Thursday, April 25, 2013

Government Subsidies: Silent Killer Of Renewable Energy

Government Subsidies: Silent Killer Of Renewable Energy
Guest post written by Paul Nahi

Hardly a day goes by that we don’t hear or engage in a conversation about energy. Too often, those conversations are about failed companies that lived only for government largesse. Whether the discussion is about the cost of energy, the damage being done to the environment, or national security issues, there is one constant: everyone agrees that the world needs safe, clean, and affordable energy.

As the chief executive of a solar technology company, no one wants an abundant supply of clean energy and a healthy solar energy industry more than I do. And the best pathway to a stable renewable energy industry is to create self-sufficiency and independence from government financial assistance.

One might question the rationality of this position, given the fact that between 1994 and 2009 the U.S. oil and gas industries received a cumulative $446.96 billion in subsidies, compared to just $5.93 billion given to renewables in those years. (The nuclear industry, by the way. received $185 billion in federal subsidies between 1947 and 1999.) Certainly, subsidies are a useful tool to help establish an emerging industry. But where there is no projected end to funding, subsidies stop being a catalyst, and start becoming a crutch. This is especially true when companies supported by subsidies become powerful enough to influence governments to perpetuate their support.

Healthy companies depend upon sound business models in a competitive environment. Lousy companies that are limping along on subsidies will slow the growth of the industry. If a product is well designed and meets the needs of the consumer, it will find success in a market economy. In that same market, the real costs of the product are accounted for in a company’s profit margin. That is not true of traditional energy companies. Complex and arcane tax laws are used to subsidize these corporations and obscure the true cost of energy. Government subsidies effectively transfer a portion of the costs to taxpayers, enabling artificially low prices and inflated profits.

Comment by Anumakonda Jagadeesh

Excellent article.

Energy subsidies are measures that keep prices for consumers below market levels or for producers above market levels, or reduce costs for consumers and producers. Energy subsidies may be direct cash transfers to producers, consumers, or related bodies, as well as indirect support mechanisms, such as tax exemptions and rebates, price controls, trade restrictions, and limits on market access. They may also include energy conservation subsidies.The global fossil fuel subsidies were $523 billion and renewable energy subsidies $88 billion in 2011.

Main arguments for energy subsidies are:

• Security of supply – subsidies are used to ensure adequate domestic supply by supporting indigenous fuel production in order to reduce import dependency, or supporting overseas activities of national energy companies.

• Environmental improvement – subsidies are used to reduce pollution, including different emissions, and to fulfill international obligations (e.g. Kyoto Protocol).

• Economic benefits – subsidies in the form of reduced prices are used to stimulate particular economic sectors or segments of the population, e.g. alleviating poverty and increasing access to energy in developing countries.

• Employment and social benefits – subsidies are used to maintain employment, especially in periods of economic transition.

Main arguments against energy subsidies are:

• Some energy subsidies counter the goal of sustainable development, as they may lead to higher consumption and waste, exacerbating the harmful effects of energy use on the environment, create a heavy burden on government finances and weaken the potential for economies to grow, undermine private and public investment in the energy sector.

• Impede the expansion of distribution networks and the development of more environmentally benign energy technologies, and do not always help the people that need them most.

• The study conducted by the World Bank finds that subsidies to the large commercial businesses that dominate the energy sector are not justified. However, under some circumstances it is reasonable to use subsidies to promote access to energy for the poorest households in developing countries. Energy subsidies should encourage access to the modern energy sources, not to cover operating costs of companies. The study conducted by the World Resource Institute finds that energy subsidies often go to capital intensive projects at the expense of smaller or distributed alternatives.

Let us examine the subsidies/incentives given for Wind in India. In the beginning 100% depreciation for wind was given which now reduced to 15%. In 80s about 2500 Water Pumping windmills were installed across the country under National Demonstration Project free of cost to the users by the then Department of Non-Conventional Energy Sources(DNES) ,Government of India. In my field also two windmills were installed. They were of poor quality and most of them disappeared now. The same was the fate of 50 Wind Turbines(Small). Also in the beginning simple Box Type Solar Cooker was given subsidy. At that Time the Bicycle was costing double that of Box Type Solar Cooker. How is it that when there is no subsidy for bicycles(the most clean form of energy) millions of bicycles are there while hardly about 7 Lakh Box type solar cookers(sold but not all used) are there in the country(for a population of about 120 Crores!).
The past experience shows wherever the subsidies are there the quality suffers. One way to tide over the problem is to give incentives to the manufacturer to produce efficient gadgets. There are TWO ways to get the cost reduced. One is more production of the goods and the other to increase the Efficiency. The latter results in more production of power.

It is no secret that subsidies result in many cases of misuse and scandals. As far as power projects are concerned any incentives should be matched with production figures.

Today under Jawaharlal Solar Mission huge funds are spent on Solar Projects especially PV with lot of incentives. It is hoped there will be more accountability to the funds dispersed as incentives/subsidy as they are all public money and the main aim is to supplement the conventional power in the power starved country like India.

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