How heavily should a state intervene in its energy sector? Virtually every developed state ponders this question. As a cautionary tale about subsidies for renewables gone wrong, it is worth looking at a fresh piece of German history.
The UK is at loggerheads on the future of its energy supply. As the new Energy Bill is to be published later this month, the debate is heating up. Conservative Energy Minister John Hayes has just provoked the more eco-friendly sectors of the public and shaken up the markets by questioning the UK’s need for onshore wind power. His comments have contradicted the very essence of London’s energy policy in recent years. More crucially, they show how confused and out of sync David Cameron and his ministers really are when it comes to this topic.
The Department for Energy and Climate Change, along with lobbyists for renewables and nuclear power, has been making the case for feed-in tariffs for months. These would give the utilities more room to calculate the expected revenue from, for example, a wind farm or a nuclear plant. That would spur on competition – whereas now, only big companies can afford to take the risk of a venture not being profitable.
Conservative politicians answer that feed-in tariffs would end up bolstering not only the renewables, but also the electricity prices – which is happening in Germany at the moment. In fact, German politicians are pondering about switching from feed-in tariffs to the utilities having to source certain portions of their electricity from renewable power. That is exactly the model that is used in the UK now. From a truly liberal point of view – party politics aside – feed-in tariffs are a step back.
Will subsidies create a flourishing industry?
The question behind the argument is: will the prices for renewables shrink quickly if the government throws money at the companies, be it through feed-in tariffs or other means? Will subsidies, in the long run, make UK engineers develop wind turbines, solar panels, nuclear plants or environment-friendly coal plants that the world wants to buy?
As a cautionary tale, it’s worth gazing across the north sea. Germany had been subsidising its solar power recklessly. Due to the state guaranteeing the revenues for 20 years, no home owner could put a foot wrong by putting a solar panel on his roof. Green Entrepreneurs like Frank Asbeck, founder of market leader Solarworld, became millionaires – and the costs were rising constantly.
Who had to pay for all that? Mr. Average had to. Each and every kilowatt hour of solar electricity had to be subsidized by the customers, through individual energy bills. So prices rose. Soon, Angela Merkel was facing a severe backlash – by the energy intensive industry which was faced with severely mounting production costs, by the lesser partner in her coalition and by consumer groups. Germany’s political leader gave in soon: last summer, subsidies were cut drastically.
German solar companies under pressure
Even earlier, German solar technology manufacturers had come under pressure from another angle: Chinese producers had begun flooding the market. Gigantic subsidies and lower wages gave and still give them the chance to produce at unmatched prices.
Taking into account that crisis-ridden European countries like Spain and Italy have also been cutting down their solar budgets, it’s easy to explain why German developers of solar parks and producers of solar panels have been folding one after another. Even for comparatively resilient companies like Solarworld, the stock value is plummeting. The subsidies that everybody had to pay through energy bills lead to exactly nothing. They were and still are an utter waste of money.
To be fair: subsidies as kick-starts for business sectors can be, and were many times, success stories. But this example goes to show that a government ramping up on green energy on a wave of public sentiment without a coherent strategy can end up shooting itself in the foot. Spending money on so-called sustainable technologies does not always prove to be so sustainable after all.
Update: Karl-Friedrich Lenz brought forward some criticism about this post. One valid point: the tariffs for solar subsidies have not been rising, as previously stated in paragraph 6 – only the costs have. His other assertions are discussed in a comment of mine.