(February 23, 2015) When subsidies are cut, renewable energy investment largely disappears.
“Solar and Wind Energy Start to Win on Price vs. Conventional Fuels,” claimed a recent article from the New York Times. “Wind power now competitive with conventional sources,” wrote the Boston Globe in another recent article. What both of those articles fail to highlight is that the “competitiveness” of renewable generators is largely a result of subsidies.
Once those subsidies are removed, or even threatened to be reduced – as recent events in Australia, the U.S. and other countries show – investment in the industry collapses, renewable energy jobs disappear and the pipeline of new projects run dry.
Australia launched its renewable energy target – first in 2001 and later updated and revamped in 2009 – aiming to generate 20 percent of all electricity by 2020 from renewable energy sources. To hit that target the government offered generous subsidies to large-scale renewable generators – such as wind farms – as well as small-scale projects like roof-top solar and solar hot water heaters.
The subsidies proved so popular that the country expects to surpass the 20 percent threshold. But that success has proven to be precarious.
A combination of soaring household electricity bills, up 110 percent over the last five years – and falling demand, contrary to forecasts made when the renewable target was introduced – left many ratepayers in the country disgruntled with the renewable policy.
In response, the government in 2014 established a commission to review the renewable target. It recommended the government scrap renewable energy subsidies going forward, but if that wasn’t possible (politically), the subsidies should grow at the same rate as overall demand for electricity. The government has yet to decide whether it will implement the commission’s findings.
But just the threat of an end to renewable energy subsidies has had dramatic results.
Investment in renewable energy dropped 35 percent in 2014, hitting its lowest level since 2009. Investment in large-scale renewable projects – the lynchpin of the renewable energy target – fell by 88 percent, hitting a level not seen since 2002 when the target was in its infancy. As much as $20 billion in renewable energy investment remains “moribund” due to the threat of changes to renewable subsidies, according to one estimate.
Major renewable energy companies, including Recurrent Energy, First Solar, Senvion and Goldwind, among others, have put their renewable investments on hold, scrapped them altogether or threatened to pull out of the country.
The renewable industry has warned that the 18,000 new clean energy jobs expected by 2020 as a result of the renewable target will fail to materialize if it’s scrapped.
The Australian example is not an isolated one. In the United States, wind developers receive a federal income tax credit for every MWh of electricity produced. In years when the subsidy has been held back – it has to be renewed periodically by lawmakers in Washington D.C. and has expired five times since 1998 – wind investment disappears. In 2013, when the subsidy was withheld, investment collapsed by 92%, according to the American Wind Energy Association.
Many workers were laid off in 2012 when it became clear the income tax credit would not be available the following year. Famed investor Warren Buffet even admitted the federal subsidy is “the only reason to build them [wind turbines]. They don’t make sense without the tax credit.”
In Sweden it’s a similar story. Investment in wind turbines dropped 83 percent in one quarter last year as companies faced political uncertainty surrounding the green certificate program and low electricity prices – themselves a result of a flood of renewable energy across Scandinavia’s connected electricity grid.
Under the certificate program, wind generators are given a certificate for every MWh of energy produced. They then sell these certificates to traditional electricity generators. Renewable producers are hoping a new government will increase the price of certificates, which acts as a higher subsidy for renewable generation.
Renewable energy producers repeatedly highlight the competitiveness of their generation, yet when the subsidies are taken away, the industry mostly disappears.
Brady Yauch is an economist and Executive Director of the Consumer Policy Institute, a sister organization of Energy Probe. Email him email@example.com. or at (416) 964-9223 ext 236.