Sunlight is an unlimited source of non-polluting energy. Most power plants currently produce electricity with steam turbines. The heat to generate the steam is supplied by the combustion of fossil fuels such as oil, natural gas, or coal. Staggering volumes of carbon dioxide gas are produced through the combustion process. Carbon dioxide is a greenhouse gas that is believed to significantly contribute to global warming.

The 1997 Kyoto Protocol forged an agreement between 187 nations for the shared reduction in greenhouse gas emissions. The goal of the Protocol is a reduction in emissions to reach a level five percent below 1990 emission levels. Because emissions have continued to rise since 1990, the reduced levels will actually be 29 percent below 2010 emissions.

Although 180 countries in total have ratified the Kyoto Protocol, the burden of effective emissions reduction is focused on far fewer countries. Some developed nations have profited from unregulated emissions of greenhouse gases for many years, and these countries have accepted a higher compliance standard under the agreement than smaller, less industrially developed countries.

Some large oil companies are investing in solar technology in an effort to reduce company reliance on costly fossil fuels. BP, Chevron, and Shell are notable in this regard. Although it sounds very appealing, free energy isn’t really free. Tremendous capital investments are required to achieve meaningful production of electricity from renewable sources. From a purely economic point of view, the return on these investments is slow when compared with new oilfield or coal mine development.

The existing worldwide capacity for electricity generation from solar energy in November of 2011 was approximately 64 gigawatt-hours. To place this in perspective, consider that the total global energy demand, from all sources, was 143,851 terawatt-hours in 2008 according to the International Energy Agency. One TWh is equal to 1,000 GWh.

The reason for the slow development of solar power is that PV panels, while markedly improving year after year, are still very inefficient. Large fields of collectors are required in order to produce commercially meaningful quantities of electricity, and efficiency is further reduced by the necessity to convert direct current to active current prior to distribution and use. A solar panel’s dependence on favorable weather conditions and immature flow cell battery technologies are additional limiting factors.

Countries bound by the Kyoto Protocol to reduce greenhouse gas emissions or slow the rate of increase in their emissions have developed several approaches to reach reduced emissions goals. One approach is to shift the capital investment burden from large generators to micro generators at end-user facilities. Even on a residential scale, the cost of converting PV energy can be prohibitive. The typical ROI on a residential PV system is approximately 10 years, depending upon location, and many homeowners are unwilling or unable to make such an investment.

Government incentive programs make the purchase of solar equipment more palatable for consumers. European countries have created feed in tariffs, often referred to as FiTs, as financial incentives for end-users. Several states in India have also created FiTs. In the US, tax incentives to homeowners also vary by state. India and China, and to some extent the US, also provide incentives to large generators to shift to solar production.

Government incentives in the US

The US has large areas in the Desert Southwest with sparse population density. This is an essential requirement for developing a solar collection field for a commercial generator. Large grant and low-interest loan programs administered by the US Department of Agriculture and by the US Department of Commerce’s Economic Development Administration are offered to utility companies for the construction of solar energy infrastructure.

Although the common image of solar power is the photovoltaic panel, the most prevalent solar technology is actually concentrating solar power. Often called CSP, concentrating solar power encompasses several approaches. One approach, called concentrating solar thermal or CST, is to use lenses or mirrors to focuses solar energy on large reservoirs of a heat transfer fluid. These reservoirs, which often contain solutions of dense brine, are circulated through boilers to produce steam for industrial heat or utility turbines.

A second approach, called concentrating photovoltaic or CPV, uses focusing lenses or mirrors to increase the amount of sunlight falling on standard PV panels. This approach increases energy production on overcast days.

The US government also provides federal tax incentives to individuals for going solar. Installation of a PV system during new home construction, or retrofitting a home with solar panels or solar hot water, qualifies for a tax deduction under the federal tax code of the US Internal Revenue Service. Many US states also provide tax incentives to homeowners who install solar technology.

Some states also require utility companies to buy excess solar power from residences. Homes with PV systems are usually connected to the power grid for electrical service during periods when the PV system is not producing. During production periods, electricity generated by PV that is not used at the site is fed back into the regional power grid through a reverse meter. Homeowners are compensated for this excess power as a credit on their electrical bill towards electricity purchased from the grid.

Not all states require utility companies to purchase excess electricity generated by homeowners. States that do have this requirement are not uniform in their compensation rates. It is also important to note that the compensation is provided only as a credit. If the amount of electricity returned to the grid exceeds the amount purchased from the grid, homeowners do not receive additional payment.

Government incentives in Great Britain

Solar power is more widely embraced in the European Union. England has a three-phase FiT program that greatly reduces the ROI for solar PV systems.

When a qualifying system, called a micro generator, is installed by a certified installer, homeowners immediately benefit from reductions in the amount of electricity purchased from the Big Six utility companies. They also receive a monthly payment from the utility company for each kilowatt-hour generated and used at the residence, and the companies are required to purchase excess solar electricity at a high, fixed rate.

This FiT provides a strong incentive for British homeowners to install solar PV systems and creates a solar PV infrastructure in densely populated regions where large fields of panels would not be possible. Many companies provide the equipment to homeowners at no cost in return for assignment of the monthly utility stipends. The cost of the equipment is rapidly paid off under this FiT, and the contracts then become valuable revenue-producing commodities for the companies for the remainder of the FiT period.

Government incentives in Italy

Italy introduced a green certification system in 2002 and a tremendously popular FiT program in 2005. Due to the tariff, solar PV system installations occurred far more rapidly than the Italian government anticipated. Solar power production increased 400 percent in 2009, and in 2010 the country was producing 6 GWh. The government plans to increase capacity to 26 GWh by 2016.

Homeowners with certified rooftop PV systems receive 0.431 €/KWh through the Italian FiT over a period of 20 years. In February of 2011, the Corriere della Sera newspaper reported that the FiT could cost the Italian government as much as €5.7 billion by the end of the year. Analysts are worried that the FiT program is unsustainable, and that the costs associated with the phenomenal growth of solar energy in Italy will have to be passed on to consumers sooner than planned and will destroy the program.

Government incentives in Spain

The looming FiT problem in Italy mirrors what has already happened in Spain. Solar PV systems grew far more rapidly in Spain than the government had anticipated. Large incentives produced nearly 10 times the expected PV system growth and led to drastic cutbacks to the FiTs.

Spanish utility companies agree that the incentives, which reached €2.6 billion in 2010, were unsustainable, but they have already advanced €20 billion to customers in subsidies for approved solar and wind projects. The Spanish economy did not benefit from the growth of the PV industry as much as expected, because less expensive panels were purchased from China instead of from domestic suppliers.

Unable to absorb the fiscal impact of the FiT subsidies, Spain has now reduced its solar energy production target from 22.7 percent of total electricity consumption to 20.8 percent. It is unclear whether or not the country will reach Kyoto-required greenhouse gas emission reductions.

Government incentives in Germany

The German solar energy program started with a FiT of 57.4 €/KWh in 2004. The tariff has gradually been reduced to less than half that amount, but the decreases were not in response to unexpected program growth or related subsidy costs. The German program was implemented with planned subsidy reductions. By law, the payments were cut by 10 percent in 2008, and additional reductions through 2011 were planned in advance.

The reduction in FiT was planned to correspond with an expected drop in the cost of PV electricity generation.

Government incentives in India

India is similar to the US in that the country has large areas of open land that could be used for fields of commercial solar PV panels. The political structure of the country is also similar to the US; there are multiple Indian states, and these states have individual solar energy programs instead of one national program.

Delhi has a FiT of 17 R/KWh, and homeowners have several options for the installation of rooftop solar PV panels. The Delhi government offers low-interest loans for up to 70 percent of the installation and equipment costs, or homeowners can lease their rooftop to developers who install the system and collect the tariff. Delhi FiTs can be collected for 25 years.

Maharashtra, Rajasthan, and Gujarat offer incentives only to developers. Of these states, Gujarat is considered to have the most advanced plan for solar energy production. The state has implemented a renewable energy policy, and CSP is a major focus of the plan.

The Indian states place the FiTs up for bid to developers. Unfortunately, there has been little limitation on the qualifications of companies who can bid on the projects. Analysts indicate that many of the winning bidders, if not the majority of them, placed bids simply to profit from subsequent sales of the FiTs to other developers. It is unclear how many of the ambitious solar power facilities will actually be built.

Government incentives in China

China is another country with vast spaces available for solar energy fields, and green energy is a booming industry there. In 2010, China produced approximately 50 percent of the world’s solar electricity. As seen with the low-cost PV panel sales to Spain, China has a rapidly expanding green energy infrastructure production base. In 2011, Suntech Power, Yingli Green Energy, and Trina Solar all reported that second quarter sales had increased between 33 to 63 percent from the previous year.

Although a booming PV manufacturing industry is desirable from a global perspective, critics argue that China uses unfair marketing practices to outcompete producers in other markets. The government provides large subsidies to solar manufacturers. State-controlled banks provide loans to the industry at below-market rates, and provincial governments provide free manufacturing and installation sites.

These same incentives are provided by other nations as well, but China’s huge size creates an economy of scale that other countries cannot match. China is also forging ahead with the construction of solar power facilities. Approximately 10 GWh in new capacity is planned for implementation by 2015.

Andy is thr CEO of Solar Panels UK