Price subsidies are simple to implement and effective in stimulating whatever industry they are bestowed upon. But as the travails of subsidised wind markets have demonstrated, they are far from ideal foundations for healthy business. The on-again, off-again nature of wind's production tax credit (PTC) in the US is an extreme example of what not to do. Even when implemented for the long term, subsidies have defects. Once a subsidy is in place, it becomes a life support machine that industry believes it cannot live without. Protecting the subsidy becomes more important than driving cost-cutting innovation. Redistributive struggles replace productive ones -- and the seeds of economic decline are sown.
Germany has struggled for years to fix its wind power purchase rates at the right level, yet its market is historically renown for high cost. Even with plenty of money sloshing about, many a project has had to be financially re-engineered to stay alive; developers, basking in subsidy security, often failed to pay attention to proper due diligence. Spain's subsidy system avoided that trap by not removing market forces entirely, but as a result fell into another one. Soaring electricity prices in Spain, on which the subsidy is based, have resulted in soaring purchase prices for wind power. The government has had enough and axed the lifeline ahead of time. The wind lobby is battling hard to get back on it (page 27).
None of this is to say that markets based on requiring electricity retailers to buy renewable energy certificates have demonstrated their superior qualities. In Britain, lack of conviction in the efficacy of market forces landed the country with legislation that is forever open to political intervention. That is a high risk factor that has led to high prices. In the US, no less than 21 states have introduced a so-called Renewables Portfolio Standard (RPS). But belief in the market has not been strong enough for any state to introduce an RPS in its original design. Most are no more than a specific requirement for green power.
The failure of governments to correctly implement the nuts and bolts of a credit trading market does not mean the stick-and-carrot method can never work. When done properly, it is an effective instrument. The US cap-and-trade market for sulphur dioxide emissions from power plant is a prime example of using market forces to reduce pollution. Indeed, America's prowess in employing competition as a force for good makes it the most likely incubator of a well-structured market for wind power. And with the political shift in Congress and the lead from the states, an RPS is on the radar screen (page 45). The states are laboratories for democracy: the trajectory of a cascading policy from state to state is often followed by a federal law that provides uniformity. Never has the timing been better for achieving that uniformity for renewables, but crafting an effective RPS that can survive the political gauntlet is a formidable task indeed.
It is more likely that pragmatism will trump idealism in the new balanced Congress. As Democratic lawmakers assume power, they will strive to assert their victory through policies that can be delivered simply and quickly. An extension of the PTC is an obvious candidate. For all its imperfections, the tax credit, when in place, does the job, while its link to a macro-economic marker prevents the incentive spinning out of control, as it did in Spain. For transforming political rhetoric into immediate, demonstrated action, the PTC wins over the RPS, even though consumers will most likely end up paying more for their wind power.
A macro economic success
Consumers, however, need not be as worried about the cost of subsidising wind power as they have been. Strong evidence is emerging that where significant volumes of wind feed into the network, it acts as a downward driver on the overall market price of electricity. The Spanish wind lobby is using that fact in arguments for keeping its lifeline; and in both Germany and Denmark, independent studies (page 28) have quantified considerable consumer savings from lower electricity prices thanks to wind. In Denmark and Spain, the savings are great enough to more than compensate for the subsidies consumers contributed to wind in the first place. The effect is seen in America, too, where wind instead of gas is increasingly setting the benchmark for the cheapest power on the system, pushing out higher priced generation.
The facts would seem to argue for a policy shift away from a focus on forging specific support systems for wind power and towards getting the cost of carbon recognised and barriers that prevent the cheapest generation from getting to market pulled down. Both the environment and the economy will benefit