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Written by: Sheena McGuinness

Sheena McGuinness

Partner

The case against renewables subsidies

I am committedly pro-renewable energy, but supporting the industry via blanket subsidies does not encourage the right behaviour, mindset or long-term thinking. Indeed, such subsidies may even stifle development and could give rise to ill feeling.

Darwin’s survival of the fittest

Modern society demands heat and power at a flick of a switch but for renewables to be viable (and for society to be less reliant on fossil alternatives) major advances in energy storage are required, given renewable energy is not dispatchable.

Unsurprisingly, the recent advances in battery storage and financial investment in battery storage funds have only occurred after the removal of subsidies.

Put simply, technological advances tend to happen when the industry has to adapt or fail. When the Government plays nursemaid to the sector via subsides, it's impossible for this Darwinian instinct to kick in. 

The battle for hearts and minds

The unequal subsidisation of the renewables sector – with the resultant increase in electricity bills to foot the subsidies – risks breeding resentment among the general public.

Favouring one type of energy producer makes it easy for the naysayers to criticise the renewables sector as not being sustainable or economical. This is difficult to argue against without convincing evidence that renewable energy is viable in the long term without subsidies. 

In the battle for hearts and minds, subsidies could be doing more harm than good.

What you don’t know can’t hurt you

The entire energy sector has received subsidies in some form or another, so the renewables sector is not alone in this regard. However, there is the additional implicit subsidy in renewable energy, aside from any explicit government subsidies. This arises from the retail price of electricity reflecting the capital cost as well as the operating cost, and a large proportion of that price is the cost of running the network.

Therefore, if the sun is shining or the wind is blowing there is no requirement for the back-up electricity and so the generators are avoiding the operating cost. But in reality the fixed costs still have to be incurred which results in an enormous implicit subsidy that is built into how electricity is priced.

Money for nothing

As a general rule, subsidies tend to go with mandates and there is plenty of evidence across the globe that renewable energy mandates lead to more expensive electricity. Let’s take Australia as an example. Before 2007 Australia was one of the most competitive electricity markets in the world. After policymakers brought in renewables mandates, electricity prices have soared.

Can’t see the wood for the trees

Some renewable subsidies can do more harm than good to the environment. Take woody biomass for example. This represents about 40 per cent of the UK’s renewable portfolio and 65 per cent of the EU renewable portfolio. The wood is produced in the US and sent to Europe in pellet form in plastic bags – hardly green and definitely not carbon neutral. Burning wood releases four to six times more genuine pollutants that can impair human health than 'dirty' fossil fuels. Despite all of these environmental no-nos, the US government still subsidises the production of the wood pellets as a renewable energy source.

In summary then, subsidies can have a detrimental impact on the environment, on technological advancement and embedding realistic investment returns. Above all, subsidies for renewables risk turning people against something that is positive and no doubt a meaningful and necessary part of our future energy mix.

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