Austerity Green: EU Fatigue Towards Renewables (excepting the UK)

“Many European countries are waking up to the disaster of extravagant subsidies to renewable energy.  But Britain isn’t.  The lesson for Americans is simply that throwing money at renewable energy is a huge economic mistake, but politicians can keep the racket going regardless.  It will take robust opposition to stop the United States repeating Europe’s mistakes.”

Renewable energy has proved an expensive and unreliable source of energy everywhere it has been tried on a significant scale. And now there is a big divide among the major European economies that have enthusiastically adopted wind, solar and the other renewables.

While the UK ploughs ahead by throwing good money after bad, Italy, Spain and Germany are cutting back on their taxpayer/ratepayer-funded generosity toward politically correct energies. France, meanwhile, with its abundant nuclear power, has smartly stayed out of the game.

In all, Europeans have tested the theory of a “clean energy revolution” to destruction. And William Stanley Jevons of 1865 The Coal Question fame would only say, “I told you so.”

Germany: Reversing Course

Germany is probably the most favourable environment in the developed world for renewable energy to be an “economic success” and to create “green jobs.” This country has extravagantly subsidized wind and solar through their feed-in tariff and has tapped into a well-established electrical engineering industry. If it’s possible to make a success of renewable energy in any major economy, then it is probably in Germany.

But legislation has now passed the lower house of the German parliament – the Bundestag – to cut those subsidies. The Government’s original plan was for around a 40 per cent cut in the feed-in tariff. By the time the cuts made it past the lobbyists and become legislation, the range of cuts was less severe, including a 16 per cent cut for rooftop solar and a 15 per cent cut in open-field solar installations.

Further changes proposed on Monday by a mediation committee to get the cuts through the upper house – the Bundesrat – look like they will be relatively minor, with double digit cuts still likely if the Government get their way.

Germany’s feed-in tariffs never really delivered the jobs that their proponents domestically and around the world have claimed. Most studies estimate a short-term increase in jobs quickly followed by significantly reduced employment.

The only way the arithmetic ever added up was to not just satisfy domestic demand but also export solar panels and the like around the world. Unfortunately, German solar manufacturers have been in deep trouble recently as strong domestic demand doesn’t make up for lower manufacturing costs in China. Firms like Q-Cells have seen dramatic falls in revenue (see here).

The basic fallacy of green jobs has become clear even in Germany: subsidies for renewable energy only make a country a big customer, not a big supplier. Buying lots of unneeded copies of Microsoft Office doesn’t make you Bill Gates, it just makes you poor.

Spain, Italy Cutting

Spain and Italy are also making cuts. Italy is going to cut its feed-in tariff by 18 per cent in 2011. In each four-month period that year there will be a 6 per cent cut. Apparently, markets expected 15 to 28 per cent, so solar companies are in some ways counting themselves lucky.

Spain is proposing 30 per cent cuts in revenue for operating solar plants. Local trade groups have complained that they are being “cheated” and face bankruptcy.

Britain: Renewables Last Stand?

Britain is the big exception. Feed-in tariffs are just coming in now to complement the Renewables Obligation.

The Renewables Obligation currently provides two Renewables Obligation Certificates (ROCs) for each MWh of power generated by new offshore wind plants.  Those ROCs are worth just under £50 each at the moment. That means total subsidies are on offer of nearly £100 /MWh from just one policy (on top of the carbon price through the EU Emissions Trading Scheme), at current exchange rates that is around $150 /MWh. Rewards for smaller scale generation under the feed-in tariff are even more generous. Small scale (up to 5MW capacity) solar gets at least £268 /MWh, or around $406 /MWh.

Despite the massive subsidies on offer, there is little sign that renewable energy is delivering power when it is needed. In the first quarter of 2010, power from renewable sources fell by 7.5 per cent compared to the same period in 2009. Companies are being paid to turn their turbines off, because when the wind does blow it often doesn’t coincide with periods of high consumer demand.

The tragedy of wasting resources on such a vast scale turns to comedy in the case of the Hebridean island of Eigg. Last week, they were awarded the overall winner prize at the Ashden Awards for Sustainable Energy (the ‘green oscars’) for their “refreshing” combination of extensively deploying wind, solar and hydro energy and limiting energy consumption in order to get 90 per cent of their energy from renewable sources.

But in recent days the islanders have had to drastically ration energy use and fall back on diesel generators as mild weather, a heat wave by Hebridean standards, has cut power from wind and hydro sources. It doesn’t bode well for renewable energy’s ability to reliably provide energy in less advantageous locations and for populations over 100.

The vast cost and doubtful utility of renewable energy is scaring investors. A report by Citigroup Investment Research has pointed to a looming “affordability crisis”. They argued that in order to meet environmental targets Britain would need to invest €161 billion by 2020, more than Germany, France and Italy combined. Paying for all that investment will mean doubling profits and doubling prices.

In the wider context of a major fiscal adjustment that will put serious pressure on household disposable incomes, there is little reason to think that doubling energy prices is politically sustainable. Politicians may be happy to sign up to extravagant subsidies now but anyone investing in renewable energy faces a serious risk that their returns will be cut (either directly or through a windfall tax) after a consumer backlash at rising energy prices.

Sadly, the Government’s response to investors being spooked by the high cost of renewable energy hasn’t been to reconsider whether the targets are practical. Instead, they are establishing new plans to channel taxpayers’ money and vast amounts of private investment through a Green Investment Bank to make up for the shortage of capital. It would take another post to go through the Green Investment Bank plans in details, but it means staking a huge amount of ordinary British families’ money on the success of renewable energy and other green technology.

EU: Just Waking Up

Some countries are waking up to the disaster of extravagant subsidies to renewable energy. But Britain isn’t. The lesson for Americans is simply that throwing money at renewable energy tends to be an economic disaster, but that politicians buttressed by expensive lobbyists can keep the racket going regardless.

It will take robust opposition to stop the United States repeating Europe’s mistakes.