A Policy by Any Other Name: Unconventional Industrial Policy in the US Residential Solar Industry

Consumer subsidies are a common policy tool for supporting the adoption of clean energy technologies. Policymakers often justify these programs as a means of stimulating infant industries, arguing that greater demand increases industry learning-by-doing, which in turn reduces costs for potential entrants. This requires learning spillovers between firms that make experience-based cost reductions a public good. However, spillovers can reduce firms’ incentives to expand output and lower costs. To evaluate this tradeoff, I estimate a dynamic structural model of the market for solar panel installations in California that endogenizes firms’ entry and exit decisions and allows for learning-by-doing with knowledge spillovers. I find that a 1% increase in a firm’s cumulative production leads to a 0.7% reduction in installation-specific costs and that learning spills over across firms. Counterfactual analysis reveals that a state-level consumer subsidy program increased solar adoption by 4% and installer entry by 9%, indicating that industry cost reductions outweigh any strategic incentives for firms to reduce learning. While consumer subsidies achieve industry growth, I find that standard industrial policies such as entry subsidies provide greater welfare gains.