Green power subsidies a mess

Harmonising green subsidies across Europe and ending technology-specific support would encourage sustainability while mitigating affordability issues, say Dan Roberts and Will Steggals.

The tension between two basic energy policy goals, sustainability and affordability, is rising: climate change policies (particularly renewables support) are making energy increasingly expensive and unaffordable for hard-pressed customers.
This is unavoidable. Dirty energy is cheaper than clean – that is why we need intervention to achieve decarbonisation. It is also why we need to make sure the policies used are as efficient as possible and balance the need to ensure affordability and competitiveness. While blaming energy companies for profiteering and implementing temporary price freezes is popular, it will not fix the problem. It just amounts to rearranging the deck chairs on the Titanic if not accompanied by a fundamental rethink.
Europe’s decarbonisation strategy is built on two key policies. The European Union Emissions Trading Scheme (EU ETS), and national, specific renewables subsidies. Frontier Economics recently held a debate between experts from all parts of the industry, government and regulators. This highlighted that neither policy is working.
The carbon price provided by the EU ETS has a massive credibility problem. Investors have seen the price plummet, in part as a result of the financial crisis. They have no visibility of the level of any carbon emissions cap (and hence implied prices) beyond 2020, and have no confidence that the mechanism will help them earn a predictable return on low carbon generation. So investing on the basis of a future carbon price is not going to happen any time soon.
Renewables subsidies are paying too much to achieve too little. The current approach is a patchwork of national initiatives, far removed from the idea of a single market, which creates inefficient outcomes.
First, most countries in Europe differentiate subsidy levels by technology, with higher cost technologies receiving higher subsidies. This means that we are not deploying the most cost-effective mix of renewables. Offshore wind may cost double what onshore costs, and solar can be four times as expensive per megawatt-hour, but that has not diminished policymakers’ desire to subsidise large-scale deployment of these technologies.
Second, support for each technology varies substantially across Europe. So even if achieving scale in the supply chain is an objective, technologies are then not being deployed where they are most cost-effective, but where subsidies are most generous. That is why German customers are paying for 30GW of solar capacity, despite the fact the average production is typically at least one-third lower than that of solar in Spain.
Third, subsidising renewables means low-cost options to reduce emissions are not taken. Under the EU ETS, European carbon emissions are capped. That means that support for mass production of renewable electricity has not yet saved a single tonne of carbon. It simply changes how emissions are reduced. Subsidies mean we build more renewables rather than using cheaper ways to save carbon, such as switching from coal- to gas-fired generation.
All this suggests ample scope for improvement, and so relief (or at least less pain) for customers in the future.
The European Commission is consulting on policy objectives between 2020 and 2030. The run-up to 2020 needs to be used wisely, to allow Europe to choose a better balance between policy objectives.
In the short term, we need to harmonise subsidies across the EU and stop paying for inefficiency. First, if costs are reasonably similar, windfarms should go where it is most windy, and photovoltaics where it is most sunny.
The argument that national support regimes are a means to create national renewables industries and jobs should not stand in the way of this development. The efficient development of large-scale renewables is likely to rely on global manufacturing. The concept of renewables as a tool of industrial policy does not stand up to scrutiny.
Second, where there are technology-­specific subsidies, we need clear criteria to judge when they should be reviewed or halted. Technology-differentiated renewables subsidies can create options – targeted support to less mature technologies may reduce future costs, allowing for cheaper future deployment. But over 100GW of solar power has been installed globally, and 70GW in Europe. Is it still credible to argue that massive subsidies are required to secure scale in the supply chain and ongoing reductions in cost? Particularly following a trade dispute in which the EU alleged China was dumping panels in the European market?
In the longer term, we need to wean ourselves off technology-specific subsidies as smoothly as possible. This means preparing institutions and investors.
A credible carbon price is key, which means providing a stable EU ETS, free from political discretion. Independent regulation brought stability and certainty to investors in the network industries in the 1980s. Something similar is needed for the EU ETS.
No-one wants an investment hiatus. Investors need to be given time to assess any new regime. But equally, we should realise that just because some investors will not welcome more risk, this does not mean that it is right to leave risk with customers.
Achieving this outcome will not be easy. But the cost of failure is immense.
The first step is recognising the problem, and we are not there yet. Politicians seem intent on blaming the industry and finding short-term fixes. Energy companies are in some ways no better. Their proposal to move the cost of environmental policies from energy bills to general taxation may be understandable (they are fed up with the role of whipping boy), but it is not necessarily helpful. Recovering costs through energy bills is regressive, but care is needed not to move in the wrong direction: customers need to see the cost of emitting carbon, else they will underinvest in energy efficiency and conservation measures.
Both sides need to step back from short-term fixes and agree an endgame. Then the work of plotting the path towards it can start.

Dan Roberts is a director and Will Steggals a consultant at Frontier Economics