The Economics of Renewable Energy

I have been doing a lot of research on renewable energy the past couple of months, and I have become convinced that government regulations with regard to renewable energy are a bad idea. President Obama has been really pushing renewable energy as a way to help resolve the economic crisis: green energy creates green jobs. He cites European countries like Spain, who are heavily invested in renewable energy, as examples to follow.

However, I came across a Spanish study that explains in much clearer economic terms than I could about what happens when regulations requiring renewable energy to be provided are required. I suggest reading the whole thing, but I will summarize it here.

Spain's government did a couple of things in order to encourage the renewable energy market:
1. It set regulated rates and highly subsidized premiums, as well as forced electricity retailers to buy all electricity from renewable sources in order to attract investment to the renewable energy sector. Without subsidization, renewable energy would not be profitable compared to other forms of energy.
2. It created incentives (renewable energy credits and aid)

This resulted in an expansion of the renewable energy markets approved by the government (namely wind, solar, and small hydroelectric), but sales prices of electricity went way up due to a huge rate deficit caused by the low ratio of sold energy to installed capacity for renewable sources.

This ratio is lowest for photovoltaic solar energy, which, combined with other problems caused by government regulation of the industry, mean the price of photovoltaic electricity is 7 times higher than the market price of electricity.

Already, the accumulated deficit from 2000 to 2008 is 15,189 Euros, which could increase uncontrollably due to an expected 500% growth in installed solar capacity. A Royal Decree enforcing quotas and other regulations are resulting in fears in an increased deficit and thus fewer solar plants are being deployed. 15,000 job losses are estimated for just a few months after this RD was released, and many companies are relocating to other countries where energy costs are lower. This is essentially a bubble effect like in the U.S. housing market.

There are 3 possible ways to correct the rate deficit in Spain:
1. Increase electricity rates by 31%. This hurts companies that use a large amount of electricity.
2. Increase taxes. This reduces the amount of money that companies and consumers have available and thus reduces consumption/investment
3. Increase the national debt. This implies that taxes will go up in the future.

In other words, renewable energy is very expensive and requires large government subsidies to work. This means higher energy costs, higher taxes, and/or higher national debt, all of which are bad for the economy.

Now, back to the main argument for renewable energy: it will create green jobs, and thus help the economy. There is a difference between the "new job opportunities that would 'derive from investments in the various forms of renewable energy sources' and those that would not be created or that would be destroyed in other parts of the economy precisely because the funding [was] diverted to renewable energy."

Resources used to create jobs in the renewable industry have to come from somewhere else in the economy: the investment in renewables is subsidized by absorbing or destroying capital from the rest of the economy. Therefore, "Investment in green jobs will only prove convenient if the expense by the public sector [(government)] is more efficient at generating wealth than the private sector. This would only be possible if public investment were able to be self-financing without having to resort to subsidies." Renewable subsidies of 28.7 billion Euros ($37 billion USD) have created less than 50,200 jobs in Spain since 2000.

So, not only are the few jobs that are created as a result of green energy hugely expensive for the government (going back to the increased electricity rates and/or taxes), jobs in other areas of the economy are destroyed. For every green job that the government attempts to create, the resources that employ 2.2 workers in the private sector are destroyed. A similar result can be expected in the U.S.



The Spaniards who did this study are not the only ones who think that following in their footsteps is a bad idea.

The U.S. government should not invest in renewable energy until the enterprise is self-financing and does not require subsidies.

-------------

For information about

• U.S. energy statistics: Energy Information Administration website.
• Renewable energy requirements in the U.S.: Database of State Incentives for Renewables & Efficiency (DSIRE); state Public Utilities Commission websites
• Renewable energy: National Renewable Energy Lab