The US government isn't alone in its struggle to make an unworkable renewable-fuels program work (OGJ, Feb. 10, 2014, p. 16; Feb. 17, p. 16). European governments, too, have generated trouble by forcing noncommercial energy prematurely into markets.
While signature fiascos in the US concern fuel ethanol, prominent European travails relate to wind and solar energy. Problems differ among European countries. In general, Europe has been shaken by the costs of replacing hydrocarbons with much-costlier renewable energy. The financial crisis of 2007-08 aggravated the strain, amplified by the deteriorating ability of industrial Europe to compete against the US, where booming development of unconventional resources has suppressed energy prices. In several European countries, rising energy prices have become politically incendiary.
Spanish leadership
The experience of Spain is instructive. Answering the European Union's summons to leadership in climate-change response, the Spanish government lunged eagerly into quest for politically acceptable energy. Now the bills are coming due. A December 2013 commentary by David Robinson of the Oxford Institute for Energy Studies traces how Spain, burdened by debt from subsidization of wind and solar energy, now might compound the difficulty as it tries to repair damage.
Since 2001, Robinson writes, Spain has accumulated a still-growing "tariff deficit" of €30 billion. The deficit, treated by financial markets as debt, resulted from tariffs for grid access set too low to allow full recovery of the costs of regulated activities. Growth of the deficit accelerated as regulation overstimulated investment in renewable energy and as recession lowered demand for electricity and required increased unit prices to assure recovery of regulated costs.
Like many in Europe, the Spanish government used a "feed-in" tariff—essentially production payments under 25-year contracts—to subsidize high-cost renewable energy. The government also set a deadline for eligibility for the subsidy without limiting the amount of wind, photovoltaic, and concentrated solar energy ultimately eligible for the assistance. The result was a rush of investment. The original plan was for development of 400 Mw of photovoltaic capacity, for example; Spain now has more than 4,500 Mw of that capacity in 60,000 installations.
The tariff deficit is supposed to be recovered from consumers over the next 15 years. The mechanism for this recovery, the access tariff, grows along with subsidies and other regulated costs and now represents about 55% of a typical power customer's electricity cost.
Last July, the government announced a series of steps to control the tariff deficit. The measures are complex and in various stages of implementation. In general, they require consumers to pay more for electricity and for producers to receive less for output of renewable energy. Instead of feed-in tariffs, producers are to receive a specified return on assets, the valuation of which remains unclear.
Predictably, the government's efforts to limit erosion of its accounts have generated controversy. Producers of electricity from renewable sources have had to operate since July under financial conditions only now coming into focus. They don't like what they see. Legal challenges loom. Consumers face the prospect of even more increases in energy costs. And Spain, once a paradise for investment in renewable energy, now looks like high hazard for capital placed at risk on behalf of energy innovation.
Typical cycle
Spain has nearly completed a cycle typical of state adventurism with energy. The cycle begins with assertions of energy goals festooned with values transcending economics. From that intellectual starting point, governments promote energy forms rejected by markets. To cover cost disparities, they implement mandates and subsidies. Then markets, reactive and unpredictable as they are, defy expectations and crush programs with reminders that someone must pay for all this righteousness.
So the Spanish government now tries to clean up the mess it made with renewable-energy leadership. The US government is beginning its version of the process with renewable fuels. Other governments should take note. Energy by fiat always fails.
