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  • Feed-in Tariffs: Just Another Renewable Energy Subsidy

    Another day, another new subsidy for renewable energy. This time it’s a feed-in tariff, as Senator Dianne Feinstein (D–CA) recently inserted language supporting feed-in tariffs into the 2012 Energy and Water Appropriations bill. Feed-in tariffs subsidize renewable energy by forcing utilities to purchase renewable energy at fixed, above-market prices. The extra cost is then passed to the consumers. Feed-in tariffs are simply another subsidy that props up a selected industry and damages the economy, industry, and consumers.

    As of 2010, more than two dozen European countries had implemented feed-in tariffs, with Germany’s being the most widely recognized. In Germany, the tariff dictates that utilities must purchase electricity from renewable energy producers at a rate that guarantees a 5 percent to 7 percent profit. These costs are then passed on to the consumers, who pay higher energy bills to reimburse the utilities for the extra expense. Germany’s tariff is guaranteed for 20 years, with gradual reductions in rates over time to promote innovation and efficiency.

    Given such lavish incentives—profits without worrying about market competition—it’s easy to see why the program is a “success” in Germany, where renewable energy production has increased from 6 percent in 2000 to 15 percent in 2008.

    But forcing renewable energy also brought increased electricity prices. According to Germany’s Federal Ministry for the Environment, Nature Conservation and Nuclear Safety, the extra cost of the “Renewable Energy Sources Act” in 2008 was €4.6 billion. While the Ministry expects the extra costs to ultimately decline, it bases that expectation on the assumption that renewable energy costs will decrease, while traditional energy costs will increase. Given that subsidies generally remove the incentive to reduce costs, this assumption is dubious at best.

    Beyond the obvious problem of government distortion of the market, there is also the fact that there is little incentive to innovate. A report by the National Renewable Energy Laboratory (NREL) points to the limitations of predetermined tariff reduction, stating that such a scheme could pose problems for policymakers faced with technologies that experience rapid changes in cost, either up or down.

    Consider this real-world example. After a sudden reduction in the cost of solar energy, Germany reacted by reevaluating its solar energy tariff rates to prevent windfall profits for solar energy producers.

    Why innovate, then? If rapid cost reduction causes a tariff readjustment (and keeps your profits around the government-determined 5 percent to 7 percent), there is no reason to waste resources attempting to develop technology any faster. And if the government is willing to adjust a tariff down, what is going to prevent a tariff increase if costs “unexpectedly” rise? After all, the objective of a feed-in tariff is not to make production affordable, but to increase the contribution of renewable energy to the energy portfolio. It is a political goal, not an economic one. Increased consumer costs are the least concern.

    But consumer costs should be much more than an afterthought. Increased energy costs are inherently regressive, as lower-income households spend a greater portion of their budget on electricity bills. In a time of worldwide economic turmoil, should lawmakers consider a policy that punishes those who struggle to make ends meet?

    A feed-in tariff is a regressive, government-imposed, consumer-funded (as opposed to taxpayer-funded) subsidy for renewable energy interests, and it is just one more example of the government choosing winners and losers. The free market should be allowed to encourage competition and innovation in all energy technologies, not just a chosen few. If proponents of renewable energy really want to prove that renewables are worth pursuing, they should personally invest in those technologies. Forcing consumers to subsidize their pet industries is not the answer.

    William Alex Schrider is currently a member of the Young Leaders Program at The Heritage Foundation. For more information on interning at Heritage, please visit: http://www.heritage.org/about/departments/ylp.cfm

    Posted in Energy [slideshow_deploy]

    9 Responses to Feed-in Tariffs: Just Another Renewable Energy Subsidy

    1. rob says:

      "The free market should be allowed to encourage competition and innovation in all energy technologies, not just a chosen few." If you truly believe this, then demand an end to oil&gas production, exploration, and transportation subsidies, agribusiness subsidies (which usually go to massive livestock and dairy farms – not the diverse and healthy food the human body needs), nuclear power subsidies, and THEN we will have a free market system that doesn't pick a choose a chosen few. This article is an absurd cherry-picking of data from Germany's monumentally successful solar program. Which is truly humorous, due to the relative lack of sun exposure in Germany compared to that of the continental US. What can we do to encourage growth in renewable technology? It is already growing explosively with minimal policy adjustment. China is lapping us with government investment in renewable technologies, pumping billions into production processes. We are lagging behind, even while our solar exports are surging and renewable manufacturing/jobs are growing at faster rates than the average US economy.

      • Dwight says:

        There is a saying that those who ignore history are bound to repeat it. Ignoring the long history of failed programs built on government subsidies, even those like the governments subsidizing of water and sewer development programs which are highly supported by many citizens (check out the report in ENR on the need for more massive financing of the infrastructure plus the report grade of D-) show the lack of our citizens understanding of basic economic principles.

    2. rob says:

      "A feed-in tariff is a regressive, government-imposed, consumer-funded (as opposed to taxpayer-funded) subsidy for renewable energy interests, and it is just one more example of the government choosing winners and losers." So in other words, you only want the government to pick and choose winners and losers that YOU want. Because you know that the government picked fossil fuels a long time ago, whoops that ended up being a mistake – the winner is turning out to be a big loser (climate change, pollution, peak oil rapidly approaching, sea level rise, groundlevel ozone, PAHs and cancer, etc.). As we're pulling carbon that has been sequestered for millions of years pumping it into the atmosphere in every corner of the earth, we should be desperate for alternatives. I would like to believe that the issue here is an ignorance of the state of reality on this planet, not an intentional disregard for human well-being. Some drawbacks may occur when converting to a closed loop, renewable generating system; however, the long term benefits outweigh the costs. So I ask of you, what do you recommend instead of "feed-in tariffs" that have you so worried about the state of our economy and looking out (all of a sudden) for the wee-little consumer?? How can we implement change in energy production without drastically changing economics in the US? Let's actually work to move forward.

    3. Bobbie says:

      how about government working on ways that isn't punishing the consumer or business, that cost NO MONEY to the consumer or business and won't compromise the health of the consumer? that's never been tried…

      get their stench of unconstitution out of the peoples' house!

    4. Lt_Fakenham says:

      You make no mention of CO2, global warming, or externalities here. That is, there is no mention of the economic rationale for subsidies. One of the main purposes of gov't is to internalize externalities, undoing what would otherwise be market distortions, rather than creating market distortions. This is what invalidates, or at least complicates, the distinction you make between political goals, as opposed to economic goals.
      Maybe they should be feed-in supports rather than fixed prices, or maybe a carbon tax would be sufficient (of course that's not happening here in the US for the time being). Maybe these technologies are truly not worth it! But you haven't even addressed the argument, so how would we know based on Heritage's contribution?

    5. David J says:

      This column would not pass a reflection for an undergrad microeconomics class.

      "It bases that expectation on the assumption that renewable energy costs will decrease, while traditional energy costs will increase. Given that subsidies generally remove the incentive to reduce costs, this assumption is dubious at best."

      "After a sudden reduction in the cost of solar energy, Germany reacted by reevaluating its solar energy tariff rates to prevent windfall profits for solar energy producers."

      The first of these two sections is obviously false. Traditional energy costs and energy provided by fossil fuels in the U.S. have been increasing at a pretty constant rate over the last several decades in spite of huge investments in R/D and far more U.S. subsidies than government provides to renewable energy (not as a proportion of the total industry, of course. Utilities have tried to hide cost increases by raising service fees rather than base electricity rates. What's more, the idea that renewable energy is unlikely to lower in cost in response to subsidies is patently absurd in light of the entire recent past. In fact, renewable energy costs have been dropping at an accelerating rate. Remarkably, the second excerpted section indicates that you are actually aware that renewable energy prices have been dropping, thanks to robust competition on the production end and substantial and increasing competition on the installation end. Do you think it is impossible that there might be technical and organizational innovation in an emerging industry because it is largely driven by moral compunction rather than a bland and pathetically selfish desire to make money at all costs? You haven't looked at the evidence, do a google news search for solar panel prices. I'm used to disagreeing in part or in whole with Heritage, but at least columns are usually executed well.

    6. steve sawyer says:

      To quote Paul Krugman (NY Times, 6 Nov 2011), "So what you need to know is that nothing you hear from these people is true."

      • Bobbie says:

        it's rightfully necessary that minds of reason consider all information to reach truth. So what you need to know is those telling you what isn't true, may just as well not be.

    7. Guest says:

      The writer states: It is a political goal, not an economic one.

      Wrong… It is an environmental goal –probably even a *survival* goal. Framing it in political/economic terms is stupid and possibly suicidal.

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