You'd think big subsidies would be good for renewable energy, and they are. But could too much of a good thing be bad for the industry?

Take a look at New Jersey. According to The New York Times, state regulators are considering endingsolarrebates - and replacing them with energy credits that would be traded on the open market - after applications have far outpaced the rebate money available.

The program has a backlog of more than 700 applications for the rebates, leading to long waits that have stretched from months into years in some cases, the newspaper reported.

It's one of the richest rebates in the country, said Ron Pernick, a principal at Clean Edge.

And therein lies the danger: Generous subsidies tend to be well used and end up costing more than expected.

Germany is a good example of the dangers of success.

The country offered a feed-in tariff that paid a higher rate for the generation of renewables, including solar power, making it cheaper to own solar power than to buy conventional electricity.

The high cost to the government led to a backlash, with politicians questioning why the solar industry still needed such high subsidies, and the tariff has declined faster than expected - although not as fast as many had feared (see Solar Prices Set in Germany).

"Germany really only needed to get [solar] to price parity, and it went over that," Pernick said. "The incentive has got to be there for the solar manufacturers and the value chain to drive down pricing. If a subsidy is too large, it has a reverse effect."

Spain has seen another case of successful-subsidy backlash.

In September, the country reached 344 of the 400 megawatts it had set as a cap on its solar subsidy, making it clear its program would reach the limit much earlier than originally expected in 2010 (see Is Spain Shining Too Brightly? and Spain Considers Adding a Solar Gigawatt). The country is considering expanding the cap, but reducing the tariff per kilowatt-hour.

Again in New Jersey, the rich rebate has jump-started solar activity, as intended. But it's cost the state a king's ransom.

The rebates, which have averaged $20,000 for residential projects and more than $1 million for large commercial installations, have cost the state $170 million so far, according to The New York Times. The Board of Public Utilities estimates the rebates would total $11 billion by 2020, if they aren't changed.

Under the new plan, most of the rebates would end this year, while some rebates for small residential projects would disappear over the next four years, the newspaper reported.

Pernick said he's not surprised about the amount. In a report earlier this month, Clean Edge forecast that it would cost up to $33 billion annually to make solar 10 percent of the country's electricity by 2025 (see When Will Solar Reach Significance?).

Setting a high incentive - such as the one in New Jersey - that doesn't decline as prices come down can leave governments with a large bill that only increases as the market develops, he said.

"You don't want an overly rich subsidy because it will break the bank and it won't result in lower pricing," he said. "Subsidies have to be very carefully structured to cover the difference between the prevailing rate of a competitive technology and that of the emerging technology, and building in a subsidy model ... that declines over time can be very important."

Pressure to reduce or eliminate successful subsidies is common, and not only in solar, he said.

Pernick pointed to the tax credits for hybrid vehicles in Oregon as an example. Some lawmakers and residents have questioned whether the credits are still needed, considering the high gas prices and the fact that the Portland metro area has more hybrids per capita than any other city in the country, according to Willamette Week.

"It's hard to know when a crossover has occurred," Pernick said. "The question of where to change or end a subsidy can be a difficult one and you certainly don't want to bankrupt a state because a subsidy is so successful."

In other words, the best subsidies are sustainable - not too high and not too low, so they can give the market some stability.

"You have to set it at the right level, so it's not overly rich - and some of these programs, such as in Germany, are overkill - but provides a long-term view of where the industry is going," Pernick said.

Still, Pernick said, in spite of strong growth, solar isn't yet cheap enough to remain competitive without government help.

"The solar industry is not at price parity yet, and incentives and tax credits are very important to getting to that place," he said. "Natural gas, oil and nuclear power all rely, to some extent, on subsidies and incentives. The oil industry doesn't have to apply for subsidies every year."

That argument might not be enough to keep the government cash coming.

New York, Colorado, Maryland and other states also are considering scaling back government subsidies, according to The New York Times.

The federal renewable-energy tax credits also are set to expire at the end of this year. The solar industry has repeatedly tried to extend the credits, but has been unable to get an extension past both houses of Congress (see Senate Blocks Renewable Incentives Bill). 

Meanwhile, Japan is countering the trend by trying to resurrect its solar subsidies, which ended in 2005 (see Japan Wants to Resurrect Solar Incentives and Japan's Wind-Power Problem).