WSJ: “Government subsidies are turning renewable energy into big business.”

From the Wall Street Journal:  ”

Clean Energy Sources: Sun, Wind and Subsidies:  As Governments Increase Spending and Support for Renewable Power, Even Fans Wonder If Aid Could Be More Efficient

by Jeffrey Ball

January 8, 2010

In frigid water four miles off England’s east coast, a floating crane is installing the last of 48 wind turbines. The 40-story-tall pinwheels are driven by two plentiful resources: ocean breezes and public funds.

Government subsidies are turning renewable energy into big business. Although fossil fuels remain by far the dominant energy source and generate big profits, in some markets government price supports are making renewable power a less-risky corporate bet than conventional fuels.

Building Wind Farms in the Ocean

3:04Renewable energy is becoming big business and one of the biggest bets these days is offshore wind farms. WSJ’s environment columnist Jeff Ball reports.

Wind farms “have a better return on investment than coal plants,” says Anders Eldrup, chief executive of Dong Energy, a company based in Denmark that is shutting down coal-fired power plants and building wind farms, including this one in the U.K., called Gunfleet Sands. But that is true only in places with hefty subsidies, he says. “Without that, they wouldn’t work.”

Critics say subsidies of any kind waste taxpayer dollars. But even fans of renewable energy worry this public largesse is costing too much. They say renewable energy deserves subsidies to help it mature to the point where it can compete against fossil fuel. But they are concerned that society, in its haste to roll out wind turbines, solar panels and other forms of clean power, is spending billions of dollars without spurring as much renewable energy as it could. The recession has worsened the waste, they say, as governments increase subsidies to meet renewable-energy targets and create “green” jobs.

Some renewable-energy subsidies have been “enormously wasteful,” says Michael Liebreich, chief executive of Bloomberg New Energy Finance, a London-based research firm. “As you get more and more renewable energy, the state is setting energy prices,” he says. “That worries me enormously.”

Common government practice today, especially in Europe, is to guarantee renewable-energy providers that they can sell their power for more than the normal electricity rate — often several times more. To trim costs, some governments are experimenting with parsing out subsidies, auction-style, to whichever renewable-energy firms are willing to accept the least aid.

[Powershift] Agence France-Presse/Getty Images

Virtually all energy is subsidized. Fossil fuels, which provide about 80% of total global energy, have enjoyed favorable tax breaks and other incentives for decades. The International Energy Agency estimates that fossil-fuel subsidies in developing countries — government money to reduce the price of energy — totaled $310 billion in 2007, the most recent year for which the IEA has statistics. Last fall, the Group of 20 leading economies called for phasing out fossil-fuel subsidies world-wide.

Yet for every unit of energy renewable energy produces, it is often subsidized more heavily than fossil fuel. Government spending and price supports accounted for about one-third of the roughly $145 billion invested world-wide in clean energy in 2009, New Energy Finance estimates. Though renewable energy gets fewer subsidy dollars than the IEA says fossil fuels receive, the price supports are covering a larger portion of renewable energy firms’ costs.

Many in the renewable-energy industry say it is high time they got that extra help. The industry needs the “economies of scale that make this a viable and effective source of electricity,” says Robert Beisner, vice president for the U.S. unit of SolarWorld, a solar-panel maker. It is planning to expand its U.S. factories to feed global demand driven by incentives.

The company is based in Germany, which has more solar panels in use than any other country despite often-overcast skies. That is because Germany offered a sweet deal: a “feed-in tariff.” It guarantees renewable-energy producers an above-market price for their power and that they can sell the power into the electrical grid at that price for 20 years.

Many countries have adopted feed-in tariffs; some are as much as five times the wholesale price of power. The governments typically reduce the rate by a few percentage points yearly. But the cost of renewable energy is falling far more quickly than that; the lifetime cost of producing some types of solar power fell 50% during 2009; most other renewable technologies fell 10%, New Energy Finance says. Moreover, once a renewable-energy producer has locked in a rate for a particular project, it gets that rate for the full life of the subsidy.

The upshot, analysts say: A feed-in tariff can guarantee a renewable-energy producer rising profits that can top 20%, far more than most conventional energy projects.

In Germany, renewable energy from projects that qualified for feed-in tariffs between 2004 and 2008 will cost consumers [euro ]122.3 billion (about $175 billion) between 2008 and 2030 — 46% more than the same amount conventional energy would cost, New Energy Finance predicts. In Spain, renewable energy from projects started under the country’s feed-in tariff between 2006 and late 2008 will cost [euro ]53 billion over the Spanish tariff’s 25-year life, the firm projects, a 75% premium over the likely cost of the same amount of conventional power.

The U.S. is a potentially massive renewable-energy market. It has windy plains, sunny deserts and areas rich in other renewable resources, such as wood. But it has lower rates of renewable-energy production than much of Europe, largely because the U.S. has smaller subsidies.

Now, as part of the Obama administration’s stimulus plan, renewable-energy producers are eligible for cash grants totaling 30% of the cost of projects they this year — however high those costs go.

Before the stimulus, the government subsidized renewable-energy producers with tax credits. But financial institutions typically partnered with small renewable-energy firms and took a cut of the government money, reducing the amount left to fund projects.

So the temporary cash grant is more efficient, says Jason Grumet, president of the Bipartisan Policy Center, a Washington think tank. Still, he says, even the grant program is “probably providing a much greater subsidy than particular projects require.”

The Obama administration says renewable-energy companies face a strong market pressure to minimize their costs: They have to compete with falling natural-gas prices. “What we’re seeing is the market price keeping the capital cost of these projects down,” says Matthew Rogers, the Energy Department official overseeing energy spending under the stimulus plan.

Some governments are experimenting with trimming subsidies by auctioning them to the lowest bidder. California and China have dabbled with this approach. But those auctions remain the exception rather than the rule. More often, renewable-energy subsidies are rising. A case in point is the London Array, a U.K. project that, if built, would be the biggest single offshore wind farm in the world.

It would sit off the coast of London, in the Thames Estuary, the same water body where Dong Energy is finishing the Gunfleet Sands wind farm. As the recession set in, companies involved in the project, including Dong, told the U.K. government they needed more aid. Early last year, the government agreed to increase the subsidy developers will get for all new offshore wind farms in the U.K.

Dong plans to start offshore construction on the project next year. Says the company’s Mr. Eldrup: “The government listened to us.”

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4 Responses to WSJ: “Government subsidies are turning renewable energy into big business.”

  1. While full of facts, Mr. Ball’s article neglects the entire reason many nations are moving to alternative energy. Environmental degradation, mainly global warming, is not measured as a cost of running coal fired power plants. To discuss the economic benefits of traditional versus clean power without looking at the societal and environmental costs for all of the methods creates a horribly skewed conversation.

  2. Jon Boone says:

    Mr. Courtland’s correct that all relevant factors must be considered when comparing power sources. Although I’m no fan of the coal industry itself, with its casual arrogance and destructive, dangerous extraction practices, I can easily construct a calculus that shows coal power has vastly more benefits than downsides, given that it has anchored our system of electricity for decades, in the process improving health and wealth for millions. Coal, natural gas, nuclear, hydro–all of these conventional generation systems work when asked to do so, complementing each other with high dispatched precision, in the process making electricity reliable, secure, affordable.

    The only so-called “renewable” that can do this–hydro (perhaps the most effective power source of all) is also environmentally treacherous, responsible for degrading millions of acres of sensitive ecosystems. Simply because a source of power is clean does not mean it is green.

    Nations that “move to” wind and solar soon realize that these can never provide “alternate” sources of power, since they require conventional power to exist at all. They make everything and everyone around them work much harder just to stay in place. And they have insidious environmental downsides. Nothing is cognitively more dissonant than unleashing huge wind turbines across a mountainside–not even mountaintop removal extraction practices for coal. At least coal works, whereas wind cannot, to provide controllable dispatchable, reliable electricity.

    • Jon, I appreciate your comments and enjoyed perusing The conventional generation systems you mention, coal, natural gas, nuclear, and hydro, are not all “reliable, secure, and affordable” when they are viewed through a sustainability lens.

      Yes, they provide us with the energy we need right now but the environmental costs that are not accounted for make these energy generation methods ripe for replacement. The huge companies behind much of the electricity in our world are beginning to make their coal extraction and hydro projects less destructive but this is not enough in the long run. The fact is these are outdated technologies that will never be as reliable, secure, and affordable as the emerging energy production processes now being developed.

      The longer we wait to transition away from the conventional systems, the more expensive the change will be, in terms of both capital expenditures and environmental cleanup. The costs of solar and other clean technologies falls every year as the their efficiency goes up. And while we will still have to rely on the current electrical grid for a number of years, we need to rewire our world to transmit energy in a 21st century manner.

  3. Jon Boone says:

    Hmmmm, Matt. The sustainability issue…? We did make short work of our forests, to be sure, although trees are, uh, renewable and, in a less rapacious world, sustainable. Coal, too, is renewable, given about 100 million years or so, and, although there may be peaks and valleys in its availability over the next 200 years–along with oil/petroleum–causing mayhem with the economy, it will likely be “sustainable” over that time. Eventually, given our desire for modern precision living, these fuels won’t be sustainable. Fossil fuels will eventually succumb to our penchant for wealth, health, productivity, and greatly increased quality of life, which the rest of the world will increasingly demand. We’ve used up much of the first rate “sustainable” hydro areas, and, except for the Chinese government, most knowledgeable people wouldn’t seek to damn up more rivers and streams to produce electricity, especially given alternative options. In any event, the Second Law of Thermodynamics makes nothings sustainable. Even black holes will evaporate. Sloganeering isn’t going to change reality.

    As for wind and solar, these are hardly new initiatives. They actually represent antediluvian technology and were quickly abandoned as soon as the steam engine caught on. Their modern incarnation has been at the public trough for many decades, receiving billions in public subsidy, without any appreciable improvement in their capabilities. Solar has limited modern application as a supplement to grid-produced power in individual homes and clustered office complexes. It can also help run traffic control systems, watches, and, one day, automobile systems. Wind has only potential for boutique applications, for those able to afford its capital costs, which will never be offset by savings from the grid.

    Industrial wind is the dumbest modern energy idea imaginable. Our modern system of power insists on capacity value–getting a specific amount of energy on demand and controlling it whenever desired. And so the issue is how to make people believe that a source of energy, which relentlessly, continuously, destabilizes the balance between supply and demand, is highly variable and unresponsive, and provides no capacity value while inimical to demand cycles, can effectively provide meaningful power.

    It’s easy to show that wind does not provide modern power performance–only desultory energy. Since energy is the ability to do work and power is the rate work is done, wind technology delivers fluctuating energy at a rate appropriate for 1810, not 2010. Imagine that our gas pumps were wind powered–to get some idea of how functionally “unproductive” such an idea is.

    Efforts to integrate such a volatile presence subvert the very reason for its existence. Despite all the installed wind in Denmark, Germany, California, Spain, and Texas, no coal farms have closed because of the technology. And many new coal plants, particularly in West Virginia, will be necessary, despite all those wind plants. And there’s not a shred of evidence that any of those places use less fossil fuel specifically because of wind. I therefore submit there is no empirical evidence to believe that wind (and solar) are truly “alternate” sources of power generation. But their massive, intrusive footprint across the land violates much that informed environmentalist should hold very dear.

    And so, if one is concerned about excess production of greenhouse gasses and getting out from under the peak fossil fuel conundrum, the ONLY game in town is nuclear, which is very safe and it can be made to provide for a range of demand cycles, including routine demand fluctuations. In terms of both human rapacity for energy and for a meaningful operational definition of sustainability, the energy density of nuclear is two million times that for fossil fuels, which are themselves exponentially more potent per volume than the renewables du jour. This is no pipe dream, for it’s been happening in France and Sweden for the last 25 years. The so-called nuclear waste, which represents about one percent of the spent nuclear fuel, is now housed deep in the earth of one warehouse building in France, awaiting newer technology to reprocess even this. It’s virtually all “sustainable.”

    Finally, comparing the cost of wind with coal, nuclear, or natural gas is akin to comparing the cost of an automobile that doesn’t work when you want it to work with the cost of an automobile that performs precisely as required whenever desired. We have lemon laws protecting people who purchase cars–or toasters, or chainsaws, or TVs–in the expectation they are buying highly reliable machines from dealers who would sell them junk. We should demand similar laws for our electricity supply.


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