Are solar subsidies unnatural but unavoidable?
Wind energy has become the favourite whipping boy in the renewable energy world. However, solar energy has its critics as well. Wind energy opponents are usually current or prospective neighbours of turbine installations. Solar energy naysayers are typically actual or would-be economists.
“Why should we invest in solar photovoltaic systems? They aren’t cost effective.” This is akin to asking, “What use are seeds? You can’t eat them.” No, solar PV is not cost-effective. Yet.
Actually, that’s not entirely true. Solar PV is already a highly competitive option in cases where the solar resource is plentiful, or alternative power sources are expensive, or both. However, there are still relatively few situations where solar PV can compete against coal, natural gas, nuclear, or hydroelectricity without subsidies.
Why should we care? Subsidies cost the taxpayer (or, in the case of feed-in tariffs, the ratepayer). The cost cannot be justified unless it brings some benefit. So what benefit do solar subsidies provide?
First, it’s worthwhile examining what will happen in the absence of subsidy. Fossil fuel energy sources are limited to however much is stashed away in the earth’s crust. As time goes on, these sources are being depleted. That is why the price of oil and coal has been climbing inexorably. Occasionally a new technology such as hydraulic fracturing (“fracking”) comes along which offers up a large amount of new supply, but such events only postpone the inevitable.
As traditional energy sources climb in price, there appear more and more marginal cases in which solar becomes a cheaper option, and the market for solar PV grows. As the market for solar increases, industry capacity increases to meet the demand. As production volumes increase, companies work their way up the learning curve and drive costs out of the process, bringing the price down. Since competing technologies are rising in price, it is an inevitable consequence that the price of solar will drop, and the market for solar will grow.
So what’s the problem? Why not leave well enough alone, and let the solar market evolve naturally?
One would do as well to ask, “Why should I leave the Titanic and get into your lifeboat? I’m not wet yet.” Yes, we’re not wet yet. But the ship is sinking, the water level is rising, and time is running out.
Fossil fuel combustion produces greenhouse gases, and greenhouse gases are altering the Earth’s climate. The damage is getting worse as time goes on, and many disastrous effects won’t even appear for many years yet. We do not have the luxury of waiting. We need to reduce greenhouse gas emissions now.
There are two ways to accomplish this. The first is to continue burning fossil fuels, but reduce or eliminate the greenhouse gases they emit. The second is to stop burning fossil fuels, and deploy non-polluting energy sources to pick up the slack.
Option #1 can be accomplished through Carbon Capture and Sequestration (CCS) technologies. However, such technologies won’t attract investment if there is no money to be made. Until carbon taxes or carbon cap-and-trade regimes are in place worldwide, there won’t be any market for CCS and the technology will continue to be a hammer looking for a nail.
Even if a CCS market springs up, it still won’t be enough. Too many fossil fuel applications don’t lend themselves to CCS, most notably automobiles. Converting the automobile fleet over first to hybrid technology and then to all-electric drives will be a mammoth undertaking requiring massive investment. It will also necessitate replacing the energy of gasoline and diesel fuel with yet more electricity.
If you run down the list of alternative energy technologies – wind, solar, geothermal, wave and tidal, biomass, whatever else is out there – and ask which of these is going to solve the energy crunch, the answer is “Yes”. None is a silver bullet. We will need all of them, including solar PV. And we will need them sooner than will be possible if market economics is the only thing driving the agenda.
Market interventions are a bad-news-good-news story. The bad news is that feed-in tariffs, renewable portfolio standards, carbon taxes, or other policy options – are a necessary evil if we are to avoid catastrophic climate change. The good news is that these interventions don’t need to last forever. They are not a life sentence. It is helpful to think of them as being like raising a child rather than owning a car.
The car will cost you as long as you own it. Loan payments, repairs and maintenance, fuel, insurance – they never go away. Clean energy interventions are not like that. They do not last forever.
A child is utterly dependent when first born. A parent must commit to providing care 24 hours a day, seven days a week, 365.25 days a year. But the level of care declines over time. First the child starts schooling. Years later they get their driver’s licence. Eventually the parent is lucky if they get a phone call once a week.
Renewable energy subsidies are the same. At the outset, they look like a significant commitment, although the miniscule size of the market and the industry ensures that the total cost is actually not that great. Over time, the market increases in size, but simultaneously the costs are driven down and the subsidy can be as well. Then the first major milestone is reached – retail grid parity, where the technology can provide energy at the point of use for the same cost per watt as the retail price. Finally, nirvana – wholesale grid parity, where the technology competes on the same level as any other source that is feeding energy into the grid. At that point, the subsidy has done its job and can be eliminated.
Renewable energy subsidies are costly, make no mistake. But leaving the clean energy market to evolve at its own natural pace will lead to planet-wide ecological catastrophe.
Life is hard, but it beats the alternative.
Other Posts by Alex Chapman
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