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Here comes the sun... not!

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Germany, once the world’s leading market for solar power, is pulling back its subsidies.

Q Cells, once the world’s largest solar company, just went bankrupt.

This isn’t happy news. If the country that birthed the Green Party cannot sustain its support for solar, what does that tell the rest of us?

It should tell us that it’s time (actually way past time) to get serious about energy and climate policy.

This week, as I followed the news from Germany, I talked with a couple of energy-policy experts who I respect–Jesse Jenkins of the Breakthrough Institute and Gernot Wagner of the Environmental Defense Fund. I also watched an interview (below) with Bill Gates from the Wall Street Journal’s Eco-nomics conference. They disagree about some specifics, but they all agree that the US needs to get a lot smarter about how to drive a transition to low-carbon energy. So let’s try to see what we can learn from Germany, and the rest of Europe.

Perhaps the most obvious takeaway is that we should not place expensive bets on any one solution. That’s what the Germans did, with generous subsidies in the form of a feed-in tariff for solar. Even though the costs of solar have dropped dramatically, the subsidies were not sustainable. Remember when people said nuclear was too cheap to meter. Solar PV is too costly to subsidize on a scale that matters.

Here’s how The Guardian reported the story last month:

You can have too much of a good thing, it turns out. The German government has said it has been forced to cut subsidies for solar panels, because demand was so high it could no longer afford to support the green technology.

In other words, the Germans are cutting back on solar subsidies not because they didn’t work but because they did. The government wants to drive down solar installations to less than half of the 7.5 gigawatts (27% of the world’s total) that it installed last year.

It’s not just Germany, either. The Spanish market went from being the largest in the world, at 2.7 GW, in 2008 to installing 17 megawatts — a drop of 99 percent — after subsidies were slashed and a cap on new installations was imposed, according to ClimateWire [subscription required]. Italy, which was the world’s top market in 2011, is also talking about cutting back.

All this, mind you, is happening in Europe, where there is a broad political consensus that climate change is serious business.

Jesse Jenkins and Gernot Wagner agree that this points to the limits of a clean energy policy that relies on subsidies for deployment. That’s essentially what we have in the US, in the form of tax credits for solar and wind power, and state renewable portfolio standards that require utility companies to generate a percentage of their electricity from renewable sources. Certainly there are benefits to policies that drive deployment–they achieve immediate reductions in CO2 emissions, and they can help get infant industries, like wind and solar, off the ground.

But  by themselves, policies focused on deployment won’t drive a radical transition to a low-carbon economy, which is what we need.

Says Gernot: “Public money is not enough to finance the transition to a green economy. Spending a couple of billion here and there is not going to revolutionize the world.”

Jesse agrees: “The financial burdens of the subsidy will eventually exceed the public tolerance…We need to deploy these technologies, but we need to deploy them in a way that drives the price down as rapidly as possible. We need smarter subsidies.” The Breakthrough Institute, with Brookings and the World Resources Institute, have a report coming out this month that will recommend new approaches–essentially, ways that subsidies can be tied to cost reductions.

What’s more, subsidies can be wasteful.  If I were to install solar panels on the roof of my tree-shaded house in Bethesda, US taxpayers would pay 30% of the costs. That’s unwise and unjust, although not nearly as unwise as given many billions of dollars to oil and gas companies to help them heat up the planet.

So what should we do? Gernot, Jesse and Bill Gates all agree that  we need breakthrough innovation to head off potentially catastrophic global warming. Today’s low-carbon energy sources — wind, solar, biofuels, electric cars, batteries–are still too expensive.

Given the government’s ability to finance renewable energy is limited, more of it should be spent on R&D where it will drive innovation and less should be spent deploying mature or wasteful technologies, like corn ethanol. This requires thinking long term, as Gates explains, because the climate crisis can’t be solved right away:

People underestimate how hard it is to make these changes. That is, they look at intermittent energy sources, they don’t think about storage and transmission. They look at things that are deeply subsidized, and they forget that they are deeply subsidized. They look just at the rich world, and they don’t look at where all the energy increase is taking place, which is in middle and low-income areas. I think the problem is way harder than many observers think.

But I also think, to counterbalance that a little bit…that the potential for innovation, not innovation in the next ten years, because you have to invent in this next ten years, but innovations that will start to be rolled out in say the 20 year time-frame, means that we can be in terms of the first derivative, in terms of the rate of change, we can be pretty dramatic. And so if you took a period like 75 years, if we really fund basic research at a reasonable level, which the U.S. does not, other countries do not, if we have policies to encourage experimentation, which just take any one of the things – nuclear, carbon capture – we’re not doing a good job on that – transmission, storage. If you do the right things, there is a chance to meet very aggressive goals in a 75-year time-frame.

Two final thoughts. As Gernot argues in his book, But Will the Planet Notice? a carbon tax or a cap on carbon emissions is the single best way to drive innovation, deployment and efficiency. Gates says pretty much the same thing:

A serious carbon tax…is the most important thing to do….that’s the greatest failure in our energy policy.

How to change politics to make a carbon tax possible is a topic for another day. I’m skeptical that we will be able to do so rapidly enough to forestall serious global warming impacts, which is why I wrote about the need to research geoengineering and air capture of CO2 (they’re not the same thing) in my short ebook, Suck It Up: How capturing carbon from the air can help solve the climate crisis. In the book, I write about Gates’ finding for research into geoengineering and and his support for a startup company called Carbon Engineering.

His talk is well worth watching, If you prefer, you can download download a transcript [PDF].

 

Marc Gunther's picture

Thank Marc for the Post!

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Discussions

Rajat Sen's picture
Rajat Sen on Apr 10, 2012 2:18 pm GMT

Great article. I agree that a meaningful carbon tax is critical, but that it is unlikely to happen in the US any time soon. Absent a carbon tax, increased support for energy research (hope for breakthroughs) and a low key, objective, non-partisan communication strategy to educate the public about climate change and its impact are the things the federal govrnment can do. 

I have been involved with energy R&D since the days of President Carter. Since that time, the federal governments success in helping the private sector deploy new energy technologies and make them commercially successful is marginal at best. We should concentrate the federal effort in supporting core R&D in energy at a much higher level and let breakthrough inventions occur. The private sector can then exploit those inventions depending on market needs.

We all know that the federal government played a important R&D role in developing the “fracking” and horizontal drilling technology for extracting shale oil and gas. Some say that this technology may bring us the “energy security” that all president’s since President Nixon have hoped for. As far as I know — no government subsidies were required for the depolyment of the technology. It took a while before market conditions became favorable for deployment with private sector investments. 



Rick Engebretson's picture
Rick Engebretson on Apr 11, 2012 10:14 am GMT

I share doubts in government subsidies, but I’m more confident of a solution(s) than this article.

My daughter is an engineer with Apple in China. Their rate of innovation and growth is exponential. They have taken our best and brightest, and our best innovations, and work very very hard, and have become a historic dynamic economy based on our former economic model. Yes, their growth has come at great cost, but they had to grow.

Our new “promise them anything” economies have failed the Western democracies. People like putting gas in their tank THEN paying. Or shopping for groceries, THEN paying. People liked a free market economy. This government subsidies economy is a “pay up front and ‘Trust Me I’m an Expert’ ” economy and it is hard to find something to brag about concerning renewable energy.

We still have talent and experts in the US, but most of them ultimately migrate to outsourcing. Government is far too comfortable having a monopoly on expertise and funding to allow new ideas into the dialog.

Government funding is like golf practice: the same people always getting do-overs. Not very good golf.

Geoffrey Styles's picture
Geoffrey Styles on Apr 11, 2012 10:08 pm GMT

Eric,

“and even when it does, it will be very expensive relative to existing technologies.”

That makes a lot of assumptions about the results of a stepped-up R&D effort, while ignoring the lessons of previous transformations driven by the better/faster/cheaper dynamic that breakthrough innovations can unleash.  Consider the introductions of kerosene for lighting, followed by electric lighting and motors, and gasoline-powered vehicles and you see little of the pushing-uphill-on-a-string problem that current renewable energy subsidies must overcome.

Another practical aspect of this is that in a fiscally constrained world, government funds go a heck of a lot farther buying R&D than they do putting steel and silicon on the ground.   

Robert Bernal's picture
Robert Bernal on Apr 13, 2012 12:11 am GMT

Willem said that the German capacity factor is (only) near ten% Wow! and this is still such an boom that the government had to cut subsidies!

Just imagine what machine made solar collection materials can do in a 20% CF area… Perhaps even creating hundreds of thousands of sq km of install jobs. Better be thankful for them pioneers (and them subsidies)!

Jonathan Cole's picture
Jonathan Cole on Apr 13, 2012 2:57 am GMT

What nearly everyone on this forum overlooks is that most of the people on this forum are reading studies and analyzing them, but that many of the studies start with completely flawed assumptions.

Germany should not have subsidized solar energy, because there is not much of it in Germany. They should have subsidized other forms of renewable energy to get the most bang for the buck. Tidal energy is a good example. Those northern countries get tremendous tidal variation which means that the raw rersource has a built-in advantage there.

Spain should subsidize solar and so should Greece and Italy, but only in the sunny areas!

The U.S. is actually not subsidizing solar, it is subsidizing the monopoly utility industry who gets great benefit from having its customers and the government tax money finance the equipment that supplies energy to their grid. Then in cases of net metering it also zeroes out the meter, thus effectively confiscating the surpluses of the people who paid to put in the equipment. This is just a part of the corruption of crony capitalism where government and business are happily fleecing the populace for ever greater profits and an ever greater piece of the pie.

I have been researching, building and living with solar energy systems that are not connected to the grid and I can tell you with no hesitation that solar is ready for prime time, but not as a scam to line the pockets of electric utility executives, but to present head-on competetion to those 19th century business models being propped up by 21st century robber barons.

I have been looking for two decades for visionary investors to bring an integrated, modularized solar product to the mass market that replaces the grid, but I get no interest whatsoever. Why? Because our society is no longer a society that fosters and promotes innovation unless it is a new way to make more money without doing anything productive.

All you have to do is look at the solar companies who have come up via venture capital, government financing and IPOs. They are all essentially companies producing a COMMODITY item while being touted as innovation. Imagine if Henry Ford had decided that in order to make his company successful he could just produce engines. That’s what’s going on in the solar arena.

Unless you are willing to be part of the “innovation” that markets and flips investments before they are even proven, then you are unlikely to get any money. Instead the investment bankers and vulture capitalists are looking for a free lunch at everyone else’s expense.

How many of the participants of this forum are now or have lived completely dependent on solar energy? I have been doing it for the better part of 30 years and I can assure you, it is more reliable, cleaner, cheaper in many places (at todays retail prices) and durable, maintainable and user friendly, if it is intergrated in the correct way.

While the local utility company has had thousands of power outages, brown-out, high voltage transients (that ruin electrical appliances) I have never had even one power outage. The only way to find out what the operative issues are in solar energy systems that can replace the grid is by actually living with solar energy independent of the grid. Only minor adjustments to electricity-use habits are required. I have all modern amenities. I do not live in a radical energy rationing regime. This is what the world could have now. I am 65 years old, I have been engineering these systems and using them for 3 decades and I also have an MBA with honors, so I believe that I have standing to make these assertions.

Every day that I go through a day using solar energy, I am delighted by the fact that we have such fantastic technology. I hope I live to see the day that the “no-can-do” trolls who make unsupportable assertions based on false assumptions about solar energy will have to eat some crow. I believe that it is technically and economically possible to have every rural, suburban and many urban homes powered directly by solar energy that is electronically conditioned and stored in batteries for convenient use. I am doing it now and I live in a fairly cloudy place.

I would love to hear from some others who support that outcome.





Brian Reynolds's picture
Brian Reynolds on Apr 13, 2012 9:52 pm GMT

Thanks Marc for a great article!  Several posters have expressed hesitation on the role and cost for various subsidies in the German market and markets in general and the boom-bust cycles seem to be good evidence that there is something wrong there.  Having said that it’s worth noting that the general size of the boom and size of the busts is really the story worth telling.  Looking at this problem (how to correctly incent the market to carbon neutral energy) you quickly get to the validity of a carbon tax.  Let’s put that aside though because governments worldwide have proven that they have an easier time with supply side incentives than they do with demand side taxes.

Looked at strictly from as a supply-side problem the issue isn’t “What is the correct subsidy to spur growth in the market?”  The question is “What does the declining curve of subsidies look like that will bring down costs and how do we build a corrective measure into legislation that will adjust down the subsidy if adoption rates exceed our expectations?”

The problem in Germany (or Pennsylvania, or New Jersey, California, Spain or any many others) is that the initial subsidies were good but because the industry was still so small (relative to the size of demand) companies had no incentive to innovate, just to push manufacturers for a cost savings.  In others words the subsidies allowed for artificially high profit margins and companies got away from innovation on everything but the technology.  Innovation on marketing, sales, supply chain etc. are at least as important as innovation on solar panels.  By way of example consider Apple (mentioned above by Rick).  Apple sells products that have a strong desire for adoption and command a premium but really aren’t any better than their competitors products.  The innovation is not just in the tech there and they’ve know that at Apple for a long time.

Energy needs to make that leap.  A good incentive would be built with a feedback mechanism in it so that rocketing adoption rates would be seen for what they are: overinvestment of public funds.  Avoiding that trap also forces business to stay sharper and help drive down consumer costs while extending the life of a government program that only has so many dollars to spend.

Jeff Watts's picture
Jeff Watts on Apr 15, 2012 5:02 pm GMT

German subsidies were poorly targeted and overly costly. Solar’s primary market will probably always be constrained to providing power to cut daytime power peak demand. As such it will probably never amount to more than 10% of the electricity production market.

It’s often claimed that reductions in Solar PV costs will lead to grid parity. This is simpley untrue and not supported by even the most basic of math.

Currently solar pv runs anywhere from 3 to 4 times more expensive than other mainstream power. For most solar PV installations the cost of Solar PV panels is less than half the total cost. Think about that for a moment. Even if Solar PV’s were ‘Free’ the cost of a Solar installation would be higher than other sources of power.

 

I think a viable long term low carbon electricity production system will need to be something like the following mix:

  • Wind 20%
  • Solar 10%
  • Hydro 10%
  • Other 10%
  • Nuclear 50%

Solar can definitely be useful, but it’s always going to be a niche energy source, largely confined to offsetting building AC loads.

 

 

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