(March 21, 2014) Germany has been experimenting with its renewable energy law for 14 years and is now highlighting its failures. Ontario, which copied that law, will likely do the same.
Ontario passed the Green Energy Act in 2009 in a bid to create a thriving renewable energy sector that would provide low-cost energy, thousands of jobs, new investment and a competitive business environment. Yet residents of Ontario need to look no further than Germany – the economic powerhouse of Europe – which passed a similar law in 2000 to understand why the Green Energy Act will fail to deliver on its promises.
According to analysis by a government-appointed commission on research and innovation, the law, known as the Renewable Energy Sources Act, has stymied innovation, produced power at times and levels that are unnecessary, failed to demonstrably create new jobs and burdened low-income households. In its annual report to German lawmakers, the Commission of Experts for Research on Innovation concluded that the law had “serious shortcomings”, had “failed as an industrial policy instrument” and was a “costly” means to reduce emissions.
Like Ontario, the German law offers renewable energy producers – ranging from wind mills, biogas and solar producers – a guaranteed rate for their power through a Feed-In Tariff (FIT). This ensures that these producers receive a premium for their generation – which, like in Ontario, is significantly higher than the market price for that power.
But, according to the report, the FIT ensures that technologies receiving a high premium – such as solar – attract too much investment and, as a result, “too much solar power is being produced.” Rather than allowing the cheapest forms of renewable energy to take hold and provide renewable power, the FIT ensures that investment will flow to those technologies receiving the largest government handout – not those that make the most economic sense.
And because the law requires grid operators to connect renewable energy producers – no matter the cost – to the grid, those producers are able to “disregard” the cost of such connections. In doing so, renewable energy producers pay little attention to the demand for their output, the report says – meaning they dump electricity on the grid when few consumers have any use for it, yet are still being paid higher-than-market prices for that output.
Because renewable energy producers don’t bear the cost of connecting to the grid, and also have little regard for whether there power is needed, as they receive a fixed, subsidized rate regardless of demand, “renewable energy not only increases system integration costs, but also jeopardises the security of supply.”
The FIT scheme has “failed as an industrial policy” since it doesn’t help bring new, innovative renewable technologies to the market. The report says that the FIT scheme largely acts as a “means of promoting the import of photovoltaic modules from foreign manufacturers – instead of providing German companies with a sustainable competitive edge.” The report found that research and development has decreased “considerably” in relative terms since the energy law was first put place and now acts more as a “production subsidy for electricity rather than an R&D funding measure.”
“Especially companies with fairly mature technologies do not feel the need to invest in research,” the report says. “The excessive growth of the market has indirectly led to market entry barriers for less mature technologies, while at the same time facilitating lock-in effects in favour of established renewable energy technologies.”
Promises that the renewable energy subsidies will create new jobs are also “unclear.” The renewable energy subsidies are financed through taxes and fees tacked onto electricity bills, which in turn, lowers consumption and investment in other areas – resulting in an overall drag on the labour market. As the German report concludes: “energy policy cannot serve as a substitute for labour market strategies to reduce unemployment.”
And finally, the renewable energy policy in Germany is regressive, hitting low-income households harder than high-income households, the report says – largely because consumers have little choice but to consume power at any price and those with low incomes are less able to offset the price increases. Also, rooftop solar installations receive a subsidy that is paid by all consumers, but largely flows to higher-income property owners.
Germany now has more than 14 years experimenting with renewable energy legislation and is now documenting the failures of those policies. It is time Ontario – which largely copied those failures – to do the same.
Brady Yauch is an economist and Executive Director of the Consumer Policy Institute (CPI). You can reach Brady by email at: bradyyauch (at) consumerpolicyinstitute.org or at (416) 964-9223 ext 236.