Subsidies and Risk

Investing in industries that enjoy significant subsidies may carry additional risks.  Subsidies, typically granted by government to support desired public policy, can also be revoked or materially altered.

For example, home solar panel systems have seen considerable growth, particularly in states that have mandated large payouts to residents who generate more renewable energy than they use.

In this instance, the subsidy is based on the sale of excess electricity to local utilities at prices that substantially exceed the utility’s own generating costs.  This is called net metering and, in essence, benefits the owners of solar panels at the expense of the rest of the utility’s customers.  Utilities are beginning to seek to reduce the net metering price in an effort to be fair to all of their customers.

Another example of potential subsidy risk pertains to electric vehicles.  A Federal subsidy of $7,500 is generally available to most customers.  However, once a manufacturer sells 200,000 electric vehicles in the U.S., this subsidy begins to decrease and quickly disappears.  Changes in the amount of subsidy are likely to affect demand.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA®