Renewables Subsidies Must Be Seen in Context

There has been a lot of talk about subsidies for the renewables sector this week, so I thought it might be useful to ponder, for a moment, a world without subsidies.

utopia

In this world, the energy mix might look different.  But the changes might not be the ones that critics of renewables subsidies would expect.

Fossil fuels benefit from a $523bn (2011) global subsidy.  This is 500% more subsidy than the renewables sector.  Therefore far from destroying renewables, if a level playing field is provided the outcome might see a greater shift to renewables than the current gradual transition.

Here’s how removal of subsidies might play out for the different fuels:

Oil

The most dramatic consequence of the removal of the subsidies to the fossil fuel industry would be a spike in the price paid by consumers for transportation fuel.  Prices at the pump would rocket.  Nigeria_Fuel-_Subsidy

Gas

Getting rid of fossil fuel subsidies would also make gas a lot more expensive.  Based on the current mix of generation in the UK, this would increase consumer bills dramatically and might encourage extensive exploration of shale gas or previously uneconomic fields.

Coal

A removal of all subsidies would result in a switch back to coal- fired power generation (coal is subsidised, but not to the same extent as oil and gas).

In our subsidy-free world, the price we pay for power would be dictated by world coal prices as money chases the black rock around the globe. coal images

But what about removing the biggest subsidy of all – the waiver of full environmental costs of the emissions associated with the burning of fossil fuels?  This subsidy was eroded initially by emissions trading, but the collapse of the European carbon price has allowed this subsidy to come back with a bang.

In our subsidy-free world, the coal (and gas)-burning power companies must pay the full environmental costs of their activities.  The scale of damage caused by the burning of coal makes that cost extremely high so an accurate carbon price would make torching vast quantities of the black stuff to supply power a far more expensive proposition.  

Nuclear

Generating nuclear power without subsidy is as plausible as oil exploration without a drill.

Renewables

Which leaves us with renewables.

The renewables sector is small compared to the others.  It should therefore be unsurprising that government support for renewables pales in comparison to the amounts paid to encourage the use of fossil fuels.  According to the IEA $66 billion in economic incentives were spent worldwide on renewable energy in 2010, less than a fifth of the $409 billion in fossil-fuel subsidies the same year.

So removal of subsidies (provided it was done across the board) might not hurt the renewables sector as much as some people think.  Renewables projects still require enormous capital outlay.   But if fossil fuels were also more expensive (due to removal of subsidy) the market might consider that the long-term insulation from commodity fluctuations makes investment in renewables worthwhile. wind_turbine

Therefore there is nothing to suggest a subsidy-free world would be without large scale renewable deployment.   If all other things were equal, renewables and subsidies are not mutually dependent.

This proposition is often misunderstood by the anti-renewables lobby.  Renewable subsidies should not be seen on a ‘per job’ basis, and headline-grabbing big numbers should be treated with caution.

If there is a jobs argument for renewables’ subsidies it is this: government support ensures that those with the talent to develop technologies that will provide for our sustainable energy future are not exiled to more progressive jurisdictions possibly to sell the skills back to the UK when the market corrects itself.

We don’t live in a subsidy-free world.  That means we have an affordable (just about) railway system, an agriculture sector and we are leading the way in the development of certain renewable technologies – particularly offshore wind. Renewables’ subsidies go some way to redress the balance which is tipped heavily in favour of fossil fuels.  They also ensure that the UK will have a means by which to generate cheap, abundant and clean electrons long after the gas and coal have become uneconomic.

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