 60% of the hours.

So even if you think AI is going to have a tremendous effect on work, the difference between catastrophe and wonderland boils down to distribution. It’s not impossible that AI renders some people unemployable, but that proposition is harder to defend than the idea that AI will be broadly productive. AI is a very general purpose technology, one likely to make many people more productive, including many people with fewer skills. Moreover, we have more policy control over the distribution of work than over the pure AI effect on work. Declare an AI dividend and create some more holidays, for example.

Nor is this argument purely theoretical. Between 1870 and today, hours of work in the United States fell by about 40% — from nearly 3,000 hours per year to about 1,800. Hours fells but unemployment did not increase. Moreover, not only did work hours fall, but childhood, retirement, and life expectancy all increased. In fact in 1870, about 30% of a person’s entire life was spent working — people worked, slept, and died. Today it’s closer to 10%. Thus in the past 100+ years or so the amount of work in a person’s lifetime has fallen by about 2/3rds and the amount of leisure, including retirement has increased. We have already sustained a massive increase in leisure. There’s no reason we cannot do it again."

Shellfish, Typhoid, and Private Control of Disease

By Jeffrey Miron.

"According to a recent study, early 20^th c. London fishmongers provided a creative solution for the problem of foodborne typhoid transmission (the study says "Industry-led efforts to mitigate contaminated shellfish reduced typhoid deaths in London from about 1.5 to 0.1 per 10,000 people between 1900 and 1920").

The issue was that shellfish

acted as vectors for waterborne diseases … Once the connection was understood, consumers alone could have substantially reduced typhoid deaths by consuming far fewer shellfish.

Instead, a prominent fishmonger company

used the Billingsgate [fish] market to help high-quality sellers signal the quality of their products by sampling and testing harvest sites, banning sales from known contaminated areas, and requiring vendors to purchase shellfish cleaning services.

This strategy meant that

consumers who were willing to risk their own quality control could purchase shellfish for a lower price from traders who did not transit through Billingsgate, while those willing to pay a premium for third-party quality control purchased shellfish through Billingsgate.

Profit-motivated companies can create public goods." 

The Rise and Decline of General Laws of Capitalism

By Daron Acemoglu & James A. Robinson. 

"Thomas Piketty's (2013) book, Capital in the 21st Century, follows in the tradition of the great classical economists, like Marx and Ricardo, in formulating general laws of capitalism to diagnose and predict the dynamics of inequality. We argue that general economic laws are unhelpful as a guide to understanding the past or predicting the future because they ignore the central role of political and economic institutions, as well as the endogenous evolution of technology, in shaping the distribution of resources in society. We use regression evidence to show that the main economic force emphasized in Piketty's book, the gap between the interest rate and the growth rate, does not appear to explain historical patterns of inequality (especially, the share of income accruing to the upper tail of the distribution). We then use the histories of inequality of South Africa and Sweden to illustrate that inequality dynamics cannot be understood without embedding economic factors in the context of economic and political institutions, and also that the focus on the share of top incomes can give a misleading characterization of the true nature of inequality."