How will we pay the green energy bill?

By Benedict De Meulemeester

By Benedict De Meulemeester on 18/03/2014

The world is going through a green energy revolution. It started in Europe where governments in countries like Germany, Spain, Denmark or Belgium set up ambitious subsidy programs for renewable energy more than a decade ago. Technologies like wind and solar started to grow at rates that nobody had dared to anticipate at the onset. In the last three years 70% of all the new power production capacity installed in Europe was renewable. This rapid development has driven down sharply the technology cost. Solar and onshore wind have now reached grid parity, meaning that an investor no longer needs subsidies to have a reasonable payback on his investment on a windmill or solar panel. The savings he makes by not having to buy the electricity from the grid is sufficient for him to win back the money invested in a reasonable timeframe.

 

This grid parity may have important consequences. It could mean that the green energy revolution has become unstoppable. Home owners might decide always to put solar panels on their rooftops to cash in on the savings on the power bills. This could push the amount of solar energy available beyond the limits of what is needed or can be distributed over the grid. Grid parity could also mean that solar and wind develop more rapidly in countries that are less generous in handing out subsidies. We are indeed seeing that other countries are taking over from the usual European suspects in the top ten of renewable energy expansion. In US, for example, more than 99% of all the new power capacity installed in January was renewable.

 

However laudable this rapid development might be from an environmental point of view, the early adopters are currently suffering a serious hangover from their subsidy binge. In Germany or Belgium for example, early investors were guaranteed subsidies as high as 450 euro per MWh produced by solar panels for a period of twenty years. Germany has continued to compensate the grid companies that have to pay these subsidies by allowing them to pass through the cost to the end consumer. This has driven up the cost for the end consumer for green energy to unsustainably high levels: 62,4 euro per MWh (the wholesale value of the power itself is currently less than 36 euro per MWh). In Belgium, more particularly Flanders, the government has frozen grid fees, building up a liability for uncompensated green power subsidies of almost 2 billion euros, as my colleague Bart recently remarked. Similar problems can be observed in Spain where the government is facing a massive debt to energy companies for uncompensated renewables subsidies. The early adopter countries are now facing the massive question of how to pay back the green energy bill.

 

At least in Germany and Belgium, the problem is exacerbated by the fact that subsidies for renewable energy are passed through one on one in the bills of the end consumers. The subsidy schemes were created at the same moment that power markets were liberalized. In this mood, ‘market-based’ solutions were devised. Germany opted for a feed-in tariff system, obliging the grid companies to buy the green electricity at a pre-set price level, sell it at the market price and get immediate compensation for the differential between subsidy level and market price level in the shape of charge through payments by end consumers. In Belgium a system of tradable certificates was created. But as the governments of the different parts of Belgium failed to put the quota sufficiently high, grid companies had and have to buy excess certificates and are now demanding compensation for that in the shape of higher grid fees.

 

In Belgium, the chairman of the Green Party Wouter Van Besien has now uttered the idea of compensating the grid companies for excess green energy costs by pay-outs from the general budget instead of passing on the bill to the end consumer in the shape of higher grid fees. We could of course observe that this is a non-solution, as wherever the money comes from, it needs to be paid by the citizens in the end, whether that is as a taxpayer or as a power consumer. Nevertheless, I think it is an interesting idea. Energy has always been subsidized, just think about subsidies for nuclear power or coal which is then used to produce power. However, these nuclear or coal subsidies were not visible in the power consumer’s bill. Renewables are the first energy technology that is so visibly subsidized by passing subsidy costs through so directly. This nourishes the idea that renewable energy is very expensive, an idea which is particularly dangerous now that it has actually become that cheap. What we have to avoid by all cost is that the fatigue due to the problems with historical green power bills causes us to stop further development for renewable energy, especially now that it has become so much cheaper. Doing that would be like racing in a Tour de France stage in which you have already climbed four mountains and then abandon in the last 5 kilometers downhill.

 

If we pay (part of) the historic green energy bill from the general budget, we could also explore possibilities of reviewing the term over which we have to pay it back. In Germany CSU politician Ilse Aigner aired this idea of spreading the green energy bill over a longer period. She unfortunately described it as building up a debt for the future generations, which caused a rapid rebuttal of the idea by CSU President Horst Seehofer. It’s a pity, because it’s a good idea. The debt is already there, investors have been promised to receive subsidies over a twenty year period. Spreading it in time just means you take a decision over the time period over which you pay back that debt. Is it bad management to decide to go for a longer period?

 

I don’t even think the objection against spreading in time of inter-generational solidarity that some observers have uttered makes sense. The current generation has invested a lot in renewable energy. Why should it rapidly pay back that bill if the future generations will continue to benefit from the MWh’s that these windmills and solar panels are putting on the grid? And when the efforts of the current generation have driven down technology costs so that future generations will be able of building their own mills and panels at much lower cost?

 

In Germany, in Flanders and in Spain, solutions need to be found for a sustainable payback of the historical green energy cost. We need intelligent financial management solutions for this problem to make sure that the renewable investments can continue without hurting the current generation too much. And as my colleague Bart has rightfully commented on the situation in Flanders, stowing away the problem until after the next elections isn’t good management.


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