21 October 2010

A Partly Sunny Forecast for European Solar Energy

In the decade since the Germans passed a Renewable Energy Law, there has been a proliferation in German solar power generation.  The generous feed-in tariff, which is a policy mechanism that guarantees grid access and long term purchase contracts for energy production, has spurred  spurred the installation of large scale photovoltaic plants near Freiburg, the German “Solar Valley” as well as on solar panels on homeowners' rooftops.

The Renewable Energy Law spread the costs of the stimulus to all German taxpayers.  But it was a huge windfall (pardon the pun) to install solar panels.  These contracts had a 20 year duration with a guaranteed purchase rate at $0.46 per kw/h.  To give you an idea of how generous those terms are, Connecticut has the highest price in the contiguous United States at $0.19 per kw/h (the average US price of electricity is less than $0.12 per kw/h.)

This boom in renewable energy production should be a fulfillment of environmentalists’ green dream.  But the explosion of solar power is threatening Germany’s aging power grid.  The system is not equipped to handle the fluctuations of renewable energy sources.  Stephan Kohler, an energy advisor to the German government, observed that “The network is facing congestion due to solar power..[t]hat is why the expansion of solar power has to be cut back quickly and drastically.”  To that end, subsidies for rooftop solar panels were reduced by 16%.   Taxpayers costs will increase to an extra $0.05 per kw/h but that will increase as the years go on.

Aside from the sky high subsidies that are guaranteed for two decades, the grid can not accommodate the variable energy production. But since the purchase contracts are guaranteed, the wasted energy would be costly and would occasionally overload the system.

The Obama Administration has often pointed to Spain as the paradigm for how a national renewable energy policy is a job creator.  Unfortunately, the same boom and bust phenomenon occurred in sunny Spain.  The Spanish Government launched a campaign to attract renewable energy with a slogan of “The Sun Moves Us” as well as a generous feed-in tariff.  Unfortunately, there were many low quality, poorly designed solar panels erected on the Spanish plains.  Due to the long-term guaranteed purchase contract for up to $0.58 per kw/h, the Spanish Government was on the hook for many uneconomic solar projects.  The Zapatero government subsequently capped production and cut payments which caused a solar bust and Spain lost its vanguard solar status.

During the campaign, Barack Obama indicated his inclination to nudge America towards renewable energy by taxing and regulating conventional energy sources until it becomes economically unproductive.  This aspiration would come to fruition if Cap and Trade legislation were enacted. In the February 2009 Stimulus (a.k.a Porkulus) package, $80 billion was earmarked for renewable energy, including a $3.4 billion allocation for a smart grid.

Fortunately, most American regulators have shied away from feed-in incentives and have tried a a technique to require municipalities to purchase a percentage of energy production from renewable sources.  As the winds of change blow towards Washington on November 2nd, American public policy planner and legislators need to learn from European errors of irrational exuberance and encourage renewable energy projects that do not become expensive white elephants.

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