Tuesday, July 5, 2011

Does renewable energy require subsidies?

A common criticism of renewable energy is that it requires subsidies to be economically viable.
There are two main answers to that:
  1. Most new technology needs some level of support to get off the ground, and in this case it’s well worth the cost of some subsidies until the technology is established. But the actual subsidies to renewables have been ineffective due to inconsistency and poor design.
  2. Fossil fuels receive far more support in direct and indirect subsidies than renewable energy and climate programs ever have. This creates a serious economic distortion that operates against renewable energy.
The following which I prepared for yes2renewables.org explains some of the issues.

What renewable subsidies are there in place?
Fossil fuel subsidies: $12.173 billion in 2010-11
Effects of fossil fuel subside vs renewables support
Renewable support mechanisms unreliable
Are subsidies unfair or inefficient in principle?

What renewable subsidies are there in place?
There are two key areas where renewable energy is subsidised: Renewable Energy Certificates, under the Renewable Energy Target (RET), and state Feed-in Tariffs.

Essentially, under the RET renewable energy producers are given a Renewable Energy Certificate (REC) for the production of a set quantity of electricity, which may be redeemed at the going rate for RECs. This scheme has provided some support to ensure large scale renewable projects (mainly wind power) can operate, but has been plagued by so many problems that it is no longer driving new projects at the same rate as it initially did.

State feed-in tariffs guarantee that rooftop solar panels will be paid a higher than market rate when they feed energy back into the grid. Over the 2009/10 to 2012/13 period, the Australian Energy Market Commission forecasts a 19% total increase in household electricity costs. Over this period, feed-in tariffs that support rooftop solar panels are expected to add only 0.6%.

Fossil fuel subsidies: $12.173 billion in 2010-11
On the other hand, there are many incentives to fossil fuel use which may not always qualify for a strict definition of “subsidy” but do amount to huge economic support.

A range of reports over the years have established that many billions per year in various economic incentives (subsidies, if you like) are given to support fossil fuel users. A comprehensive review is found in the report “Energy and transport subsidies in Australia” (Chris Riedy, Institute of Sustainable Futures, UTS 2007). The report was prepared for Greenpeace, and subjected to peer review.

More recently, the Australian Conservation Foundation produced a report that shows the total climate change expenditure is $1,078.8 million for the 2010-2011 year, while total fossil fuel incentives are more than ten times greater at $12.173 billion.

The largest subsidy is not in electricity generation, but transport. 74% of the incentives to fossil fuels identified in Riedy’s report relate to transport – things like FBT (Fringe Benefits Tax) exemptions for company cars, and so on. From Chris Riedy’s report:
“The largest identified subsidy results from the failure of governments to capture sufficient revenue from the road network to cover the cost of maintaining the network and to achieve an appropriate rate of return. In other words, motorists do not pay as much to access and use the road network as they should. In 2005-06, the cost of providing the road network was $4.7 billion more than the revenue received from road users. This shortfall – the road user deficit – is a major subsidy in the transport sector.”

The subsidy to fossil fuel use is fairly obvious since, after electricity production, the transport sector is one of the largest (and fastest-growing) sources of greenhouse emissions in Australia.
But coal is a serious recipient of government support. Riedy writes:
“The next largest subsidy is associated with fuel subsidies at coal-fired power stations. There is evidence that coal-fired power stations pay much less for their fuel than the international market price. This indicates the existence of a subsidy to coal-fired power stations, amounting to between $450 million and $1.1 billion in 2005-06, depending on the assumptions used to calculate the subsidy. The subsidies received by several electricity generation companies with a large proportion of coal-fired generation in their portfolio appear to rival or exceed the profits made by those companies in 2005-06. In other words, government subsidies appear to be directly creating profits for coal-fired generators.”
These subsidies may do wonders for corporate profits, but they aren’t having a huge impact on keeping electricity prices down:
“Based on some simple calculations, removal of the identified subsidies in the electricity sector would increase electricity prices by about 0.5 cents per kilowatt hour or 3.9%. A price increase of this magnitude would be expected to lead to a fall in long-term electricity demand of about 1.4% and a reduction in greenhouse gas emissions of about 2.7 Mt CO2-e [CO2 equivalent].” (Riedy)
Despite the dispute in Australia about whether all these measures constitute subsidies, international bodies are not so doubtful. The following is from ABC radio’s PM program:
LEXI METHERELL: According to the International Energy Agency, governments around the world spent US$312 billion subsidising the consumption of fossil fuels in 2009. The OECD (Organisation for Economic Cooperation and Development) says that ending those subsidies could reduce emissions by 10 per cent by 2050.
Acknowledging a problem, leaders at the G20 meeting in Pittsburgh in 2009, including the then prime minister, Kevin Rudd, agreed to take an axe to those subsidies. But the following year Australia returned to the Toronto meeting, saying it didn’t have any subsidies to cut.
(… )
CHRIS REIDY: The fuel tax credit scheme which refunds fuel excise for off-road use of diesel fuel, for example, could be placed under the definition of subsidies.
LEXI METHERELL: The Government decided the scheme is not a fossil fuel subsidy, even though the OECD says it is. Last financial year, the mining sector received about $1.9 billion in fuel tax refunds.

Effects of fossil fuel subside vs renewables support
The government has sometimes claimed it does not want to “pick winners” in renewable technology. But their level of fiscal support for fossil fuels clearly is picking a favourite. The existence of such a large network of subsidies/incentives over time represents a serious investment in maintaining the current systems of energy use.

New technologies usually struggle to compete with established ones in their early years, but our current situation exacerbates the difficulties for renewables. It also represents a lot of revenue (or foregone revenue), and perhaps investment, that could have otherwise been funding a transition to clean energy.

Extrapolating from the ACF’s study, Bernard Keane of Crikey.com did some further analysis which details more about trends in fossil fuel incentives. According to his calculations (based on very conservative assumptions), even with the projected revenue from the (now axed) Carbon Pollution Reduction Scheme, subsidies to fossil fuels would still outstrip funding for climate programs.

Renewable support mechanisms unreliable
Keane also pointed out that climate change programs tend to be programs of limited time frame, liable to be changed or pulled with changes in government priority, and therefore not very reliable. On the other hand, fossil fuel subsidies – because they are built into the tax system – are far more reliable, allowing industry to make longer term plans based on these incentives.

The RET is a good case study in how poorly planned and administered programs can stifle development.
The Howard government’s RET (then known as the MRET, Mandatory Renewable Energy Target) was a victim of its own success. The renewable industry met the target in half the expected time. By 2007, the scheme was stalled as the government would not increase the target further, claiming it had been “too successful”. Renewable energy investment fled the country.

Many hoped for improvement with the election of the Rudd government in 2007, but problems continued. The viability of large-scale renewable projects was thrown into doubt when the government included domestic solar panels and solar hot water systems in the RET, flooding the market with small installations. As a subsidy to homeowners, the scheme also gave five times the RECs for solar PV, which became known as “phantom RECs”. Large-scale renewable energy projects remained stalled without access to enough RECs. This problem has now been remedied with a separate market for domestic scale renewables, but renewables investment has yet to recover.

Solar panel rebate schemes have also seen highly disruptive policy changes, such as when minister Peter Garrett announced virtually overnight a cut to the rebate scheme.

Are subsidies unfair or inefficient in principle?
According to free-market fundamentalist ideologues, maybe. But if renewable energy is needed to stop dangerous climate change, subsidies to ensure it develops are a reasonable measure.

We should also remember that the existing coal-fired power stations which generate most of our electricity were built by government departments not by private entrepreneurs operating in a “free market”.

Certainly, we can be critical of certain funding choices. The current choices of the Solar flagships program to fund a daytime-only solar photovoltaic plant, and a gas-boosted solar thermal plant, instead of solar-thermal power towers with heat storage, could also be seen as picking the second-best option. Renewable energy advocates have a lot of work to do.


A summary of how the RET works can be found at http://www.climatechange.gov.au/en/government/initiatives/renewable-target/need-ret.aspx

Energy and transport subsidies in Australia – 2007 update
By Chris Riedy, Institue for Sustainable Futures, UTS 2007

ABC radio’s PM program interviews Chris Riedy and others:

ACF: Australia spends $11 billion more encouraging pollution than cleaning it up

Our Carbon Addict Tax System
Bernard Keane, Crikey, March 3 2011

Renewable energy targets: 10 years on, will we ever hit them?
Giles Parkinson, Crikey, April 4 2011

Our costly obsession with aircon
Giles Parkinson, the Climate Spectator, 14 June 2011

Future Possible Retail Electricity Price Movements: 1 July 2010 to 30 June 2013
Australian Energy Market Commission, 10 June 2011


  1. The point you seem to miss is that in the first instance -- in Britain and Australia for example-- ALL electricity production -- infrastructure and the rest -- was built up and paid for by governments who were much poorer than today's institutions -- having less revenue resources.Subsidies weren't an issue. It was a state run thing. The privatisation of energy production is a very new phenomenon. To accept the neo-liberals mindset denies these relevant historical precedents.Even the research resource of a now corporatised CSIRO can drive inovation in the sustainable energy sector for state run production.

    Aside from its local environmental impact(especially on water flows along the Snowy Rive and tributaries of the Murray) , the Snowy Scheme --http://australiac.gov.au/about-australia/australian-story/snowy-mountains-scheme -- was an exercise in renewables that had nothing to do with subsidies. It wasn't even considered.

  2. I did mention that, but not until the last section. You are quite right; and maybe I should have made that point more prominently. When I've got time I'm hoping to look in more depth about the impact of privatisation on energy prices and the development of renewables.


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