By Paolo von Schirach
June 19, 2012
WASHINGTON – Large investments in subsidized renewable energy for the most part make no econ0mic sense. And yet, they seemed to make a lot of sense only a few years ago. In 2008 oil was at a staggering $ 140 plus a barrel, thus prohibitively expensive. Al Gore had won the Nobel Prize and an Oscar for his warnings on man made climate change. The world seemed to be (mostly) of one mind. Human kind needed to stop, immediately, burning (super expensive and super dangerous) fossil fuels, while it was incumbent on all governments to push for the rapid adoption of renewable energy technologies.
Renewable energy was adopted
And so we did. May be the adoption of renewables was not as massive as some would have liked. But major steps were taken. Governments passed laws that forced utilities to purchase electricity made form renewable sources, even though the price was way higher than power produced from conventional sources. The conventional wisdom was that these fledgling industries needed to be nurtured. And in any event, the main goal was not to create viable businesses; but to save the planet from certain man made destruction.
Besides, the argument went, we were soon going to run out of most fossil fuels. Therefore there was also a longer term, but equally certain economic survival imperative.
The case for renewables faded
Well, fast forward to today and we are in entirely different world. The global warming “science”, whereby rising temperatures will destroy the planet, while the phenomenon is totally man made, for some reasons appears to be less cogent. Furthermore, additional studies indicate that, even if the main argument were true, heroic and immensely costly efforts aimed at reducing the consumption of carbon based fuels would have only negligible effects on the temperature of the earth surface.
On top of that, the United States is experiencing now a natural gas boom that reduced the price of gas to levels not seen in more than a decade. In this entirely new context, it is hard to justify the forced purchase of more expensive renewable energy.
Europe paid a huge price
The record shows that in Europe, where these policies of subsidizing renewable energy have gone on much longer and a much larger scale, the economic price paid for this fixation has been very steep. Investing in non competitive renewable energy is expensive. Capital has been sunk in costly enterprises that can come to life and survive only because of mandates. For instance, it is estimated that a major new system of off shore wind farms in the UK would cost about 140 billion pounds. The same energy could be produced via conventional means at 5% of the cost. Consider that.
Huge cost, no benefit
In the end, because of these mandates, consumers and the broader economy have to pay a higher price for electricity. All this translates into a substantial waste of capital that could be used more productively. For example, Germany, a rainy country, made huge investments in solar energy, an effort described by a utility executive to be as cost effective as establishing large scale pineapple farming in Alaska.
There you have it: waste of capital and overpriced energy that imposes an extra burden on the economy. And all this has been done in the name of an ideological fixation about the blessings of renewable energy that has become for some the equivalent of a religion.
We should side step economic concerns only if we had compelling evidence
Look, if we had indeed definitive and conclusive proof that a) global warming is both man made and catastrophic; and b) that stopping now to burn oil, coal and gas would quickly reverse it, then we could argue that this is not about economic choices but about planetary survival. But we are not there, it seems. The environmentalists’ zeal has been deflated. The science is not as compelling as it seemed to be.
The US natural gas revolution changed everything
In the meantime, at least here in the US, just in the last few years we realized that we have a true energy game changer: immense amounts of cheap natural gas that, among other things, has much lower emissions than coal. This means that we have a really inexpensive and much more benign fossil fuel for electricity generation and down the line also for transportation. (Much lower emissions than oil derived gasoline). Put all this together and you realize that renewable energy, at least as mainstream policy, is politically and economically dead. For sure there are and there will be niche markets in which renewable energy can be and is cost effective. But not everywhere, as we used to think.
Continue funding research
This of course does not mean that we stop researching new forms of energy. On the contrary, we should keep going, at full speed. At some point new technologies will be developed that will be truly cost effective. (And, yes, at some point we shall run out of fossil fuels). Who knows what scientists may come up with in the next 1o years.
But there is a huge distinction between subsidizing open ended energy research and subsidizing the adoption of current technologies that are still not economically viable. And this is what we have been doing.