What Germany Can Teach Us About Subsidies For Renewable Energy

Don Nickles Chairman and CEO, Nickles Group
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Currently, Germany is in the process of backtracking from overly generous subsidies for renewables because they’ve resulted in skyrocketing electricity prices and increased carbon emissions. These unintended consequences should serve as a cautionary tale to U.S. policymakers as to the harm that outsized government handouts for renewables can have. Thankfully, there’s time to prevent anything like this from happening in the U.S., so long as we draw upon lessons learned from Germany and quickly act to end egregious subsidies like the wind Production Tax Credit (PTC).

The policy, which is being considered by the Senate as a part of its extenders package at a cost of $13 billion to taxpayers, should be allowed to permanently expire. We need look no further than Germany to understand why.

In 2000, Germany embarked on an “energy transformation” to have the bulk of its energy supplied by renewable power sources by 2050. As part of this, Germans invested heavily in wind and solar power, encouraged by a generous “feed-in tariff” that guaranteed prices and access for any renewable energy fed into the nation’s power grid. In effect, this guaranteed renewable energy producers a selling price for their power, often at above-market rates.

Rather than an energy transformation, these factors have created an energy disaster. First, these subsidies have led to an increase in residential electricity prices, which have more than doubled between 2000 and 2013 (from 18 cents to 37 cents per kilowatt-hour). In fact, electricity prices in Germany are the second-highest in the European Union, according to Eurostat. This has led to as many as 800,000 Germans having their power cut off because of an inability to pay for rising energy costs.

Germany’s government-forced promotion of renewable energy, as well as its decision to phase out nuclear power, has also led to increased emissions due to an increase reliance on coal and natural gas to keep the lights on. Germany emitted 951 million metric tons of carbon dioxide last year, compared to 913 million metric tons of carbon dioxide in 2009, despite spending about $138 billion to go green in the last decade.

Accordingly – and this is where U.S. policymakers should take heed – officials in Germany are changing course, with the government announcing just last month that state support for wind and solar will be reduced because of the strains these policies have caused on Germany’s consumers, economy and industry.  In fact, in reference to the scaling back of renewable subsidies, Economy Minister Sigmar Gabriel said it was necessary because rising prices due to excessive tax handouts “have become the [country’s] biggest problem by straining our economy and industry.”

While the way subsidies for renewables work – and the reasons for their implementation – are different in the U.S., Germany’s experience should serve as a cautionary tale of the unintended consequences they can bring, in the form of higher energy prices and increased carbon emissions. America has its own version of costly and wasteful subsidies for green energy; one of them is the PTC.

The 2.3 cent per kilowatt hour credit that goes to wind generators in the form of the PTC greatly distorts electricity markets, harming other forms of generation that don’t receive this enormous subsidy. For one, market distortions occur around “negative pricing,” which occurs when the value of the tax credit is so large that it’s worth more than the average wholesale price of electricity. This means that even when there is no demand for electricity, wind operators will actually pay the market to take their power to collect the subsidy, because they’ll still turn a profit. It also means that when there is very little demand for electricity, the tax credit’s distortionary effects force all electricity producers to pay the market to take their power, but wind producers are the only ones making money thanks to their subsidies from taxpayers. As Warren Buffett recently acknowledged, these wind projects “don’t make sense without the tax credit”.

But it doesn’t end there – market distortions driven by the PTC are not unique to occurrences of negative pricing. So long as the PTC exists, distortions are occurring in electricity markets, which means that distortions are happening 24/7, 365 days a year. The subsidy harms reliability because it crowds out other, more reliable sources of conventional generation, as it makes it difficult for them to recover their costs. It also discourages investment in new power generation.

These conditions have already contributed to the announced closure of base load generators across the country, including the Kewaunee Power Station in Wisconsin and Corette power plant in Montana, both of which were fully operational. Even hydro facilities in the Pacific Northwest are threatened by the wind PTC.

While the U.S. is certainly not where Germany is yet, there’s clearly a danger of heading down a similar path, and we must reverse course before the PTC and other green subsidies cause any further harm. Instead of overly generous subsidies that favor one kind of generation, policymakers should focus on how to balance America’s environmental and economical goals. When the time comes for Congress to make a choice on the PTC, it should take the German lesson into consideration and vote no – before it’s too late.

Former Oklahoma Senator Don Nickles is the chairman and CEO of The Nickles Group, LLC.  He was a member of the U.S. Senate from 1981-2005.