If asked the question, “Do you think governments should support renewable energy with subsidies?” most progressive trade unionists would probably respond affirmatively. Renewable energy is crucial in the fight against climate change, generates no pollution, and creates jobs. Subsidies also provide a way for individuals and local groups to produce solar power, thus undermining the market dominance of large energy companies.

There is also a clear sense that subsidies will help eliminate fossil fuels. These fuels (themselves subsidized) cook the climate, poison the air and water, enrich the already super rich, undermine democracy, and lead to land grabs and wars.[1] Furthermore, most opponents of government support for renewables don’t like government subsidies, in principle. In the U.S., many are climate-change deniers, CEOs of large utilities that are content to carry on using coal or gas, or employers concerned about the cost of energy and U.S. competitiveness, a noble cause currently being served by cheap shale gas from fracking.

For these and other reasons, progressives have generally closed ranks behind the idea that renewables should be subsidized. This kind of thinking is widespread, which means the number of people on the political left willing to question the wisdom of subsidizing renewables could probably sit on the tip of a small wind turbine.

Questioning subsidies is not the same as questioning the importance of renewable energy. Quite the opposite.

But this kind of questioning is urgently needed. Questioning subsidies is not the same as questioning the importance of renewable energy. Quite the opposite. Those who understand that a rapid transition to a renewables-based system is needed on a global scale will be well-served by grappling with the technical and economic obstacles to that transition. Are subsidies helping renewables?  Or are they, in fact, hindering their deployment?

Galloping Forward at a Snail’s Pace
First, it’s important to remind ourselves of the political impetus for subsidies. Renewable energy brings many benefits, but the main reason for subsidies is to “incentivize” private-sector investment in order to achieve arguably the most important single objective in the fight against climate change, namely, the decarbonization of electrical power. In 2014 then-head of the International Energy Agency (IEA), Maria van der Hoeven, asserted that “Keeping temperature increase below 2°C will require revolutionary changes” to the global energy system.”[2] Similarly, the IEA and the International Renewable Energy Agency (IRENA) have concluded that reaching the science-based Paris Agreement targets will “require an energy transition of exceptional scope, depth and speed.”[3] The IEA estimates that meeting the Paris targets will require at least three-quarters of the world’s electricity to come from renewables by 2050, with nuclear power making up most of the remaining 25 percent.[4]

But current trends are not remotely in line with such targets. At the end of 2015, wind and solar combined generated just 4.6 percent of global electrical power.[5] And with global energy demand growing at around 2 percent per year, both fossil fuels and renewables are currently expanding together, and will continue to do so unless there is a major policy shift.[6] The proportion of electricity generated by fossil fuels globally—roughly two-thirds—has barely changed since 1990, but the quantity of electricity generated has grown dramatically. Energy-related emissions levels have almost doubled during the same period.[7]

Where Are the Investors?
Meanwhile, the world may desperately need renewables, but without subsidies renewables cannot survive in the kinds of competitive electricity markets that were created in many parts of the world as a result of the wave of privatizations during the 1980s and 1990s. And without subsidies there would be virtually no investment whatsoever. As the IEA noted in 2016, “Market-based, unsubsidised low-carbon investments have been negligible.”[8]

Because coal and gas are currently cheaper means of generating power, the dominant policy approach has been to ensure that renewable energy is protected from its competitors, or is taken “out of market.” To achieve this, private wind and solar companies and investors are offered “certainties” through power purchase agreements (PPAs) that ensure that the power generated will be sold at an above market price by an “offtaker”—which is normally either a centralized generator (a power utility) or a government agency.

The need for more investment is indisputable. In a 2018 study, IRENA put the level of required investment in renewables at $25 trillion between now and 2050, which adds up to roughly three times current annual levels.[9] Where will this investment come from? According to Greenpeace, governments must use “a range of fiscal instruments” to attract private capital, because businesses, “need to know if the electricity from the power plant can be sold to the market for a price that guarantees a good return on investment.”[10]

. . . [B]ridging the investment deficit in renewables will require a lot more subsidies until renewables can one day compete with fossil fuels.

In other words, bridging the investment deficit in renewables will require a lot more subsidies until renewables can one day compete with fossil fuels. If the current incentives are not strong enough to guarantee private profit, says Greenpeace, they simply need to be stronger and more consistently applied in order to interest investors, particularly “institutional investors” that are sitting on trillions of dollars in assets. Encouraged by the renewable energy industry, this “make it profitable” idea continues to dominate liberal thinking.

The “Out of Market” Experience
Subsidies for renewable energy did not just fall from the carbon-infused sky. The wind and solar boom began in Germany following the introduction of a subsidy known as the Feed-in Tariff (FiT). The FiT is a permissive version of a PPA in that, in its original form, took a “come one, come all” approach with no limits on who could produce power or how much wind and solar they could produce. The FiT allowed renewable energy generators (including home owners and businesses that installed solar) to feed power into the grid at a pre-agreed above-market price, for 20 years or more. As climate targets became more ambitious during the early 2000s, the FiTs became more generous. Communities and farmers clubbed together to set up more than 800 energy cooperatives. German municipal authorities, too, took matters a step further and as many as 100 reclaimed local grids from private companies (remunicipalization) whose service contracts were due to expire. The subsidy was working—it created jobs, enhanced local control, and the deployment levels were impressive. In 2012 Germany—not exactly the sunniest country on earth—could boast around one-third of the world’s total installed solar capacity.

Not surprisingly, the FiT approach spread across Europe and led to a rapid increase in investment and deployment.[11] By 2014 E.U. countries had invested approximately €1.1 trillion[12] and wind and solar today provides 15 percent of the region’s power, more than three times the world regional average.[13] The E.U. was also the first region to develop offshore wind, with over 90 percent of global installations.[14] FiTs soon became the “policy of choice” globally as policymakers sought to develop their own renewable energy markets. Renewable energy grew fivefold from 2005 to 2015. In 2016, a record-breaking 161 gigawatts (GW) of wind and solar was installed.[15]

The Unraveling
FiT subsidies had made Europe the recognized “world leader” in renewable energy. But by 2013 governments took decisive action to pare back the FiTs. It’s important to know why this happened and then draw the necessary conclusions.

In hindsight, it is clear that the FiT was set up in a way that, at some point, there would be a political backlash. Not every supporter of subsidies for renewables is aware of the fact that the costs of the FiTs were passed on to consumers in the form of higher electricity charges. The European Commission calculated that FiT payments added €40 billion to electricity bills in 2012 alone. In 2016, German consumers saw €23 billion added, and the average household electricity price in Germany was 25 percent higher than it would have been without the subsidies.[16] In Italy, the FiT stimulated an impressive 16.4 GW of new renewable capacity, but 85 percent of the incentives went to large producers. And according to one union source “the capital behind those investments overwhelmingly originated outside Italy, while the bill was paid by 29 million Italian consumers.” [17]

Claiming to speak for the forgotten (white, native) working class, ascendant right- wing parties across Europe jumped all over these numbers. And while the main political message has been anti-immigrant and anti-E.U., a number of  [right wing] parties pointed to the negative impact of renewables’ subsidies on working people and the need, therefore, to dump the E.U.’s climate commitments. The right argued that the FiT transferred resources from the vast majority of energy consumers toward investors, private renewables companies, and to relatively wealthy property owners and farmers. And by raising the cost of electricity, the E.U. was losing competitiveness to, for example, Asia and the U.S. where coal and gas provided cheap and abundant power.

Utilities Bite Back
Another unanticipated problem with subsidies was the crisis of the utilities. In the context of competitive energy markets—where selling power is the name of the game—the growth of subsidized renewables meant that utilities using coal, gas, or nuclear power would lose market share. Market-protected renewables only need to generate a limited amount of power (say 5 or 10 percent) in order to disrupt the utilities’ entire business model. In Europe (and increasingly elsewhere) utilities’ stock market values plummeted by around 50 percent from 2008 to 2013. Once a “safe bet,” utilities had become exposed to high levels of risk, and investors ran for the exits.To make matters worse, on sunny and windy days renewable energy floods into the grid, causing prices to drop almost to zero. During these periods, the utilities suffer an additional drop in sales revenue.

. . . [A] number of . . . [right-wing] parties pointed to the negative impact of renewables’ subsidies on working people and the need, therefore, to dump the EU’s climate commitments.

For many environmentalists, the plight of the utilities became a cause for celebration—more evidence that renewables were winning and the bad guys in coal, gas, and nuclear were losing. But the utilities’ poor economic position could not alter the fact that wind and solar still only generate about 15 percent of the region’s energy. And when the sun does not shine or the wind does not blow, then coal, gas, and nuclear generation is still needed in large quantities as back up on a 24/7 basis.

Governments realized they could not afford to allow renewables to drive the utilities into bankruptcy. And with investors jumping ship, they were forced to come to terms with the fact that the old system was dying before the new one was ready to take over. The E.U. responded in two ways. First, beginning in 2013, it dramatically reduced and has since abandoned the FiT for renewables, and replaced it with capacity auctions or “competitive bidding.” Second, the E.U. extended subsidies (“capacity payments”) to coal, gas, and nuclear companies in order to keep them solvent and to lure investors back into the power sector. This has created a “subsidies for all” situation, whereby governments reward the capacity to produce power even though the power may not be actually sold or used.

Auctioning the Future
But it doesn’t end there. Replacing the FiT with competitive bidding was intended to reduce the cost of the subsidies by making renewable energy companies compete against each other in order to win contracts to provide power. The prize for a successful bid would be a 15- or 20-year PPA that guaranteed revenues and profits. But this “winner-take-all” situation favors the large energy companies and their capacity to bid low, thus narrowing the number of subsidy beneficiaries to a few large companies.[18]

Competitive bidding lowered the cost of subsidies, but it created a more serious problem. Observing the plummeting auction prices, investors quickly realized that wind and solar profit margins would inevitably narrow. Investment in renewables has since collapsed. At its 2011 peak, E.U. investment hit $132 billion, but by 2017 levels had plunged to $41 billion.[19] In Germany investment fell 61 percent from 2014 to 2016. The fall in the U.K.’s investment levels has been even more precipitous. A May 2018 parliamentary report calculated a 66 percent drop in the 2016-2017 period.[20] Deployment levels have already fallen sharply, particularly in onshore wind and solar.[21]

If at First You Don’t Succeed, Give Up
The need for an energy revolution is accepted by the policy mainstream. What’s not accepted is the need to break completely with the “make it profitable” logic and to replace it with [for] a public-goods approach that can finance and implement the transition.

This will require two radical, but necessary, steps. The first step is to reclaim firm public control over the power sector. The introduction of subsidies and capacity payments speaks to the extent to which the “competitive market” is not only no longer competitive but can also no longer be usefully described as a market. Some in the policy mainstream have already accepted that “wholesale liberalised electricity markets are often not strategically aligned with the low-carbon transition.”[22] In other words, the choice is either protect the planet or persist with the
illusion of market competition. Even the Thatcherite Centre for Policy Studies has concluded, “You can have (subsidized) renewables. Or you can have the market. You cannot have both . . . If renewables are a must-have, then nationalization is the answer. Even the Thatcherite Centre for Policy Studies has concluded, “You can have (subsidized) renewables. Or you can have the market. You cannot have both….If renewables are a must-have, then nationalization is the answer.” [23]

The need for an energy revolution is accepted by the policy mainstream. What’s not accepted is the need . . . [for] a public-goods approach that can finance and implement the transition.

The second step will involve the reinstatement of energy planning within a public goods framework. The current “high risk” conditions impose obstacles to the energy transition that a public approach would avoid. For example, integrating renewables will require grid modernization—which is something neither the utilities nor the private renewable companies want to pay for. Even a World Bank study concluded that achieving this will require a “public sector–led proactive planning effort.”[24]

But who will pay for all of this?  The story of the E.U. is one of a lot of public money being used to develop a (now faltering) private, for-profit renewables sector, and it is a story that is being retold elsewhere in the world. It makes more sense for public funds to be used to develop large-scale public renewable power. This would be a cheaper and more equitable alternative to “protecting” renewables from market competition; turning the power sector into a battleground between different sources of energy, and causing recurrent panic attacks among risk-averse investors.

The financial, social, and environmental case for public renewable power is very strong, and has been presented in detail elsewhere.[25]Many of the costs associated with renewable energy pertain to securing upfront capital, and private sector borrowing invariably involves interest rates that are higher than is the case when public entities borrow money. According to Public Services International Research Unit, whether public or private, “Money is borrowed from the same financial institutions—banks, pension funds and other investors.”[26] Thus the source of the capital is the same; but the terms are better for public entities—that ultimately have government backing—than they are for private concerns that must deliver profits and dividends in a relatively short time frame or face bankruptcy. [27]

Public financing and public ownership can also control costs by removing profit. Electricity prices can be structured in a way that generates revenue from providing electricity as a well-managed public service. This will bring to an end to the current “build and sell” approach to expanding renewable energy which is chaotic and subject to destructive boom-bust cycles. Public ownership can facilitate planning and cooperation between different public entities—banks, generators, installers, and communities.

Public power will be cheaper than private generation ever could be, but the fact that gas- and coal-fired power may still be cheaper is not the decisive issue. The future of humanity cannot rest on whether the price of electricity is 10 cents a kilowatt hour or 13 cents. Fossil-based power creates massive social and environmental costs that are not reflected in electricity prices, but they are nevertheless undeniably real.

Whatever the exact shape of the alternative, the current policy commitment to renewable energy subsidies is not working. The subsidies are frequently regressive; they transfer public funds to private interests; and—last but certainly not least—they have not produced the levels of investment and deployment needed in order to meet climate goals.

It is worth remembering that this was the reason for subsidies in the first place.

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 Notes

[1] See http://www.pbs.org/now/shows/347/oil-politics.html
[2] Maria van der Hoeven, “Webinar Launch of the Solar Electricity Roadmaps 2014,” Webinar, Paris, September 29, 2014, available at https://www.iea.org/media/speeches/mvdh/140929_Solar_Roadmaps_Speech.pdf.
[3] International Energy Agency (IEA)/International Renewable Energy Agency (IRENA), “Perspectives for the Energy Transition: Investment Needs for a Low Carbon Energy System,” 2017, available at http://www.irena.org/menu/index.aspx?mnu=Subcat&PriMenuID=36&CatID=141&SubcatID=3828
[4] IEA Energy Technology Perspectives, 2017, https://www.iea.org/etp2017/summary/.
[5] British Petroleum, Statistical Review of World Energy, 2018, https://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy/electricity.html
[6] IEA, World Energy Outlook 2017, http://www.iea.org/bookshop/750-World_Energy_Outlook_2017; EIA, International Energy Outlook 2017, https://www.eia.gov/outlooks/ieo/.
[7] British Petroleum, https://www.bp.com/en/global/corporate/energy-economics/statisticalreview-of-world-energy/electricity.html
[8] IEA, “Re-powering Markets,” 2016, available at http://www.iea.org/publications/freepublications/publication/re-powering-markets-market-design-and-regulation-during-the-transition-to-low-carbon-power-systems.html
[9] IRENA, “Global Landscape of Renewable Energy Finance,” 2018, 14. http://www.irena.org/publications/2018/Jan/Global-Landscape-of-Renewable-Energy-Finance
[10] See http://www.greenpeace.org/international/en/publications/Campaign-reports/Climate-Reports/Energy-Revolution-2015/. September 2015.
[11] REN21, “Renewables 2017 Global Status Report.” http://www.ren21.net/status-of-renewables/global-status-reportrenewables-2017-global-status-report/
[12] The European Trade Union Institute (ETUI) Feed-in Tariffs have resulted in a more than 25% share of renewable electricity, technological innovation, thousands of tons of CO2 savings, 370,000 jobs, and high revenues for communities and regions. About twenty million Germans today live in so-called 100 percent RE regions (in total about 140 country-wide) that aim to supply 100 percent of their electricity and often also heat demand with renewables. These regions create local value by saving high costs for energy imports, creating local jobs, and generating tax income.
[13] See http://ec.europa.eu/eurostat/statisticsexplained/index.php/File:Net_electricity_generation,EU-28,_2015_(%25_of_total,_based_on_GWh)_YB17.png.
[14] European Commission, Assessing the European clean energy finance landscape; European Environment Agency, available at https://www.eea.europa.eu/themes/climate/trends-and-projections-in-europe/executive-summary-1.
[15] Jackson et al., “Warning Signs for Stabilizing Global CO2 Emissions.”
[16] See http://fortune.com/2017/03/14/germany-renewable-clean-energy-solar/. “The rise in that surcharge is the single biggest reason that the amount the average German household spent on electricity rose to 1,060 euros in 2016, up 50% from 2007.” However, in Germany’s case, renewables contributed 32% of the country’s electricity consumption during the same year.
[17] Tommaso Rondinella and Elena Grimaccia, “How austerity put a brake on the energy transformation in Italy,” in Béla Galgóczi, ed., Europe’s Energy Transformation in the Austerity Trap, ETUI, 2015; http://www.etui.org/Publications2/Books/Europe-s-energy-transformation-in-the-austerity-trap
[18] See https://www.worldfuturecouncil.org/parliamentarians-can-revive-energiewende/
[19] UNEP and BNEF, Global Trends in Renewable Energy Investment Report 2018, http://fs-unep-centre.org/publications/global-trends-renewable-energy-investment-report-2018 . Fiona Harvey, “European clean tech industry falls into rapid decline,” The Guardian, 23 March 2016, http://www.theguardian.com/environment/2016/mar/23/european-clean-tech-industry-falls-into-rapid-decline.
[20] See https://www.parliament.uk/business/committees/committees-a-z/commons-select/environmental-audit-committee/news-parliament-2017/green-finance-report-published-17-19/
[21] For recent explanations of the downward trend in investment in renewables in Europe and globally, see: International Energy Agency, July 2018 https://www.iea.org/newsroom/news/2018/july/global-energy-investmentin-2017-.html; see also, Bloomberg New Energy Finance, July 2018, https://about.bnef.com/blog/solar-energy-investment-set-fall-2018-cutback-china-lower-equipment-costs/
[22] Fragmentation cites: OECD, Business and Finance Outlook 2016 , chapter 5 http://www.oecd.org/finance/oecd-business-and-finance-outlook-2016-9789264257573-en.htm
[23] See http://www.cps.org.uk/publications/reports/central-planning-with-market-features-how-renewable- subsidies-destroyed-the-uk-electricity-market/.
[24] Marcelino Madrigal and Steven Stoft, “Transmission Expansion for Renewable Energy Scale-Up Emerging Lessons and Recommendations” (The World Bank, Washington, DC, June 2011).http://www.cps.org.uk/publications/reports/central-planning-with-market-features-how-renewable-subsidies-destroyed-the-uk-electricity-market/
[25] See http://unionsforenergydemocracy.org/resources/tued-publications/tued-working-paper-10/.
[26] Public Services International (Feb 2015) Why Public Private Partnerships Don’t Work, http://www.world-psi.org/en/publication-why-public-private-partnerships-dont-work
[27] See http://unionsforenergydemocracy.org/resources/tued-publications/tued-working-paper-10/.

 

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Author Biography

Sean Sweeney, PhD, is the director of the International Program for Labor, Climate, and Environment at the Murphy Institute, School of Labor and Urban Studies, CUNY.