Spanish Wind, Revisited

Two years ago, Spain’s fixation on renewables and “green jobs” was praised by President Obama as a success story worthy of our emulation. With Obama making renewables a centerpiece of his administration with an eye toward the 2012 election, the obvious question is: How is Spain doing today?

The Initial Debate

My editorial “Spain Is Tilting at Windmills” (May 2009) presented the results of a study prepared by Gabriel Calzada Álvarez, PhD, an economics professor at King Juan Carlos University in Madrid. The report, “Study of the Effects on Employment of Public Aid to Renewable Energy Sources,” released in March 2009, was a comprehensive review of the long-term effects of Spain’s renewable energy policy on jobs and the economy. In sum, the study found that for every green job created, 2.2 private industry jobs were lost, and each “green job” cost the Spanish government 571,000 euros ($790,000 today).

After my editorial was published, the U.S. National Renewable Energy Laboratory (NREL) published a poorly reasoned rebuttal to Professor Calzada’s study. NREL’s report made the usual mistakes when accounting for “green job” creation. A good example is the baseless assumption that there is a pool of qualified people not otherwise employed by private industry, immediately available, and willing to take newly created, government-subsidized, green jobs. Transferring skilled workers from jobs that produce value (profits) to “green jobs” created by government fiat is an inefficient way to deploy capital in a free market economy.

The report also ignores the impact of the costs (taxes and increased deficits) of the temporary green jobs. By redeploying capital that would otherwise be used for investment or developing new products, these costs impose an economic opportunity loss to the free market. Finally, the authors assume that government-paid green jobs, paid for with deficit spending, are not temporary but permanent.

The NREL report dismiss these critical market factors without explanation, using claims such as “there is no justification for the assumption that government spending . . . would force out private investment.” Money is not a renewable resource; the money to pay for these jobs is not infinite, as the report author’s assume. Spain learned this lesson the hard way.

No Role Model

Rather than debate free market economics, let’s use Spain as a case study of the effect of deficit spending to provide excessive government subsidies for renewable energy. Spain uses a generous feed-in-tariff (FIT) to spur the growth of renewables. In 2010, the wind subsidies paid by the government were an average of €38 ($52.50 today) per MWh above the wholesale market price of electricity. This subsidy was paid for by government deficit spending amounting to €6.3 billion in 2010 alone, according to a Bloomburg analysis, until Spain’s economy crashed.

But give credit to the Spanish government for ordering a series of significant budget cuts that should reduce the deficit to 6% in 2011 from 11.2% in 2009. In truth, the cuts were forced by the European Union (EU) because Spain’s economy was threatening the entire EU monetary system, but the cuts were nevertheless made.

The big surprise occurred this past February when Spanish Prime Minister Jose Luis Rodriquez Zapatero admitted that the solar industry in Spain just might be a “bubble” after all and that Spain is no long financially capable of paying such lucrative FITs. The bubble soon burst, and one of the government’s austerity moves was to reduce the overall renewable FIT subsidies by about 45%, starting in the second quarter of 2011, to thereby reduce deficit spending.

The announcement of changes to the FIT had an immediate and profound impact on job loss and company closures. So far, in the solar industry alone, an estimated 75,000 jobs have been lost in Spain as a consequence of the subsidy cuts and another 40,000 jobs are expected to be lost by the time the cuts are fully effective.

The green jobs may have evaporated, but the residue from Spain’s renewable policies remain: Retail electricity rates increased from 20%, for residential rates,to over 100% for some industrial users, and unemployment passed 20%, all in 2010. What has happened in Spain was precisely as predicted by Professor Calzada two years earlier.

Follow the Leader?

Recall President Obama’s support of the American Recovery and Reinvestment Act (Stimulus Act) when lobbying Congress: “Think of what’s happening in countries like Spain, Germany and Japan, where they’re making real investments in renewable energy,” the president said.

The Congressional Budget Office concluded in a mid-February report that, just like Spain, U.S. government deficit spending to produce jobs is a very inefficient way to deploy capital. The report, “Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output from October through December 2010,” found that the price tag of the Stimulus Act now stands at $821 billion and that somewhere between 1.4 and 3.6 million jobs were created or saved. If we use an average of 2.5 million jobs, then we (and our children, because it was deficit spending) paid $328,400 for each job saved or created.

Professor Calzada’s report concluded by saying, “the U.S. should expect a loss of at least 2.2 jobs on average” for every one created should it continue down the same investment path as Spain. We have, and if Spain remains our role model for creating “green jobs,” as suggested by President Obama, then expect to see our renewable bubble burst in a couple of years with similar results.

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Dr. Robert Peltier, PE, is editor-in-chief of POWER magazine, the premier publication covering business and technology in the global generation industry. This post originally appeared in the April 2011 edition of that publication.