Governmental incentives for renewables are necessary and provide great value-for-money

One of the arguments that anti-wind lobbyists pull out after the rest of their arguments related to economics and efficiencies of wind energy are shot down is that of economic incentives and market distortions favouring renewables. The argument goes like this: “If wind energy is so cheap and effective, why do they need <insert name of governmental incentive program here>.” Many people with a very strong free market bent start with that argument on ideological grounds.

Most jurisdictions world wide do have governmental incentives to support more rapid transition to less harmful and  not well entrenched technologies such as wind and solar generation.  Ontario in Canada has a Feed in Tariff program (FIT) which provides guaranteed higher prices per KWh to generators of renewable electricity. Australia has a federal program where utilities are mandated to purchase a certain percentage of MWh of renewable energy or pay fines to the government. The United States has a production tax credit which provides a tax break for generators per KWh, reducing the amount of taxes that they pay (which many Republicans and most Libertarians in the US hate despite their commitment to lower taxes).

Short Answer:

Incentives for renewables help level the playing field. They match and exceed existing market distortions favouring traditional forms of generation. They partially account for the uncosted negative impacts of fossil fuel generation in particular.  They help overcome organizational inertia favouring traditional forms of generation.  They provide an incubator environment to allow supply chains, manufacturing and labour forces to grow rapidly with greater certainty. Incentives for renewables more than pay for themselves.

Long Answer:

As always with any argument in this space, the answer has multiple components.  While not fully inclusive of all of the reasons why incentive programs are brought into play world wide, here are the major challenges renewables incentives help overcome:

  1. Existing market distortions favouring traditional forms of generation
  2. Uncosted negative externalities
  3. Organizational inertia
  4. Fledgling supply, labour and financing chains

This article will look at each of these in turn, providing for each the value proposition that renewables incentives bring.

1. Incentives for renewables counterbalance existing market distortions favouring traditional generation

According the International Monetary Fund:

On a pre-tax basis, subsidies for petroleum products, electricity, natural gas, and coal reached $480 billion in 2011 (0.7 percent of global GDP or 2 percent of total government revenues). The cost of subsidies is especially acute in oil exporters, which account for about two-thirds of the total. On a post-tax basis—which also factors in the negative externalities from energy consumption—subsidies are much higher at $1.9 trillion (2.5 percent of global GDP or 8 percent of total government revenues). The advanced economies account for about 40 percent of the global post tax total, while oil exporters account for about one-third. Removing these subsidies could lead to a 13 percent decline in CO2 emissions and generate positive spillover effects by reducing global energy demand.

In the United States, credible estimates of annual fossil fuel subsidies range from $10 billion to $52 billion annually.

Source: http://cleantechnica.com/2011/10/12/fossil-fuel-subsidies-still-too-high/

Source: http://www.nytexaminer.com/2012/09/fossil-fuel-group-whines-about-tax-credits-for-wind/

In Australia, they have seen decades worth of major investments in infrastructure that the government put into the fossil fuel industry, and that continue today with market imbalancing support for coal seam gas and expansions of coal mines.

For example, the New South Wales government had the opportunity to have a major coal seam developed by the private sector at full market prices. Whitehaven Coal offered to provide coal at $55 / ton, but assessment found that this fair market price would raise the price of electricity considerably.  The NSW government undertook to develop the coal seam itself for $1.5 billion and sell coal to the electrical generators at an artificially low price of $31.16 per ton.  This is interesting, as the government is not only directly investing public dollars in more coal mining, it is committing to a loss of economic value on each ton of coal it produces. This is not only a direct subsidy to coal-fueled electricity, it is a direct cost to taxpayers.

Similarly, the amazing success of shale gas in the USA is a result of 40 years of government investment in many aspects of that industry. It’s an overnight, free market success that followed decades of government incentives.

Nuclear power has seen market distortions world wide in the 5-6 cents / KWh for decades, and continues to see that favouritism today.

Without being exhaustive, the same pattern can be seen for hydroelectric as well.  The reality of the energy market place is that because it has such long time frames and strong societal impacts, the government is the only body positioned to shift the market in an effective direction over time to enhance the economy and reduce negative impacts.

An incentive for renewable energy provides a market levelling force for these existing distortions.  Of course, fossil fuel distortions are spread over a bigger energy base, many are consumption based and they vary substantially by jurisdiction. In general, renewables incentives per KWh exceed direct incentives to traditional sources today. If this were the only argument for renewables incentives, they would be smaller.

And of course, it’s worth noting that removing distortions favouring traditional forms of generation just doesn’t seem to be something anyone cares about.  In fact, many of the same organizations lobbying strongly to eliminate renewables incentives on the other hand lobby strongly to maintain or extend fossil fuel distortions.

2. Renewables incentives balance uncosted negative impacts of traditional generation

A “negative externality” is an cost that is not included in the price of something, and as such is not subject to market forces. As a simple example, burning coal was a prime cause of acid rain which destroyed forests. The cost of the impacts on the environment were not included in the price per KWh of burning coal. In North America, acid rain has mostly been dealt with by governments enacting legislation requiring coal generation plants to reduce sulphur dioxide outputs, and that particular externality is now costed into the price of coal power.

Coal continues to be the form of fossil fuel generation with the highest negative externalities. It’s negative externalities have been priced at a median of 17.8 cents per KWh by a US study. These costs include public health impacts due to asthma and emphysema, remediation of directly destroyed ecosystems due to coal mining and of course the impacts of global warming.

Source

In blunter terms, a Harvard School of Public Health study from 2007 projected that a single Delaware wind farm would save eight lives a year and a conservative $1 billion USD in avoided health care costs over its 25 year lifespan. As the authors say:

With the inclusion of other health outcomes and given the factors described above that might imply greater benefits per unit emissions reduction in Delaware, the discounted present value of the health benefits of the proposed wind park likely greatly exceeds $1 billion.

Prior to widespread understanding of the negative impacts of global warming, shale gas was considered a clean fossil fuel, and it’s health and direct environmental impacts are lower than coal. As can be seen from the table below, outside of CO2e, natural gas produces a fraction of the pollutants that coal does.

Source: http://www.naturalgas.org/environment/naturalgas.asp

However, as the table above and the chart below show, shale gas generation still produces 50 times the CO2e per MWh of wind, solar and nuclear generation over its full lifecycle.  This means that while shale gas is twice as good as coal from a global warming perspective, and as a result is a reasonable part of the mix for a transitionary period, it’s a bad bet for a long term source of major amounts of our power.

Source: http://en.openei.org/apps/LCA/

Finally, there is the negative externality of fresh water use.  Thermal plants — coal, nuclear and shale gas — depend for the most part on large volumes of cool water in lakes or rivers.  Coal and nuclear, as examples, require 500 and 600 times the water as wind energy on a per KWh basis over their full lifecycle as the graph below from the California Energy Commission shows. These numbers are confirmed by other analyses.

Sources: http://cleantechnica.com/2010/10/15/water-energy-facts-blog-action-day-water/
and http://www.civilsocietyinstitute.org/media/pdfs/091912%20Hidden%20Costs%20of%20Electricity%20report%20FINAL2.pdf

This does not mean that the water disappears, but it’s value is degraded often significantly.  First, it is returned to the river or lake at an increased temperature when those bodies are already seeing warmer water; this is contributing to heat shock that is killing plants and fish in the water.  Second, while every effort is made to keep the water used for cooling clean, it is running through pumps and pipes, and significant accidents have occurred where water quality has been damaged through release of fossil fuels and radioactivity.

One of the  results of global warming is significant regional drought and warmer surface water temperatures.  One of the impacts of this is on traditional thermal — coal and nuclear — and hydro generation.  The hydro generation is self-evident: less surface water means less hydro generation. The coal and nuclear generation is less self-evident, but no less serious. As shown above, these require enormous amounts of cool water. However, with lakes and rivers already warmer due to global warming and with some of them having much less water due to drought, many coal and nuclear generation plants are producing less than their maximum capacity and are in danger of being shuttered entirely.

The economic impacts of global warming are already running into the trillions, with projections of economic impacts by 2030 in the 3.2% of global GDP.

These negative externalities are currently uncosted in traditional forms of generation, are in the range of 1-5 cents per KWh for nuclear and hydro, 5-10 cents per KWh for shale gas and nearly 20 cents per KWh for coal.  Meanwhile, renewables’ negative externalities are fraction of a cent. They generally don’t require massive amounts of water, they don’t create pollution and they don’t produce CO2e.

That difference in price is borne by society and in jurisdictions such as Ontario and Australia often comes out of different portions of taxes that people pay.  Incentives for renewables are an investment in reducing negative externalities of traditional forms of generation that governments are already paying for.  As one example, every MWh of renewables typically eliminates one MWh of fossil fuel generation with the attendant reduction of one MWh of fossil fuel green house gases.

Image courtesy of http://www.guardian.co.uk/environment/blog/2012/sep/26/myth-wind-turbines-carbon-emissions

3. Incentives assist in organizational change to overcome inertia and resistance in the utility and generation sector

Energy generation and distribution is a very big industry.  It deals in 20-50 year time frames and often undertakes projects that span more than a decade.  And the vast majority of expenditures are for business-as-usual: keeping existing generation humming, keeping the grid working and keeping the lights on.  The successful and powerful people in these organizations have significant investments in traditional forms of generation.  They have organizations of thousands of people who work for them on traditional forms of generation.  They have political capital invested in decade-long efforts to get major capital nuclear plants built or refurbished.

The companies engaged in this have enormous investments in manufacturing, skilled labour pools, equipment and manufacturing plants.  Often these investments are still amortizing, costing them money on their books every month and year; that cost doesn’t go away if they have to do something new or if a new competitor threatens their market share.  Often these investments are fully amortized; companies are receiving excellent profits and any new competitors will threaten those profits.

Unions exist in this area as well.  They have thousands and tens of thousands of members who are trained and skilled on traditional technologies.  Renewables are usually not constructed or maintained by unionized staff, but by companies which engage labour on the open labour market at market rates.  Union leadership has two problems to deal with then. One is threats to their members’ livelihood, but the other is threat to union power.  If union numbers drop, union power drops.

All of these forms of organizational inertia exist in the power industry.  In general, they are a good compromise that is very effective at keeping the status quo working in a complex, regulated and long-term thinking industry. However, when change is required as is the case with the shift to renewables, these forms of organizational inertia work against the change instead of for it.

In Ontario, for example, Don MacKinnon, President of the Power Workers’ Union which represents coal workers lobbies the government to keep using coal, unsurprisingly.

In this environment, external force must be applied to create change. Politically implemented incentives are a key part of the toolkit for this change. They are not the only tool that can or is being applied, and they are insufficient in and of themselves to create change, but in order to achieve the value proposition of renewables, they are key to overcoming industry inertia.

4. Incentives help renewables establish competitive supply chains, labour forces and financing

Renewables are not new technology and they are not innovations or alternatives that must be helped to become technically good producers of electricity.  They are effective, mature technologies that have not had a significant foothold in the market, have not had well-established and efficient supply chains and are not entrenched in major utilities and generation companies to nearly the extent of coal, natural gas, nuclear and hydro generation.

Economies of scale are critical to forms of generation that must compete in the highly competitive and mature energy industry, where players have been refining their supply chains and agreements for decades.  The decade or two decade incentive schemes have created sufficient economic certainty for major international organizations to invest in building their capacity.  The incentive programs are sufficient for labour forces to mobilize, for colleges and universities to create specialized training programs and for individuals to consider lifelong careers in renewables or to switch from moribund careers in car manufacturing.

World wide, the wind industry is seeing a maturing shakeout, with consolidation and mergers happening regularly.  The number of players in the industry is smaller and individual players have a larger market share.  This is a sign of a maturing market.

Keen-eyed and ambitious young people are now assuming that entering the renewables field is a profitable and sensible career decision, as opposed to a virtuous way to remain poor.

Financing organizations and mechanisms have achieved maturity now as well.  The financing industry understanding of the risks, payback levels and appropriate financing vehicles is very strong, much stronger than it was even a decade ago.

These incentives have played out with different results than hoped for in many jurisdictions.  The USA has stronger onshore manufacturing results from its PTC incentives, while Ontario and Australia have relatively little local manufacturing. And of course China has been the largest beneficiary of manufacturing in the wind energy space.

While other benefits of incentives continue to pay dividends, the dividends in this space are diminishing for wind energy.  Solar and other renewables, however, still need more support to make them effective competitors.

Summary:

Incentives programs make tremendous economic, environmental, social and political sense.  They help build local and global jobs, they reduce health impacts and they force a very effective but very traditional industry to innovate.  Many of the challenges that incentives for renewables overcome are not going away any time soon, so any reduction of incentives should be matched by other efforts to minimize or negate those challenges, for example eliminating fossil fuel market distortions.

Additional References:
[1] http://www.ucsusa.org/assets/documents/nuclear_power/nuclear_subsidies_report.pdf
[2] http://oilprice.com/Energy/Natural-Gas/An-Economic-Analysis-of-Fracking.html
[3] How effective are wind turbines compared to other sources of energy?

5 comments

  1. Lyn Harrison, InsightWind · · Reply

    Never were truer words written, Mike. An excellent and well crafted summary of the issues. The problem is, that as the world gets ever more complex, people are ever shorter of time, so our leaders demand ever simpler answers to vital questions. Those who need to read what you write here do not have the time or patience to do so. In my wind advocacy work I attempt to keep the dominant message very simple, if only to create sufficient interest for the listener to ask me more (which can be half the battle won):

    Wind power is by far the cheapest mass form of electricity generation we have available, seen over a 25 year time horizon and including retention of a large proportion of existing thermal generation to provide reserve power. For economic reasons alone, wind will eventually replace our reliance on nuclear and fossil fuel, most likely in a mix of other renewables. But we cannot afford to wait, neither economically nor in relation to global warming, for this transition to take place under its own steam. Nothing less than massive innovation and change in the world’s largest and most entrenched industry (electricity generation) is required. That industry has no incentive to change its ways without government intervention. To speed up the transition, government support is needed.

    Simple really!

    Do keep the blog going. You are very good at this stuff.

    1. Thanks for your kind words Lyn. You’re correct that many people will only make time for simplified and often emotive answers. But I’ve found that many, including politicians, will read longer pieces or have their staff read them.

      Simple is great and there is a tremendous need for it. It will move many more people than my analyses and is arguably much harder to do well. But I find my niche is doing some heavy lifting bringing quality material up to the level of abstraction where others can find the simplest truth out of it. I think it was Mark Twain who ended a letter saying, “I apologize for writing such a long letter. If I’d had more time, it would have only been half a page.”

      Paul Gipe has sent me a tremendous amount of material recently that is food for thought. He, obviously, is much deeper into the professional and implementation side of things than I am, and summarizes his message to governmental agencies as:
      1. Decide whether you want to implement renewable energy
      2. Pay a fair price for it

      He makes a compelling case specifically for feed-in-tariffs as the most effective and efficient mechanism for enabling renewables, but spends his time on the details of policy and implementation and less on the advocacy side I think. I’ve asked for his comments on this as well, and hope that he will find time.

      Thanks again for your insights.

      1. Lyn Harrison, InsightWind · ·

        Oh Mike, I was not in any way suggesting that longer articles were not useful, just bemoaning the challenge of getting them read. I’m the champion of the long involved article on wind. I recognize your skill at presenting complex issues in straightforward language that cuts to the quick without sacrificing accuracy. Don’t stop!

        Your niche (heavy lifting to provide easy access to quality material) was my daily aim as the former editor and co-owner of Windpower Monthly.

        Paul Gipe and I know each other well and have rubbed shoulders on this beat for more years than I’d like to admit to. I have issues with feed-in tariffs for a number of reasons, based on my experience of this particular market structure as a resident of Denmark for the past 30 years, and my economic policy beliefs. I have great respect for Paul’s views, but believe, from close observation of the difficulties caused by feed-in tariffs, there is a better way long-term.

        As to communicating the wind message, I’m beginning to think it’s time we stopped being nice and moved to a whole new level. I would not welcome the day that happened. Respectful dialogue backed by evidence and science has always been my approach. I fear I may have been hopelessly naive, however.

        Paul?

      2. I would be fascinated in a Gipe – Harrison debate on Feed-in-Tariffs vs other forms.

        Regarding Denmark, we’ll be in Copenhagen in late June, early July on vacation. Perhaps we could meet and chat for an hour? I’d appreciate your time and insights.

  2. […] [12] How effective are wind turbines compared to other sources of energy? [13] Governmental incentives for renewables are necessary and provide great value-for-money [14] Wind farms causing fires? All smoke and no flame [15] How much backup does a wind farm need? […]

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