Zhang 1 Eric Zhang Brian Matzke ENG 225 Essay 3 December 14, 2011 2493 words Renewable Energy:

Alternatives to Subsidies According to the Intergovernmental Panel on Climate Change (IPCC), CO2 emission from human activities, such as fossil fuel burning, is one of the biggest contributors to the global warming climate change (Yuan, Zuo). Research has shown that to prevent a temperature rise of more than 2C, global greenhouse gas emissions must be slashed by at least 80% by 2050. Over the same period however, the world's demand for electricity will more than double. Without a large shift to cleaner energy forms, it will be impossible to prevent the temperature from soaring. No one knows where that would lead, but one can assume a good possibility of catastrophic changes in the weather, rising sea levels, melting permafrost and so forth (Astill, Fripp, and Bradley Jr). Because of this, it has put enormous pressure on both governments and industries to rethink their attitudes and behaviors towards sustainability issues; from 2005 to 2010, renewable energy developments have doubled across the world. However, there is an increasing level of concern on the high initial cost associated with the renewable energies, which is one of the critical barriers to the promotion of its further developments. Because it is so expensive relative to its fossil fuel counterparts, renewable energy currently account for only about 4.5% of the global energy matrix (Lucon et al.). The government's standard response, then, is to subsidize renewable energy because of its social benefit in order to promote renewable energy. The opposing side, however, believes that subsidies create perverse incentives and market inefficiency. Through free market interaction, only the most efficient will survive, and in time renewable energies will be able

Zhang 2 to power our world. Renewable energy, though not currently able to completely replace fossil fuels, does need to be incentivized because of its social benefit; however, I believe subsidies are not the right measure other alternatives including renewable portfolio standards, production tax credits, and a national power grid need to be focused on instead. In tackling promoting renewable energy, we must first consider whether renewable energy is currently applicable in powering the world's energy needs. Robert Bradley Jr, founder and CEO of the Institute for Energy Research, looks at how the various renewable energies are not particularly viable. Geothermal power is rare because of the scarcity of volcanoes, hot springs, and warm mines while Hydropower is cheap but unreliable due to the volatility of droughts. The most popular of the two renewable energies, wind and solar, are not only unreliable due to the volatile nature of wind and sunshine, but also have low power densities, which means they require much more land: ... these new energy infrastructures would have to be spread over areas ten to a thousand times larger than todays infrastructure of fossil fuel extraction, combustion and electricity generation: this is not an impossible feat, but one posing many regulatory (environmental assessments of affected areas, rights-of-way permission and inevitable lawsuits), technical and logistic challenges (Smil). Until renewable technologies improve and become more efficient, those in favor of maintaining fossil fuels and low carbon natural gas argue that the current cost efficiency is overwhelmingly in their favor. In Renewable energy: Externality Costs as Market Barriers, Anthony D. Owen, president of the International Association for Energy Economics, provides a table of current costs of different energy sources. Coal and Gas, measured in costs of Euros/Kilowatt Hour, are currently at ranges of 3-5 and 2-4, respectively. On the other hand, solar power using grid connected photovoltaics range anywhere from 20-80 alongside solar

Zhang 3 power thermal electricity costing 12-18. Wind ranges from 3-5 and 6-10, onshore and offshore respectively (Owen). Those in favor of subsidizing renewable energies, however, say that estimates of damage costs resulting from combustion of fossil fuels, if internalized into the price of the resulting output of electricity, could lead to a number of renewable technologies being financially competitive with generation from coal plants (Owen). In the same data table above used for current costs, Owen also lists expected future costs beyond 2020 as technology matures. Solar power photovoltaic costs are drastically reduced, ranging from 4-10 Euros/Kilowatt Hour, while wind costs have also been reduced down to 2-3 for onshore and 2-5 for offshore. Owen also provides a table addressing the external damage costs of emissions of carbon dioxide. Coal and Oil provide for a combined 1690 tonne/Gilowatt Hour amount of carbon dioxide emissions, while Solar and Wind are a combined 10. Furthermore, the external costs of electricity production in Europe for coal and oil range from 2-15 Euros/Kilowatt Hour while Wind falls from 0-.25 and Solar 0-1. Using this data, internalizing the costs of coal and oil through taxes and subsidizing renewable energies would serve to make renewable energies very viable. Subsidies do this by encouraging enhanced levels of investment in research and development and incentives to deliver economies of scale in production. It hopes to create a cycle of putting revenues back into optimizing production in order to aggressively lower costs. An example is the computer industry, where the cost of purchasing a computer today compared to two decades ago is exponentially cheaper. By subsidizing and investing in the industry today, it makes it cheaper tomorrow. Matthias Fripp, research fellow in renewable energy at the University of Oxford, further argues that there are additional benefits to investing in today's renewable energy.

Zhang 4 Because renewable power is poised to become the next new trillion-dollar industry, the countries that grow strong will gain the most in employment and GDP. It seems reasonable to spend the energy budget building and operating new productive assets at home rather than paying inflated prices to owners of oil and gas wells (Fripp). Opposers respond, however, that it is not guaranteed that companies will put their subsidies and revenues back into optimizing production like the computer industry. Therefore, it is hard to estimate not only how efficient new renewable energies technology will become but also how fast, nullifying Owen's argument above of cheap expected future costs of renewable energies. His expected costs of renewable energy in the future are still estimates. Moreover, subsidies have a well-worn tendency to waste money and create unwelcome externalities in the process. James Astill, energy and environment editor of The Economist, explains how the renewables industry shows plenty of evidence of the former and runs the risk of harming our current economy: In Germany, billions of euros of public money have been splurged on feed-in tariffs to encourage rooftop solar panels. In Britain, 100 billion is being splurged on offshore wind farms, which cost more than three times as much as the reviled onshore version. The collapse and bankruptcy this year of Solyndra, a solar panelmaker, which had been given a $535m federal handout shortly before, has blackened the name of its entire industry in America. Spanish, French, Italian and British solar feed-in tariffs (policy designed to accelerate investment in renewable energy by offering long-term contracts to renewable energy producers) have all been abruptly reined back in recent years. The solar industry is in chaos as a result: dozens of firms, in Europe, China and America, will go bust. (Astill, Fripp, and Bradley Jr)

Zhang 5 Looking at both sides, however, I believe neither side is fully correct. While global warming and human carbon dioxide emitting activities is clearly an issue and needs to be addressed, letting the efficient market take place by itself does not always pave the way to the most efficient outcome because of social costs and benefits. Looking at the evidence that Owen provides, it is clear that the costs of oil and coal and benefits of renewable energies needs to be internalized. The current carbon tax, many experts argue, simply isn't enough (Astill, Fripp, and Bradley Jr). While it should remain to put extra costs on the usage of oil and coal, wasteful subsidies and its adverse effects should not be given to firms in renewable energy. Rather, subsidies should only be given to research in order to provide more efficient renewable energy. This way, inefficient firms do not rely on government handouts while future renewable energy technological improvements are still being made. The strongest firms are the most efficient firms they should not have any advantage over another firm (e.g. through subsidies) in order to remain in business. While subsidies are not the answer, other alternatives RPS, PTC, an the national power grid need to be focused on to promote renewable energies and speed the process for technological growth for cost effective clean energy. Already implemented in 30 American states and a few countries including Britain, Italy, Poland, and Chile, the Renewable Portfolio Standard (RPS) is an efficient and successful mechanism implemented by the government in stimulating new renewable energy. The RPS mandates utility companies to find a portion of their electricity from renewable sources but leaves them free to to pick the cheapest renewable energy source available. Unlike feed-in tariffs which guarantee purchase of all renewable energy regardless of cost, RPS programs forces price competition between different types of renewable energy, making only the most efficient

Zhang 6 companies to make profits and stay in business. Competition leads to innovation and efficiency that will deliver renewable energy at the lowest possible cost, allowing renewable energy to compete with cheaper fossil fuel energy sources. I believe increasing the RPS to a federal level, then, would provide increased stable demand for renewable energy and growth. Though the Edison Electric Institute, a trade association for America's investor-owned utilities, stands against the idea of a federal RPS because of inequities among states (states that have an abundance of wind/solar energy would have a easier time with the RPS than those without), it could be avoided with proper design. For example, if the federal RPS allows tradable credits, utilities in states without renewable resources may purchase renewable credits from resource-abundant areas and transfer the credits back to their home state to fulfill the RPS obligations. Market mechanisms would equalize the cost burdens among states (Yang, Williams, Monast). In Texas, the wind RPS was so successful that its 10 year goal in 1999 was met in just over 6 in 2005. Wind power development has more than quadrupled since it was mandated, and wind's pricing remains competitive with coal and gas (Texas Renewable Portfolio Standard). The demonstrated success of RPS programs, especially in Texas, should further push other states as well as other countries that have not implemented them to do so. Alongside RPS programs, some governments have implemented Production Tax Credits (PTC), which provide tax incentives for companies that generate renewable energy. In the US, the government provides a 2.2 cent per kilowatt hour benefit for the first ten years of a renewable energy facility's operation. However, it is not a subsidy. Rather than giving the firm lump sum amounts of money for the firm to freely allocate, the PTC merely gives a tax benefit (lowering costs) in however much renewable energy they produce. This lowers their production costs to be

Zhang 7 more competitive with fossil fuels and oil, but does not offer them the long term government backed stability that a feed-in tarriff does, thus ensuring that the firm still must remain competitive and efficient to stay in business. PTC has shown positive results and has been a major driver of renewable energy development, particularly in wind. However, PTC's are not always implemented properly. In the United States, Congress has repeatedly gone back and forth between extending and retiring the PTC. Originally enacted as part of the Energy Policy Act of 1992, there have been four extensions of the provision, and on three occasions it has been allowed to sunset. This on and off status contributes to a boom-bust cycle of development. The Union of Concerned Scientists explains: The cycle begins with the industry experiencing strong growth in development around the country while the PTC is firmly in place, and in the years leading up to the PTC's expiration. Lapses in the PTC then cause a dramatic slowdown in the implementation of planned wind projects. Upon restoration, the wind power industry takes time to regain its footing, and then experiences strong growth until the tax credits expire. ("Production Tax Credit for Renewable Energy") Therefore, a long term extension of the PTC should be passed, and in further extensions, they need to be done at least a year ahead of expiration. PTC's should also be promoted in other countries, as they have had success without external costs and inefficiencies that subsidies bring. Finally, governments should focus their attention into the establishment of a national power grid. Currently, the U.S. electric grid is a complex network of independently owned and operated power plants and transmission lines. Revamping it is difficult because it was not originally designed as a national integrated system, but rather several small grids built by individual utilities

Zhang 8 to meet local consumer needs. The regulatory oversight, then, was set up at the state level, so those looking to construct new interstate transmission lines must comply with the varying and inconsistent requirements of several jurisdictions (Yang, Williams, Monast). Private companies that attempt to modernize or expand the grid often face regulatory hurdles, disputes over land use and difficulty getting consent from other transmission line owners. The government, however, has the ability to overcoming these obstacles, and in doing so provides huge benefits for the renewable energy industry. For example, North Dakota has an abundance of wind and land to build large-scale wind farms. However, because the current grid cannot deliver the power to large-scale markets New York and California, it is not economically profitable to build the wind farms. With the national grid, this would be possible, increasing both the demand and development of wind energy, but also efficiently distribute the energy in the open market to those needing it the most and willing to pay the highest price. Similarly, it would open up the solar industry, as states with more sun than others would be able to distribute it to states that don't e.g. California/Florida to Maine/Minnesota. Eventually, all consumers would have access to affordable pollution-free, low-carbon electricity generation produced anywhere in the country. Neither the idea of strong subsidies nor the idea of letting the free market dictate renewable energies is viable. The social benefits vs the social costs does need to be taken into account, but not through subsidies. Rather, we should be looking towards the alternatives that do not create negative effects and have already proven to be working in renewable portfolio standards and production tax credits. Moreover, the creation of a national power grid would do much more than spark the renewable energy market. It would create jobs, make affordable cleaner energy, as well as increased GDP. With focus towards these alternative measures, it will lead to a faster efficient

Zhang 9 renewable energy industry so that in the future cost efficient and affordable renewable energy have have replaced fossil fuels and gas, eliminating the threat of climate change due to human activities.

Works Cited Astill, James, Matthias Fripp, and Robert L. Bradley Jr. "Economist Debates: Renewables." The Economist. 8 Nov. 2011. Web. 14 Dec. 2011. Lucon, O., Painuly, J. P., Fifita, S., Arvizu, D. E., Tsuchiya, H. and Wohlgemuth, N. (2006), Is renewable energy cost-effective?. Natural Resources Forum, 30: 238240.

Zhang 10 doi: 10.1111/j.1477-8947.2006.00110.x "Production Tax Credit for Renewable Energy." Union of Concerned Scientists. 13 Sept. 2011. Web. 14 Dec. 2011. "Texas Renewable Portfolio Standard." SECO | State Energy Conservation Office. Web. 14 Dec. 2011. <http://www.seco.cpa.state.tx.us/re_rps-portfolio.htm>. Xue-liang Yuan, Jian Zuo, Pricing and affordability of renewable energy in China A case study of Shandong Province, Renewable Energy, Volume 36, Issue 3, March 2011, Pages 11111117, ISSN 0960-1481, 10.1016/j.renene.2010.09.012. Yang, Chi-Jen, Eric Williams, and Jonas Monast. "Wind Power:Barriers and Policy Solutions." Toward a Low-Carbon Electricity Sector (2008). Duke University. Nov. 2008. Web. 14 Dec. 2011.