The Future of Energy:Renewable energy subsidies & Reducing Emissions



Today’s guest post by Whaleoil reader Bruce Alan Forbes is part of an article he wrote called The Future of Energy with predictions for 2040. As it is an in-depth analysis I divided it into six posts so that we could discuss each part separately.

Current Subsidies

Worldwide, hundreds of billions of dollars per year are spent on subsidising wind and solar electricity generation, and on pursuing the development of marine power technologies based on waves, tidal currents and tidal barrages. In most countries, renewable energy is subsidised by the taxpayer and/or electricity consumer. ?Feed-in tariffs?, ?Production Tax Credits?, ?Renewable Portfolio Standards? and ?Renewables Obligation Certificates? are all forms of subsidy. The developers or investors benefit from subsidies and tax breaks that, in some cases, result in them getting their money back in very short periods. In nearly all cases, the cost of paying these subsidies is either added to the cost of electricity paid for by all consumers, or is derived from governments? other tax revenues or increased government debt. It is these subsidies, not economic merit, that have produced the explosion in renewable energy projects over the past decade. Without subsidies, constructing wind and solar farms for connection to the grid would be a hugely loss-making business.

There are also hidden subsidies in the form of free or subsidised transmission, backup and system services such as frequency management and voltage support. The costs of these services, which are needed disproportionately by wind and solar generators, are passed on to all consumers. The consumer also pays for the construction of the relatively inefficient open-cycle gas turbines (OCGTs) that are needed to avoid blackouts when the wind is not blowing in the required velocity range, or the sun is not shining.

The practice of subsidising wind or solar generation is sometimes defended on the basis that fossil-fuel or nuclear generation is also subsidised. When the subsidies are compared on an equitable basis – that is, on the subsidy per unit of energy (kWh) generated – it is apparent that renewable energy technologies are more heavily subsidised by many orders of magnitude.

The International Energy Agency?s (IEA) World Energy Outlook 2012 advised that about $240 billion had been spent on subsidies for new renewable energy generation between 2007 and 2011. This amounted to about 5 cents per kWh generated. As already mentioned, there are also significant hidden subsidies. It is also apparent that the IEA expects that there will be a continuing need for these subsidies to and beyond 2040. It is both contradictory and implausible for any agency or person to continue to assert that large subsidies will continue to be needed well into the future, while simultaneously claiming that these renewable technologies are – or soon will be – competitive with coal, gas or nuclear electricity generation. It is likely that such subsidies have cost more than $500 billion since 2004, and that the total additional economic burden of renewable energy technologies to date is about $2 trillion.

The Near-term Outlook for Subsidies

Many countries have already found that the cost of renewable energy subsidies is unsustainable, so they are being scaled back. This has happened in Spain, Germany and in the UK for both wind and solar power. In the US, many subsidies are renewed every few years, and they are therefore at continual risk of being scaled back or even totally abandoned. Offshore wind power is heavily subsidised in many countries, but as the overall cost per kWh is about three times that of onshore wind power, these subsidies appear to be very vulnerable.

Unless the economies of the OECD countries improve greatly, it seems likely that investments and subsidies for renewable energy projects will continue to decline. As this happens, most existing onshore wind farms should still make enough money to pay for their continued operation and maintenance; so there is a reasonable chance that they will not be abandoned immediately. Conversely, offshore wind farms and many solar installations will be at great risk of negative operating cash flows. This will result in their abandonment. When this happens, large amounts of public funds (taxpayers? and/or electricity consumers?) will be needed to dismantle offshore wind farms, solar farms, roof mounted solar cells and those onshore wind farms with low capacity factors and/or high maintenance costs. When subsidies disappear, all the companies manufacturing wind turbines or solar cells will be in serious trouble, and most will go bankrupt. Their share prices have already dropped dramatically over the last few years, so private investors have endured the most of the losses to date. In general, it would be much cheaper to substantially reduce or totally withdraw subsidies immediately, rather than to continuing to support uneconomic renewable energy projects that generate overpriced electricity.

Options for Reducing Carbon Dioxide Emissions

Governments subsidise renewable energy because they have been convinced (with minimal evidence) that CO2 emissions are dangerous and that renewable energy is a good way to reduce the emissions that result from burning fossil fuels. Consequently, any credible review of the merits of renewable energy technologies must examine alternative methods of reducing CO2 emissions, and must also consider whether the hypothesis that man-made emissions of CO2 will actually lead to the predicted catastrophic outcomes. When the situation is studied objectively and holistically, it becomes obvious that there are a number of options that can make substantial reductions in CO2 emissions for little or no cost, compared to current practice that achieves smaller reductions at much higher cost. This following section discusses the costs and merits of the major options.

The available conventional large-scale technologies:

? nuclear power;
? more efficient coal-fired generation;
? switching from coal to gas (largely due to new shale reserves);
? more efficient gas-fired generation;
? more large-scale hydropower (in countries where the potential is available)

These can deliver all the electricity we need at a reasonable cost. The available small-scale technologies are:

? wind power;
? solar power;
? power from tidal barrages; ? small hydropower.

All of these are expensive and require major subsidies to compete with conventional generation. Technologies that have not yet shown anything near technical or economic viability are

? wave power;
? marine current power.