HRG. 113-623. 2014-7-22. U.S. Security implications of international energy and climate policies and issues. U.S. Senate 113th congress
MARY HUTZLER, Distinguished senior fellow, Institute for Energy Research, Berlin, MD
RENEWABLE SUBSIDIES IN EUROPE
Spain (Also see Spain’s Photovoltaic Revolution)
In order to enhance renewable energy sources in Spain, the Government enacted legislation to reach 20% of electric production from qualified renewable energy by 2010. To meet this target, the government found it needed to provide incentives to ensure the market penetration of renewable energy, including providing above-market rates for renewable-generated electricity and requiring that electric utility companies purchase all renewable energy produced. In 1994, Spain implemented feed-in tariffs to jump start its renewable industry by providing long-term contracts that pay the owners of renewable projects above- market rates for the electricity produced.18
Because renewable technologies generally cost more than conventional fossil fuel technologies, the government guaranteed that renewable firms would get a higher cost for their technologies. But, because the true costs of renewable energy were never passed on to the consumers of electricity in Spain, the government needed to find a way to make renewable power payments and electricity revenues meet. Since 2000, Spain provided renewable producers $41 billion more for their power than it received from its consumers. 19 (For reference, Spain’s economy is about one-twelfth the size of the U.S. economy.) In 2012, the discrepancy between utility payments to renewable power producers and the revenue they collected from customers was 5.6 billion euros ($7.3 billion), despite the introduction of a 7% on generation. 20 The 2012 gap represented a 46% increase over the previous year’s shortfall.
A massive rate deficit should not come as a surprise. For 5 years, IER has warned of this problem beginning when Dr. Gabriel Calzada released his paper on the situation in Spain and testified before Congress.21 He found that Spain’s ‘‘green jobs’’ agenda resulted in job losses elsewhere in the country’s economy. For each ‘‘green’’ megawatt installed, 5.28 jobs on average were lost in the Spanish economy; for each megawatt of wind energy installed, 4.27 jobs were lost; and for each megawatt of solar installed, 12.7 jobs were lost. Although solar energy may appear to employ many workers in the plant’s construction, in reality it consumes a large amount of capital that would have created many more jobs in other parts of the economy. The study also found that 9 out of 10 jobs in the renewable industry were temporary. 22, 23
Spain’s unemployment rate has more than doubled between 2008 and 2013. In January 2013, Spain’s unemployment rate was 26% the highest among EU member states.24 Spain’s youth unemployment (under the age of 25) reached 57.7% in November 2013, surpassing Greece’s youth unemployment rate of 54.8% in September 2013. 25
The Spanish Government did not believe Dr. Calzada 5 years ago, but they have now been hit in the face with reality. To recover the lost revenues from the extravagant subsidies, the Spanish Government ended its feed-in tariff program for renewables, which paid the renewable owners an extremely high guaranteed price for their power as can be seen by the deficit. Currently, renewable power in Spain gets the market price plus a subsidy which the country deems more ‘‘reasonable.’’ Companies’ profits are capped at a 7.4% return, after which renewable owners must sell their power at market rates. The measure is retroactive to when the renewable plant was first built.26 Therefore, some renewable plants, if they have already received the 7.4% return, are receiving only the market price for their electricity.
Wind projects built before 2005 will no longer receive any form of subsidy, which affects more than a third of Spain’s wind projects. As a consequence of the government’s actions to rein in their subsidies and supports, Spain’s wind sector is estimated to have laid off 20,000 workers.
The Spanish Government also slashed subsidies to solar power, subsidizing just 500 megawatts of new solar projects, down from 2,400 megawatts in 2008.27 Its solar sector, which once employed 60,000 workers, now employs just 5,000. In 2013, solar investment in Spain dropped by 90 percent from its 2011 level of $10 billion.
Spain’s 20% renewable energy share of generation from wind and solar power has come at a very high cost to the nation.
In Germany, as part of the country’s ‘‘Energiewende,’’ or ‘‘energy transformation,’’ electric utilities have been ordered to generate 35% of their electricity from renewable sources by 2020, 50% by 2030, 65% by 2040, and 80% by 2050. To encourage production of renewable energy, the German government instituted a feed-in tariff early, even before Spain.
In 1991, Germany established the Electricity Feed-in Act, which mandated that renewables ‘‘have priority on the grid and that investors in renewables must receive sufficient compensation to provide a return on their investment irrespective of electricity prices on the power exchange.’’ 28 In other words, utilities are required to purchase electricity from renewable sources they may not want or need at above-market rates. For example, solar photovoltaics had a feed-in tariff of 43 euro cents per kilowatt hour ($0.59 U.S. per kilowatt hour), over 8 times the wholesale price of electricity and over 4 times the feed-in tariff for onshore wind power. A subsequent law passed in 2000, the Renewable Energy Act (EEG), extended feed-in tariffs for 20 years.29 Originally, to allow for wind and solar generation technologies to mature into competitive industries, Germany planned to extend the operating lives of its existing nuclear fleet by an average of 12 years. But, the Fukushima nuclear accident in Japan caused by a tsunami changed Germany’s plans and the country quickly shuttered 8 nuclear reactors and is phasing out its other 9 reactors by 2022, leaving the country’s future electricity production mostly to renewable energy and coal. 30
Coal consumption in Germany in 2012 was the highest it has been since 2008, and electricity from brown coal (lignite) in 2013 reached the highest level since 1990 when East Germany’s Soviet-era coal plants began to be shut down. German electricity generation from coal increased to compensate for the loss of the hastily shuttered nuclear facilities. Germany is now building new coal capacity at a rapid rate, approving 10 new coal plants to come on line within the next 2 years to deal with expensive natural gas generation and the high costs and unreliability of renewable energy.31 As a result, carbon dioxide emissions are increasing.
While the United States is using low cost domestic natural gas to lower coal-fired generation, in Germany, the cost of natural gas is high since it is purchased at rates competitive with oil. Also, Germany is worried about its natural gas supplies since it gets a sizable amount from Russia. While domestic shale gas resources are an alternative, particularly since the Germans are hydraulic fracturing pioneers and have used the technology to extract tight gas since the 1960s, Germany’s Environment Minister has proposed a prohibition on hydraulic fracturing until 2021 in response to opposition from the Green Party.33 According to the Energy Information Administration, Germany has 17 trillion cubic feet of technically recoverable shale gas resources.34
Germany has some of the highest costs of electricity in Europe and its consumers are becoming energy poor. In 2012, the average price of electricity in Germany was 36.25 cents per kilowatt hour,35 compared to just 11.88 cents for U.S. households, triple the U.S. average residential price.36 These prices led Germany’s Energy Minister to recently caution that they risk the ‘‘deindustrialization’’ of the economy.
In addition to high electricity prices, Germans are paying higher taxes to subsidize expensive green energy. The surcharge for Germany’s Renewable Energy Levy that taxes households to subsidize renewable energy production increased by 50 percent between 2012 and 2013—from 4.97 U.S. cents to 6.7 cents per kilowatt hour, costing a German family of 4 about $324 US per year, including sales tax.37 The German Government raised the surcharge again at the start of this year by 18% to 8.61 US cents per kilowatt hour representing about a fifth of residential utility bills,38 making the total feed-in tariff support for 2014 equal to $29.6 billion US.39 As a result, 80 German utilities had to raise electricity rates by 4%, on average, in February, March, and April of this year.
The poor suffer disproportionately from higher energy costs because they spend a higher percentage of their income on energy. As many as 800,000 Germans have had their power cut off because of an inability to pay for rising energy costs, including 200,000 of Germany’s long-term unemployed.40
Adding to this is a further disaster. Large offshore wind farms have been built in Germany’s less populated north and the electricity must be transported to consumers in the south. But, 30 wind turbines off the North Sea island of Borkum are operating without being connected to the grid because the connection cable is not expected to be completed until sometime later this year. Further, the seafloor must be swept for abandoned World War II ordnance before a cable can be run to shore. The delay will add $27 million to the $608 million cost of the wind park. And, in order to keep the turbines from rusting, the turbines are being run with diesel. 41 42
Germany’s power has been strained by new wind and solar projects both on and offshore, making the government invest up to $27 billion over the next decade to build about 1,700 miles of high-capacity power lines and to upgrade existing lines. The reality is that not only is renewable energy more expensive, but it also requires expensive transmission investments that existing sources do not, thus compounding the impact on consumers and businesses.
Germany knows reforms are necessary. On January 29, the German Cabinet backed a plan for new commercial and industrial renewable power generators to pay a charge on the electricity they consume. As part of the reform of the Renewable Energy Sources Act, the proposal would charge self-generators 70% of the renewable subsidy surcharge, (i.e. the 6.24 cents per kilowatt hour). Under the proposal, the first 10 megawatt hours would be exempt for owners of solar photovoltaic projects that are less than 10 kilowatts. According to the German Solar Energy Industry Association, about 83% of solar self-generators would be subject to the new charge. Another reform being considered is a reduction in the feed-in tariff from the current average of 23.47 U.S. cents per kilowatt hour to 16.56 U.S. cents per kilowatt hour.43 On July 11, Germany’s upper House of Parliament passed changes to the Renewable Energy Sources Act, which will take effect as planned on August 1. The law lowers subsidies for new green power plants and spreads the power-price surcharge more equally among businesses.44
Unlike Spain and Germany, the United Kingdom (U.K.) started its feed-in-tariff program to incentivize renewable energy relatively late, in 2010.45 Hydroelectric, solar, and wind units all have specified tariffs that electric utilities must pay for their energy, which are above market rates. Like the other countries, the U.K. has a mandate for renewable energy. The United Kingdom is targeting a 15% share of energy generated from renewable sources in gross final energy consumption and a 31% share of electricity demand from electricity generated from renewable sources by 2020.46 The U.K. generates about 12% of its electricity from renewable energy today. The increased renewable power will cost consumers 120 pounds a year (about $200) above their current average energy bill of 1,420 pounds ($2,362). 47 The U.K. is closing coal-fired power plants to reduce carbon dioxide emissions in favor of renewable energy. In the U.K., 8,200 MW of coal-fired power plants have been shuttered, with an additional 13,000 MW at risk over the next 5 years, according to the Confederation of U.K. Coal Producers. 48 The U.K.’s energy regulator is worried that the amount of capacity over-peak demand this winter will be under 2%—a very low, scary amount for those charged with keeping the lights on—and the lowest in Western Europe.
Beginning in January 2016, the European Union will require electric utilities to add further emission reduction equipment to plants or close them by either 2023 or when they have run for 17,500 hours. Because the equipment is expensive, costing over 100 million pounds ($167 million) per gigawatt of capacity, only one U.K. electricity producer has chosen to install the required technology. Most of the existing coal-fired plants are expected to be shuttered since only one coal-fired power plant has been built in the U.K. since the early 1970s.
To deal with the reliability issue, the U.K. Government is hosting an auction for backup power, but it is unclear how it will work. According to the Department for Energy and Climate Change, electricity producers will be able to bid in an auction to take place this December to provide backup power for 2018. The program, called a capacity market, is expected to ensure sufficient capacity and security of supply. The Department estimates that the U.K. power industry needs around 110 billion pounds ($184 billion) of investment over the next 10 years. The Renewable Energy Foundation (REF) estimates that consumers currently pay more than £1 billion ($1.66 billion) a year in subsidies to renewable energy producers—twice the wholesale cost of electricity. Those subsidies are expected to increase to £6 billion ($10 billion) a year by 2020 to meet a 30% target of providing electricity from renewable energy. 49 As a result, a growing number of U.K. households are in energy poverty. In 2003, roughly 6% of the United Kingdom’s population was in energy poverty; a decade later, nearly one-fifth of the nation’s population is in energy poverty.
As a result, the government has proposed that renewable companies sell their electricity to the national grid under a competitive bidding system. The new proposal limits the total amount of subsidies available for green energy, which were previously effectively limitless. The reduction in subsidies has led to renewable developers scrapping plans amid claims that the proposal will make future renewable development unprofitable.50
The U.K. is both cutting the level of their feed-in tariffs and the length of time they are available. Effective July 1, 2013, the feed-in tariff for solar generated electricity was reduced from 15.44 pence (24 cents U.S.) to 14.90 pence per kilowatt hour. In October 2011, it was 43.3 pence (67.5 cents U.S.) per kilowatt hour—almost three times the reduced level.51 Also, the length of time for the subsidy entitlement is being reduced—for example, it will be 15 years instead of 20 years for wind farms built after 2017.
The reductions indicate that the original subsidies were overgenerous and that wind turbines are unlikely to have an economic life of 20 years. 52
But, according to the Climate Change Committee (CCC), without tougher action, Britain will miss its 31% target of cutting emissions, managing only a 21% reduction instead, which will hinder meeting its commitment to cut greenhouse gas emissions by 80% of 1990 levels by 2050. The CCC called for more progress on insulating homes, promoting the uptake of ground source and air source heat pumps,
Similar to Germany and Spain, Italy also used feed-in tariffs to spur renewable development, and found it too costly. In 2005, Italy introduced its solar subsidy plan, providing solar power with premiums ranging from Euro 0.445 ($0.60 U.S.) per kilowatt hour to euro 0.490 ($0.66 U.S.) per kilowatt hour. 54 That subsidy resulted in the construction of more than 17,000 megawatts of solar capacity. In 2011, Italy’s solar market was the world’s largest, but that market has slowed due to the removal of subsidies. Italy ceased granting feed-in tariffs for new installations after July 6, 2013, because its subsidy program had reached its budget cap—a limit of 6.7 billion euros ($8.9 billion) as of June 6, 2013. The law restricts above-market rates for solar energy a month after the threshold is reached. Without tariffs, the Italian solar market will need to depend on net metering (where consumers can sell the power they generate themselves to the grid) and income tax deductions for support.55
Italy also undertook other measures. In 2012, the government charged all solar producers a 5-cent tax per kilowatt hour on all self-consumed energy. The government also curtailed purchasing power from solar self-generators when their output exceeded the amount the system needed. Those provisions were followed in 2013 by the government instituting a ‘‘Robin Hood tax’’ of 10.5% to renewable energy producers with more than $4.14 million US in revenue and income greater than $414,000 US. 56 According to Italy’s solar industry, the result of these and other changes has been a surge in bankruptcies and a massive decrease in solar investment.
18 Institute for Building Efficiency, Feed-In Tariffs: A Brief History.
19 Financial Post, Governments Rip Up Renewable Contracts, March 19, 2014.
20 Bloomberg, Spain’s Power Deficit Widens by 46 Percent as Steps to Close Gap Founder, April 25, 2014.
21 Institute for Energy Research, August 6, 2009.
22 Study of the effects on employment of public aid to renewable energy sources, Universidad Rey Juan Carlos, March 2009.
23 Eagle Tribune, Cap-and-trade bill is an economy-killer, June 28, 2009.
24 The Failure of Global Carbon Policies, June 11, 2014.
25 Spain Youth Unemployment Rises to Record 57.7 Percent, Surpasses Greece, January 8, 2014.
26 Financial Post, Governments Rip Up Renewable Contracts, March 19, 2014.
27 Wall Street Journal, ‘‘Darker Times for Solar-Power Industry,’’ May 11, 2009.
28 Heinrich Bo¨ll Foundation, Energy Transition: The German Energiewende.
29 Institute for Building Efficiency, Feed-In Tariffs: A Brief History, Aug. 2010.
30 German Federal Ministry of Economics and Technology and Ministry for the Environment, Nature Conservation and Nuclear Safety.
31 Forbes, ‘‘Germany’s Energy Goes Kaput, Threatening Economic Stability,’’ December 30, 2013.
32 BP Statistical Review of World Energy 2014. 33Wall Street Journal, Germany’s fracking follies, July 7, 2014.
34 Energy Information Administration, Technically Recoverable Shale Oil and Shale Gas Resources: An Assessment of 137 Shale Formations in 41 Countries Outside the United States, June 2013.
35 Europe’s Energy Portal Germany Energy Prices Report.
36 U.S. Energy Information Administration, Monthly Energy Review.
37 Tree Hugger, German Electricity Tax Rises 50 Percent to Support Renewable Energy, October 17, 2012.
38 Reuters, Five million German families faced with higher power bills, February 24, 2014.
39 Frontier Economics, German renewable energy levy will rise in 2014.
40 The Australian, Europe Pulls the Plug on its Green Energy Future, August 10, 2013.
41 New York Times, Germany’s Effort at Clean Energy Proves Complex, September 18, 2013.
42 Renewables International, First municipal offshore wind farm awaits grid connection, June 25, 2014.
43 Bloomberg, Germany moots levy on renewable power use, February 4, 2014.
44 Wall Street Journal, Germany’s Upper House Passes Renewable Energy Law, July 11, 2014.
45 Institute for Building Efficiency, Feed-In Tariffs: A Brief History, Aug. 2010.
46 International Energy Agency, Global Renewable Energy, National Renewable Energy Action Plan.
47 Bloomberg, Green Rules Shuttering Power Plants Threaten UK Shortage, March 19, 2014.
48 Bloomberg, Green Rules Shuttering Power Plants Threaten UK Shortage, March 19, 2014.
49 The Telegraph, Wind farms subsidies cut by 25 percent, July 14, 2013.
50 The Telegraph, Wind farm plans in tatters after subsidy rethink, March 2, 2014.
51 Mail Online, Solar panel payments are about to fall again but the cost of buying them is falling too—so is it still worth investing?, June 14, 2013.
52 The Telegraph, Wind farms subsidies cut by 25 percent, July 14, 2013.
53 The Global Warming Policy Foundation, Proposals to Step up Unilateral Climate Policy Will Trigger ‘‘Astronomical Costs,’’ Peiser Warns, July 15, 2014.
54 International Energy Agency, Global Renewable Energy, ‘‘Old’’ Feed In Premium for Photovoltaic Systems.
55 Bloomberg, Italy Set to Cease Granting Tariffs for New Solar Projects, June 11, 2013.
56 Financial Post, Governments Rip Up Renewable Contracts, March 18, 2014.