Is renewable-energy push really economically sound?

4th March 2011 By: Kelvin Kemm

As the world financial ‘bubble and bang’ ripples continue to reverberate around the world, people are rethinking a number of financial decisions and models of the last few years.

Some of the past excitement has been tempered by calmer, sober thinking. Two interesting recent newspaper quotes have a bearing on this. On January 27, columnist Eric Reguly, of The Globe and Mail, stated: “The Spanish and Germans are doing it. So are the French. The British might have to do it. “Austerity-whacked Europe is rolling back subsidies for renewable energy as economic sanity makes a tentative comeback. Green energy is becoming unaffordable and may cost as many jobs as it creates. But the real victims are the investors who bought into the dream of endless, clean energy financed by the taxpayer. They forgot that governments often change their minds.”

This sentiment was echoed when, on January 28, in Business Green, it was noted: “European Union (EU) energy commissioner Guenther Oettinger is expected to be given the go-ahead to find new ways of financing green energy projects at an energy summit in Brussels next week in a bid to reduce demand for national incentives and European Investment Bank (EIB) loans. “Oettinger said at a European Parliament hearing on Wednesday that member States need to find new sources of financing because the EIB cannot continue to prop up the [renewable energy] industry as it moves forward. ‘Don’t kid yourself,’ he said. ‘We don’t have the machine to print new money.’”

Much of the decision-making associated with renewable energy over the last few years has been highly influenced by a fervour to do what is considered ‘good for the planet’ rather than what is economically sound.

As Reguly pointed out, “austerity-whacked Europe is rolling back subsidies for renewable energy as economic sanity makes a tentative comeback”. In Europe, Spain is now in a state of renewable energy ‘bubble and bang’, Over some years, Spain invested heavily in solar energy because this was said to be the socially responsible thing to do. Also, behind the scenes, Spain was receiving subsidies from Germany. Under EU rules, the ‘better-off’ countries had to help the ‘less well off’, and Germany met its obligations partly by supplying solar panels and other solar technology products to Spain.

This was all subsidised to meet EU requirements. In sunny Spain, it seemed to work, and Spain became the world’s top solar power producer. Reguly pointed out: “Since 2002, about €23-billion has been invested in Spain’s photovoltaic (PV) industry, which sucked up €2,7-billion in subsidies in 2009 alone, or more than 40% of the freebies doled out to the country’s entire renewables sector.”

However, by the end of 2009, when the Spanish economy was taking a nosedive and austerity measures had to be introduced, a royal decree reduced artificial tariffs on new PV plants by up to 45%. Existing plants would remain untouched. But not for long! Only a month later, a new royal decree retroactively limited the total number of production hours that existing PV plants could log to qualify for the subsidies.

Spain’s solar industry lobby group, the Asociacion Empresarial Fotovoltaica, estimated that the second decree would effectively reduce tariffs received by PV plants by 30%, forcing many of the PV companies to default on their debt.

At about the same time, the French government unveiled a plan for a three-month moratorium on new solar projects that would be eligible for subsidised tariffs. The goal was to prevent a speculative PV bubble while the French government mulled new regulations for renewable energy.

The French regulator of the energy and natural gas markets recently estimated that taxes on electricity would have to almost triple to meet the rising costs of renewable energy.

Meanwhile, Germany is cutting back on subsidies too and has revealed a reduction in subsidies to households that generate their own electricity with their own solar panels.

There is a knock-on effect and job creation is also being hit. In Spain, at Madrid’s Juan Carlos University, researchers have found that, for every renewable job created, 2,2 jobs are lost elsewhere. In other words, in the broader economy, nine jobs are lost for every four green jobs created.

The whole subsidy issue in energy in Europe is so complex that touching it is like sticking your finger into a spider’s web – it gets all tangled up.

Subsidies that investors thought were really long term are now turning out to be short term. Governments change their minds and the investors forgot about that. When governments were looking for investors, they would not have announced ‘temporary’ subsidies. They wanted them to look good, so they made them look solid. The subsidies looked as solid as the American subprime housing bond market appeared – this market subsequently blew up and started the whole world financial shake-up.

Meanwhile, the International Energy Agency has said that, assuming that all alternative energy subsidies in the world are met, world alternative energy subsidies will soar from $57-billion to $205-billion by 2035, measured in 2009 dollar terms.

But it is extremely unlikely that the world will stay on this growth curve. Economic reality is kicking in fast.