Green energy can survive subsidy cuts

Infrastructure investment plus new emerging markets in Brazil and Mexico could counterbalance falling renewable energy support in indebted Europe, which until now has accounted for the majority of green subsidies.

Renewable energy faces public funding pressure, where heavily indebted developed European countries are slashing support to shield consumers from higher bills.

Europe has been the mainstay for the industry, with its $35 billion accounting for more than half global renewable subsidies in 2010, according to the International Energy Agency.

Demand is shifting to emerging economies which lack resources to lavish on the sector.

In one possible stop-gap, however, an EU summit last week supported the notion of subsidised project finance, where governments take first-loss guarantees, which Britain's main business lobby also backed this week.

The aim is subsidise credit to lure pension funds, and stimulate investment in grid infrastructure.

Meanwhile, in emerging economies signs are that the sector can survive without European-style guaranteed price support.

Falling support

The European model for renewable energy support, copied widely elsewhere, is a feed-in tariff where generators including households can sell renewable power back into the grid at a premium price.

Germany's 1991 "Act on Feeding into the Grid Electricity Generated from Renewable Energy Sources" kick-started that model and fostered an industrial strategy which served Berlin well, and Denmark and Spain too, developing export markets in wind and solar power equipment.

But the need for tariffs is dwindling.

The price of solar modules in the early 1990s was around 6 euros per watt compared with below $1 now.

The price of wind turbines in the early 1990s was around 1.6 euros per watt, compared with about half that now.

Germany recognises that, which it has shown in proposals to slash tarrif rates following other European countries like Italy and Britain.

But the experience of subsidy-free Spain and New Zealand shows eliminating support altogether is a prescription too far just yet.

In January 2012 Spain halted subsidies for renewable energy projects to help curb its budget deficit.

The solar industry body, the European Photovoltaic Industry Association, projects as little as 50 megawatts of solar PV installed in Spain this year compared with 2,800 MW in 2008 before subsidies were first cut, rising to 500 MW or more in four years' time as the technology became more competitive.

In New Zealand, solar installations barely registered last year, but the country installed more than 100 MW of wind power, reflecting superior competitiveness with solar.

New model

Emerging economies are adopting feed-in tariffs, and cheaper alternatives.

Mexico will more than double its installed capacity this year to 2 gigawatts, estimates the Mexican Wind Energy Association.

Wind farm operators do not get direct payments per unit of electricity. Instead, the Federal Electricity Commission offers companies a discount on electricity prices if they sign long-term power contracts with wind farms.

Brazil last year switched to an auction model, away from feed-in tariffs, complimented by state-sponsored financing.

The government awarded some 5.1 GW of capacity in 2011, of which 3 GW were wind power, in a technology-neutral auction.

Brazil's National Development Bank (BNDES) offered state-sponsored soft loans to wind projects at rates well below (500 basis points to 750 bps) market-priced lending, according to Deutsche Bank analysts in their Global Climate Change Policy Tracker published last month.

While that still represents a subsidy, the competitive pressure of auctions coupled with soft loans cut the price of wind power by nearly two-thirds compared with the earlier feed-in tariff, estimated the Deutsche Bank report.

Overall, the global picture remains a patchwork of support policies including tariffs, carbon pricing and more complex tradable certificates.

But signs are that the sector can survive without feed-in tariffs in emerging economies, while developed countries may sustain investment through subsidised project finance, as an interim during record low carbon prices and as governments cut tariffs.

This article was originally published by Reuters. Republished with permission.