The Windbaggers charter and energy subsidies

Over the last few years the level of growth in renewable energy has been impressive. The 2011 Gen 21 report revealed that some 97 GW/yr of new renewable energy capacity had been installed in 2010 alone, up from an installation rate of 80 GW/yr the year before (consider the fastest install rate of nuclear was only 30 GW/yr back in the 70’s). This brings the world to a total renewables installed capacity of 5,360 GW‘s. In certain specific fields such as wind energy and solar PV strong growth rates (of up to a 50% rise in production capacity per year) have been recorded.

Figure 1, Worldwide growth rate of renewables [credit: Ren 21]

Furthermore, the reliability of renewables has improved, with better capacity factors now being recorded and crucially, the installation and running costs have been falling. Indeed its getting to the stage where renewables electricity is one of the cheapest forms of energy generation.

However, this growing industry faces threats from a number of different directions. Most notably many governments seem keen on cutting subsidies to renewables. While in some cases this is likely driven by the fact that, as noted, they are increasingly becoming economically viable options. But in quite a number of cases it is suspected that the motivation is more about protecting vested interests.

Figure 2, Wind turbine production line [credit: Treehugger.com and Acciona Inc.]

Barmy British Stuff

The UK government for example, has drastically cut the subsidies to solar PV systems….twice in one year! Although solar is still worthwhile without these subsidies, inevitably this cut led to a number of PV projects in the country stalling or being cancelled and ultimately lay-offs in some firms is a risk.

Similarly the UK government is now threatening to end wind energy subsides. Officially the reasoning behind this is economics, renewables are getting to the stage where they don’t need subsidies (as noted), and with the UK government short on cash, they need to cut back.

Now ordinarily I’d buy that (long term I accept the renewables needs to move beyond the subsidy cradle eventually)….but why then is the government preparing to write a blank cheque for nuclear power? A cheque that will cost the UK between £55 Billion (by my count) to £155 Billion (according to Tom Burke over 30 years) made out in the name of the nuclear lobby!

And fossil fuels? They are effectively subsided in the UK to the tune of $5.6 Billion a year. Indeed the bulk of energy subsides worldwide (according to the IEA) are for fossil fuels.

Figure 3, Energy subsidies world wide (excluding nuclear) [credit: The Guardian based on IEA data]

Consider that the subsides to renewables have never cost the UK anything like that. The following article in the Telegraph (hardly a bastion of tree huggers) suggests a figure of £1.5 billion in subsidies now, and possibly as much as £8 billion by 2020. I would include the caveats that this study would require the current ambitious renewable targets being continued (and the nuclear and fossil fuel lobby would rather they weren’t!), that the installation costs remain static (they’re currently falling!) and no cut in subsidy between now and then of course. Also, the figures the Telegraph relies upon come from REF, a known anti-wind farm front group(so I’d take these figures with a pinch of salt and consider them a maximum upper limit).

But even taking this worse case scenario from the anti-wind farm lobby above, you have to conclude that the UK would be better off sending its money subsidising wind energy than nuclear power or gas fired power stations. As it delivers better value for money in terms of providing a larger amount of low-carbon, indigenous energy on the grid.

Obviously the suspicion of environmentalists is that the real reason behind these subsidy cuts is more borne out by a desire to clear renewables out of the way for the conservatives sweethearts (Nuclear and Fossil fuels). As well as being a concession to country laird MP’s in the party and the landed gentry who are fighting wind farm projects within view of their country estates (not so much NIMBY but Not In Sight of My Private Hunting Lodge). I would note that if it was a simple case of avoiding the visual impact of onshore wind farms, a slight decrease in the onshore subsidy and an increase in the subsidy for offshore wind farms, would solve this problem by moving the bulk of such projects offshore. Although even that would not be to the liking of a certain wig wearing, golf playing, wind bag.

Furthermore for a government supposedly committed to low carbon energy, the Tory’s have set the upper limit for allowed carbon emissions from future power stations way too high and its feared that the very CfD mechanism that they hope to finance new nuclear plants with will ultimately lead to more gas fired power stations as well.

Indeed, as I suspect the nuclear plants can’t be build quickly enough, my fear is that by prioritising nuclear in favour of renewables, a gap in the UK energy grid will be created, one that that can only be filled with more gas and coal fired power stations (as I discuss here).

Figure 4, Wind energy protests

Tea bagging wind bags

Across the pond, in the US we can see more “Windbaggers” at work. Presidential candidate Mitt Romney has indicated that he would led federal incentives to subsidise wind farms lapse when they come up for renewal next year. His argument seems to be that he’s against federal subsides to any company.

Of course, he seems to be quite okay with the idea of the US government continuing to subsidise fossil fuels, estimates suggest to the tune of between $15.4 billion to $54 Billion a year (depending on how you do you’re counting). Plus he wants to maintain a federal loan scheme intended to get new nuclear power plants build (unclear how much that will costs as only a handful have been ordered, but if we were to assume a modest $2 billion per plant, then that would amount to $208 billion just to replace America current inventory of reactors) not to mention that the US government is going to have to spend an estimated $400 billion cleaning up its existing nuclear waste stockpile (as I discuss here).

And of course while we’re talking of subsidies how about the ridiculous subsidy of being able to dump millions of tons of a climate changing gas into the earth’s atmosphere each year without paying a penny for the damage that this is going to cause? Or how about the billions it cost to invade Iraq to secure its oil? Estimates for this vary (Wikipedia has a few links to different sources on this) from $4 trillion to just $758 Billion. Or indeed how about the tens of billions spent annually to keep the oil supply routes from the Middle East secure?

Messy Compromises

Now while I accept that a renewables industry dependant on subsidies is not a long term proposition, its important to remember why subsidies were imposed in the first place. As I’ve illustrated above, the energy industry is anything but a balanced free market, even in the US.

If its a flat level playing field that governments wants, then simply end all subsidies of all energy sources, and impose a modest carbon tax to offset the potential harm of climate change and that would be that.

But governments, fearful of upsetting vested interests in the fossil fuels and nuclear industries have long baulked at the prospect of doing this. Not to mention the fact that in the short term, this form of free market solution would probably see an increase in energy bills (and petrol prices) which would be hugely unpopular with electorates. Subsidies to renewables were always part of a messy compromise to get governments off the hook, as making people pay what fossil fuels (or nuclear energy) really costs would simply upset too many apple carts.

The uncertainty principle

Indeed the most serious damage done by these decisions isn’t the cut in subsidy itself (as noted renewables are still viable in certain situations without subsidy) but the uncertainty and business risk it introduces.

Figure 5, the choice

Put yourself in the shoes of a renewable corporate executive. You would like to build a new factory, doubling your output and cutting unit production costs by, say 20%. In order to do this, you need some sort of an idea as to what’s going to happen in the energy market on a time scale of a few years or decades and its profitability. Not least because in order to finance this project, you’ll need to go to bank and present them with something resembling a financial statement. These sudden drastic cuts to the subsidies creates a huge level of uncertainty, increasing the business risk for renewable investors, making it harder for them to get projects financed.

Indeed such measures merely confirm the view widely held by renewable campaigners and in industry, that the UK and US governments are morally (or perhaps we should say immorally) committed to a combination of nuclear and fossil fuels. And thus regardless of what the renewables industry does, or how cheap they make renewable energy in future, they’ll just move the goal posts to make sure their favoured industry’s still wins.

If you’ve ever wondered why the UK, which has some of the best wind energy resources in Europe, needs to import turbines from Germany, Denmark, China or America, well its because who in there right mind is going finance the building of a factory here if they suspect the government is ultimately planning to hand over a large chuck of the energy market gift rapped to the nuclear or coal lobby.

To draw a comparison, let’s suppose the UK government woke up tomorrow and announced it was cutting in half those subsidies it gives to fossil fuels or nuclear?

I suspect the result would be a sudden drastic increase in energy costs, with firms both sides of the equation (users and producers) going bankrupt, indeed many nuclear plants (which depend on government to cover the long term costs of waste disposal as well as site security and insurance in the event of an accident) would probably have to shut down within hours. Similarly, cutting the defacto subsidies to the road lobby or airlines (neither pays anything close to what it actually costs the nation to run both services, as I discuss here) would have haulage firms and airlines practically queuing up outside bankruptcy courts.

Or how about doubling the price of alcohol overnight (to cover the cost to society of rowdy drunks)? I suspect that within the hour both Cameron and Osborne would be dragged from their beds in Downing street and beaten to death by a angry mob of Chav‘s and CAMRA members armed with Buckie bottles. Consider how the last time the UK government tried to increase petrol duty (or more to the point, cut the de-facto fossil fuel subsidy) at an above inflation rate, the result was a near revolt by haulage firms and tanker drivers. While Alastair Darling got himself bared from nearly every pub in the UK just for putting up beer taxes by a few pence.

Drastically changing the business conditions for any industry, without any prior warning is unacceptable and would hit any company in any industry hard. While yes, subsidies need to go eventually, such changes need to brought in gradually, with plenty of advanced warning so companies have time to adapt.

Three plans

In essence governments have three basic options. Option one, is the aforementioned “real” free market solution. All energy subsidies to all energy sources are withdrawn. Of course, for the reasons already discussed (many major fossil fuel firms would go bust, as would all but a handful of renewable energy firms, the entire nuclear industry would likely be rendered insolvent, energy costs to consumers would rise substantially which would be unpopular with voters) I doubt this would be acceptable, particularly for those on the political right.

Option two is for some sort of “managed” energy market. Where it is carved up with, say 20% going to wind, 15% nuclear, 30% fossil fuel with CSS, 10% solar, etc. I would note that it would be essential in such a carve up to ensure that it is “energy” that is considered and not just electricity (which is just 20% of the UK’s energy consumption). Indeed its worth remembering that bulk of fossil fuel consumption is tied up in the “non-electrical” side of the equation in the form of heating and transport fuels. Thus it is also important to match demand (say heating) with supply (solar thermal? Gas? Biomass?). Trying to hammer a square peg (nuclear twined with heat pumps to meet heating needs or wind farms for peaking electricity) into a round hole isn’t going to work.

While I’ve heard many Tories talking in terms such as I describe above, the political reality is that this would amount to de-facto nationalisation of the entire energy industry, which I can’t see the labour party, never mind the Tory party ever agreeing too.

So option three is a combination of the two. Gradually many energy subsides are phased out (other than those that address matters such as fuel poverty or energy security). The cost of paying for these in the interim, being drawn from a newly introduced carbon tax, which also serves to discourage carbon intensive energy use. Initially this tax would be low and only applied to things such as electricity generation or industrial heat processes. However, gradually it would be increased in scale. I would also recommend the phasing out of VAT at the same time, so it would effectively replace the latter. And as a result this carbon tax would be directed into other areas, such as heat generation, domestic gas use and petrol use by cars and planes and finally the carbon footprint of products themselves.

Properly timed these measures would produce only a modest increase in energy costs, indeed future price rises due to peak oil and the price volatility that it would bring about would likely still be the main source of price rises. More importantly such measures would make low carbon solutions, such as electric cars or renewable energy sources (or indeed nuclear power) much cheaper (in short you’d essentially be creating a minimum “floor” price for fossil fuel prices and a maximum “ceiling” price for zero carbon energy).

Whichever option the government chooses, it has to do so quickly as we’re reaching a global tipping point very rapidly. And it must be a policy that is clearly set out, with no more of the smoke and mirrors we’ve seen up until now. Industry at all levels (fossil, nuclear and renewables) must be given plenty of time to adapt to any changes. And most importantly, anybody calling for an end to the system of energy subsidies (again fossil fuel, nuclear or renewables), such as Mitt Romney, should not be allowed get away with making a choice sound bite. They must provide (as I have done) a comprehensive plan for how they are going to achieve this.