Spanish Renewable Lessons for Obama

By Andrés Cala Posted on Aug. 02, 2012, Energy Tribune

Spain is planning to correct its renewable energy experiment gone wrong by spreading the pain, a powerful lessons for a White House with an incoherent energy policy that has often cited its model as one to emulate.

This week Obama’s campaign bashed challenger Mitt Romney for planning to end tax incentives for wind power if elected. “By opposing an extension to the wind production tax credit, Mitt Romney has come out against growth of the wind industry to support 100,000 jobs by 2016 and 500,000 jobs by 2030.”

Obama’s expectations though are based on European policy support models that are being revised and corrected. Ahead of November elections, both candidates must realize America’s energy policy more than ever demands a coherent policy based on its best interest not ideological imperatives.

Putting renewable on steroids can come to damage a country’s power sector, consumers, and the renewable industry itself, and in Spain’s case, even a national economy.

Public support for renewable power in America thus should be reconfigured to achieve realistic economic or geopolitical net gain, not winning elections.

During the first two years of his administration, President Barack Obama and top officials praised Spain as a successful model to create employment and improve energy security. So did everyone else, for that matter, but it’s time to heed the lessons.

For over a decade Spain has accumulated nearly 25 billion euro in debt –equivalent to more than half of the urgent capitalization needs of its distraught financial system- mostly in the form of subsidies for wind and solar energy.

Basically the country did not pass along to consumers the cost of generating around 30 percent of its electricity through renewable sources, and faced with the prospect of a macroeconomic sovereign collapse it has decided to hike taxes for power utilities, to increase consumer prices, and to cut some of the generous subsidies that the renewable industry has enjoyed.

The conservative government’s proposed solution has expectedly enraged all sides, although the final reforms will not be decreed until later this month.

All sides have legitimate grievances. After all, hiking consumer electricity prices during a recession is beating a dead horse; renewable players say the back-peddling will all but kill their industry already hit by an earlier moratorium imposed on new renewable projects, and utilities say more taxes will only mean more layoffs and less investment.

Furthermore, Spain’s generous subsidies already attracted more than twice as much installed capacity than its peak demand of 40 GW, and much cheaper fossil fuel and nuclear generators are being left idle to pay for renewable output.

In this context, the country has no choice but to pull the plug on its renewable experiment. More than a decade of robust Spanish growth ended in 2008 as a construction boom went bust leaving millions without a job and as the global economic crisis further undermined the economy.

Gross national product in 2012 and 2013 is expected to further contract and unemployment, already the highest of any rich nation at 25 percent, is expected to continue growing and to become increasingly hard structural, according to the OECD.

The IMF estimates Spain needs around 45 billion euros to recapitalize its ailing banks and Europe has already pledged as much as 100 billion euro. But markets are nervous. Spain will eventually have to seek a sovereign bailout like those of Greece, Ireland, and Portugal.

Meanwhile, the difference between the cost of generation and what consumers pay is adding between 7 and 10 billion euros annually in debt, depending of the year, according to the Energy Ministry, 60 percent of which comes from subsidizing renewable power.

The subsidy system itself is also dysfunctional. Solar companies get as much as half of the subsidies, despite contributing less than 5 percent of total power generation in 2011, while wind power gets around a quarter of subsidies despite contributing three times more power.

The government thus plans to raise taxes across the board for power generation between 3 and 20 percent, depending on the source. Fossil fuels, nuclear and hydroelectric would be taxed the least, while renewable would be taxed more. Companies have said consumer prices will inevitably increase.

Utilities, which truth be told are among the biggest investors in renewable power and thus are complicit of the failed experiment, have said tax increases doesn’t address the problem per se and fear the government is simply using them to raise revenue. And renewable energy investors, from international funds to small families, have also blasted planned reforms which they describe as suicidal.

Back to the drawing board

Spain is the worst example, but not the only.

A recent International Energy Agency outlook of renewable power this decade suggests how Spain’s model embodies the “wrongs” of unconditionally supporting the industry.

Now its renewable revision is going to eliminate thousands of jobs and billions in investment, and more critically become another agonizing drag on the economy.

Many countries overdid it, plain and simple. Renewable industries in OECD reached maturity and have become an economic drain, which is why countries are quietly backtracking, as the data shows.

“First, general macroeconomic and credit concerns are increasing capital costs, reducing risk appetites, and prompting investor preferences for higher returns and shorter payback periods, which tend to work against renewable technologies. Second, short-term policy uncertainty in some markets is undermining renewable project economics due to potential changes in financial support,” the IEA said.

The IEA’s report also shows how several technologies are competitive in some markets, able to compete with fossil fuel options. It got there thanks to generous subsidies in countries like Spain, Germany, and Italy, but also the United States, China, and Japan.

Indeed, renewable power is a viable economic option under certain circumstances. And in the US, there are some regions that can make a case for long term economic sustainability, even amid a natural gas glut.

But so far this administration has had an ideological, not economic approach to energy policy. And America can’t afford gambling its energy future. And for that matter, the renewable industry can’t afford it either.


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