Renewable energy has become a topic of increasing interest in recent years, as fossil fuel prices have been volatile and the focus on climate change has sharpened. Governments in many jurisdictions have been instituting policies to increase the installation of renewable energy capacity, as the technologies involved are not generally able to compete on price with conventional generation.
The reason this is necessary, as we have pointed out before, is that the inherent fossil-fuel dependence of renewable generation leads to a case of receding horizons. We do not make wind turbines with wind power or solar panels with solar power. As the cost of fossil fuel rises, the production cost of renewable energy infrastructure also rises, so that renewables remain just out of reach.
Renewable energy is most often in the form of electricity, hence subsidies have typically been provided through the power system. Capital grants are available in some locations, but it is more common for generators to be offered a higher than market price for the electricity they produce over the life of the project. Some jurisdictions have introduced a bidding system for a set amount of capacity, where the quantity requested is fixed (RFP) and the lowest bids chosen.
Others have introduced Feed-In Tariff (FIT) programmes, where a long-term fixed price is offered essentially to any project willing to accept it. Tariffs vary with technology and project size (and sometimes inversely with resource intensity) with the intention of providing the same rate of return to all projects. FIT programmes have been much more successful in bringing capacity online, especially small-scale capacity, as the rate of return is higher and the participation process much less burdensome than the RFP alternative. Under an RFP system accepted bids often do not lead to construction as the margin is too low.
The FIT approach has been quite widely adopted in Europe and elsewhere over the last decade, and has led to a great deal of capacity construction in early-adopter countries such as Germany, Spain and Denmark. In Canada, Ontario was the first north American jurisdiction to introduce a similar programme in 2009. (I was involved in negotiating its parameters at the time.)
Renewable energy subsidies are becoming increasingly controversial, however, especially where they are very large. The most controversial are those for solar photovoltaics, which are typically very much higher than for any other technology. In a number of countries, solar tariffs are high enough to have produced a bubble, with a great deal of investment being poured into infrastructure production and capacity installation. Many of the countries that had introduced FIT regimes are now backing away from them for fear of the cost the subsidies could add to power prices if large amounts of capacity are added.
As Tara Patel wrote recently for Bloomberg:
To end what it has called a “speculative bubble,” France on Dec. 10 imposed a three-month freeze on solar projects to devise rules that could include caps on development and lowering the so-called feed-in tariffs that pay the higher rate for renewable power. The tariffs were cut twice in 2010. “We just didn’t see it coming,” French lawmaker Francois- Michel Gonnot said of the boom. “What’s in the pipeline this year is unimaginable. Farmers were being told they could put panels on hangars and get rid of their cows.”…. ….EDF received 3,000 applications a day to connect panels to the grid at the end of last year, compared with about 7,100 connections in all of 2008, according to the government and EDF.
The policy of generous FIT subsidies seems to be coming to an end, with cuts proposed in many places, including where the programmes had been most successful. The optimism that FIT programmes would drive a wholesale conversion to renewable energy is taking a significant hit in many places, leaving the future of renewable energy penetration in doubt in the new era of austerity:
Half of the 13 billion euro ($17.54 billion) reallocation charges pursuant to Germany’s renewable energy act was put into solar PV last year. The sector produced about 7 GW of electricity, surpassing the 5-GW estimate. The government deemed the industry boom as counterproductive, pushing it to reduce subsidies and narrow the market.
In an attempt to get hold of what could be a runaway solar subsidy market, the Senate approved an amendment April 21 that will allow the Energy Regulatory Office (ERÚ) to lower solar energy prices well below the current annual limit of 5 percent cuts. At the start of 2011, the state will now be able to decrease solar energy prices up to 25 percent – if President Klaus signs the amendment into law. Even with a quarter cut, the government’s subsidies for feed-in tariffs remain so high that solar energy remains an attractive investment.
The Ministry of Sustainable Development is expected to cut the country’s generous feed-in tariffs by 12 percent beginning September 1 in an effort to rein in demand and curb spending, according to analysts and news reports from France.
Incentives for big photovoltaic (PV) installations with a capacity of more than 5 megawatts (MW) will be slashed every four months by a total of up to 30 percent next year, said Gianni Chianetta, chairman of the Assosolare industry body. Incentives for smaller PV installations will be gradually cut by up to 20 percent next year. One-off 6 percent annual cuts are set for 2012 and 2013 under the new plan, the industry source said.
The U.K. government signalled it may cut the prices paid for electricity from renewable energy sources, saying it began a “comprehensive review” of feed-in tariffs introduced last year. Evidence that larger-scale solar farms may “soak up” money meant for roof-top solar panels, small wind turbines and smaller hydropower facilities prompted the study, the Department of Energy and Climate Change said today in an statement. A review was originally planned to start next year.
The move will allow the government to change the above- market prices paid for wind and solar electricity by more than already planned when the new prices come into force in April 2012. The department said it will speed up an analysis of solar projects bigger than 50 kilowatts and that new tariffs may be mandated “as soon as practical.” “This is going to put the jitters into some market segments,” Dave Sowden, chief executive officer of the Solihull, England-based trade group Micropower Council, said today in a phone interview.
The Portuguese government has announced that it will review the existing feed-in tariff mechanism following calls that the subsidies are excessive and contribute to the increase of electricity prices to final consumers.
Initial enthusiasm among ratepayers for the scheme is flagging in the wake of perceived links between the FiT and increased energy prices. The FiT passed into law in May 2009 as part of the Green Energy Act, which aims to promote the development of wind and solar generation in the province. With provincial elections slated for 6 October next year, the opposition Progressive Conservative Party is threatening to substantially revise and possibly even scrap the FiT should it win. Even if it the subsidy scheme were to be revoked, the legal implications of rescinding the over 1500MW in existing FiT contracts would be highly problematic.
Spain is the example everyone wishes to avoid. The rapid growth in the renewable energy sector paralleled the bubble-era growth of the rest of Spain’s economy. The tariffs offered under their FIT programme now come under the heading of ‘promises that cannot be kept’, like so many other government commitments made in an era of unbridled optimism. Those tariffs are now being cut, and not just for new projects, but for older ones with an existing contract. People typically believe that promises already made are sacrosanct, and that legal commitments will not be broken, but we are moving into a time when rules can, and will, be changed retroactively when the money runs out. Legal niceties will have little meaning when reality dictates a new paradigm.
Spain’s struggling solar-power sector has announced it will sue the government over two royal decrees that will reduce tariffs retroactively, claiming they will cause huge losses for the industry. In a statement, leading trade body ASIF said its 500 members endorsed filing the suit before the Spanish high court and the European Commission. They will allege that royal decrees 156/10 and RD-L 14/10 run against Spanish and European law.
The former prevents solar producers from receiving subsidised tariffs after a project’s 28th year while the latter slashes the entire industry’s subsidised tariffs by 10% and 30% for existing projects until 2014. Both bills are “retroactive, discriminatory and very damaging” to the sector. They will dent the profits of those companies that invested under the previous Spanish regulatory framework, ASIF argued.
The government announced soon after that it would introduce retroactive cuts in the feed-in tariff program for the photovoltaic (PV) industry in the context of the austerity measures the country is currently undergoing. According to this plan, existing photovoltaic plants would have their subsidies cut by 30%, a figure that would go up to 45% for any new large scale plants. Smaller scale roof installations would lose 25% of their existing subsidy, while installations with a generating capacity of less than 20 KW would have 5% taken from their tariff.
Spain has been forced to cut back on solar subsidies because of the impact on ratepayers. But Spain’s overall economy is in much worse shape and the subsidies for feed in tariff are threatening to push the country into bailout territory or, at lease, worsen the situation should a bailout be needed.
The strain on government revenue is in part due to the way Spain has designed its feed-in tariff system. Usually, this type of subsidy is paid for by utilities charging more for the electricity they sell to consumers, to cover the cost of buying renewable energy at above-market prices. Therefore no money is actually paid out of government revenues: consumers bear the cost directly by paying higher electricity bills.
In Spain, however, the price of electricity has been kept artificially low since 2000. The burden has been shouldered by utilities, which have been operating at a loss on the basis of a government guarantee to eventually pay them back. The sum of this so-called ‘tariff deficit’ has accumulated to over €16 billion (US$ 20 billion) since 2000. For comparison, Spain’s deficit in 2009 was around €90 billion (US$ 116 billion) in 2009 and its accumulated debt around €508 billion (US$ 653 billion).
Ontario threatens to take the Spanish route by instituting retroactive measures after the next election. For a province with a long history of political interference in energy markets, further regulatory uncertainty constitutes a major risk of frightening off any kind of investment in the energy sector. Considering that 85% of Ontario’s generation capacity reaches the end of its design life within 15 years, and that Ontario has a huge public debt problem, alienating investment is arguably a risky decision. FIT programmes clearly sow the seeds of their own destruction. They are an artifact of good economic times that do not transition to hard times when promises are broken.
The outcome of an autumn election in Ontario could stunt a budding renewable energy industry in the Canadian province just as it is becoming one of the world’s hot investment destinations. If the opposition Progressive Conservatives win power on Oct. 6, the party has promised to scrap generous rates for renewable energy producers just two years after their launch by the Liberal government. That could threaten a program that has lured billions of dollars in investment and created thousands of jobs.
The Conservatives, who are leading in the polls, have yet to release an official energy manifesto. Even so, the industry is privately voicing concern, especially after the party said it would scrutinise contracts already awarded under Ontario’s feed-in tariff (FIT) program. “They are going to go through the economic viability of the energies and review all of the past contracts … I think that is going to cause a lot of delays, a lot of problems and a lot of risk to Ontario,” said Marin Katusa, chief energy analyst at Casey Research, an investor research service.
George Monbiot, writing for The Guardian in the UK, provides an insightful critique of FIT programmes in general:
The real net cost of the solar PV installed in Germany between 2000 and 2008 was €35bn. The paper estimates a further real cost of €18bn in 2009 and 2010: a total of €53bn in ten years. These investments make wonderful sense for the lucky householders who could afford to install the panels, as lucrative returns are guaranteed by taxing the rest of Germany’s electricity users. But what has this astonishing spending achieved? By 2008 solar PV was producing a grand total of 0.6% of Germany’s electricity. 0.6% for €35bn. Hands up all those who think this is a good investment….
As for stimulating innovation, which is the main argument Jeremy [Leggett] makes in their favour, the report shows that Germany’s feed-in tariffs have done just the opposite. Like the UK’s scheme, Germany’s is degressive – it goes down in steps over time. What this means is that the earlier you adopt the technology, the higher the tariff you receive. If you waited until 2009 to install your solar panel, you’ll be paid 43c/kWh (or its inflation-proofed equivalent) for 20 years, rather than the 51c you get if you installed in 2000.
This encourages people to buy existing technology and deploy it right away, rather than to hold out for something better. In fact, the paper shows the scheme has stimulated massive demand for old, clunky solar cells at the expense of better models beginning to come onto the market. It argues that a far swifter means of stimulating innovation is for governments to invest in research and development. But the money has gone in the wrong direction: while Germany has spent some €53bn on deploying old technologies over ten years, in 2007 the government spent only €211m on renewables R&D.
In principle, tens of thousands of jobs have been created in the German PV industry, but this is gross jobs, not net jobs: had the money been used for other purposes, it could have employed far more people. The paper estimates that the subsidy for every solar PV job in Germany is €175,000: in other words the subsidy is far higher than the money the workers are likely to earn. This is a wildly perverse outcome. Moreover, most of these people are medium or highly skilled workers, who are in short supply there. They have simply been drawn out of other industries.
Widespread installed renewable electricity capacity would be a very good resource to have available in an era of financial austerity at the peak of global oil production, but the mechanisms that have been chosen to achieve this are clearly problematic. They plug into, and depend on, a growth model that not longer functions. If we are going to work towards a future with greater reliance on renewable energy, there are a number of factors we must consider. These are not typically addressed in the simplistic subsidy programmes that are now running into trouble worldwide.
We have power systems built on a central station model, which assumes that we should build large power station distant from demand, on the grounds of economic efficiency, which favours large-scale installations. This really does not fit with the potential that renewable power offers. The central station model introduces a grid-dependence that renewable power should be able to avoid, revealing an often acute disparity between resource intensity, demand and grid capacity. Renewable power (used in the small-scale decentralised manner it is best suited for) should decrease grid dependence, but we employ it in such a way as to increase our vulnerability to socioeconomic complexity.
Renewable energy is best used in situ, adjacent to demand. It is best used in conjunction with a storage component which would insulate consumers from supply disruption, but FIT programmes typically prohibit this explicitly. Generators are expected to sell all their production to the grid and buy back their own demand. This leaves them every bit as vulnerable to supply disruption as anyone who does not have their own generation capacity. This turns renewable generation into a personal money generating machine with critical vulnerabilities. It is no longer about the energy, which should be the focus of any publicly funded energy programme.
FIT programmes typically remunerate a wealthy few who install renewables in private applications for their own benefit, and who may well have done so in the absence of public subsidies. If renewables are to do anything at all to help run our societies in the future, we need to move from publicly-funded private applications towards public applications benefitting the collective. We do not have an established model for this at present, and we do not have time to waste. Maximising renewable energy penetration takes a lot of time and a lot of money, both of which will be in short supply in the near future. The inevitable global austerity measures are not going to make this task any easier.
We also need to consider counter-cyclical investment. In Ontario, for instance, power prices have been falling on falling demand and increased conventional supply, and are now very low. In fact, the pool price for power is often negative at night, as demand is less than baseload capacity. Under such circumstances it is difficult to develop a political mandate for constructing additional generation, when the spending commitment would have to be born by the current regime and the political benefits would accrue to another, due to the long construction time for large plants.
Politicians are allergic to situations like that, but if they do not make investments in additional generation capacity soon, most of Ontario’s capacity could end up being retired unreplaced. Large, non-intermittent, plants capable of load following are necessary to run a modern power system. These cannot be built overnight.
Many jurisdictions are going to have to build capacity (in the face of falling prices in an era of deflation) if they are to avoid a supply crunch down the line. Given how dependent our societies are on our electrified life-support systems, this could be a make or break decision. The risk is that we wait too long, lose all freedom of action and are then forced to take a much larger step backwards than might other wise have been the case.
Europe’s existing installed renewable capacity should stand it in good stead when push comes to shove, even though it was bought at a high price. Other locations, such as Ontario, really came too late to the party for their FIT initiatives to do any good. Those who have not built replacement capacity, especially load-following plants and renewables with no fuel cost going forward, could be very vulnerable in the future. They will be buffeted first by financial crisis and then by energy crisis, and there may be precious little they can do about either one.