European subsidy cuts deal hard blow to renewables

European subsidy cuts deal hard blow to renewables

Europe has proudly led the global pack in renewable energy production for years. But as public and private budgets come under increased pressure, it is increasingly difficult to maintain the hefty support to green consumers and producers.

Much of the impressive growth of solar and other renewable energy sources in Europe in recent years has been down to generous subsidies, namely feed-in tariffs (FITs). These arrangements mandate utility companies to buy energy from producers through attractive and stable long-term contracts which guarantee access to the electricity grid.

Whereas the US employs a decentralized jumble of renewable energy standards, tax credits, and net metering that largely aims for more piecemeal increases in clean energy production, a number of European states have used FITs to achieve more rapid gains. This helps to explain why 22% of the European Union’s (EU) total electricity generation and 33% of its installed electrical capacity come from renewables, compared to 13% and 16%, respectively, in the US.

Nevertheless, with belt-tightening and austerity becoming the norm across Europe, the glory days of European FITs may be over.

In its effort to boost sluggish growth and reduce power bills by 10%, Italy’s new center-left government of Matteo Renzi looks set to deal a heavy blow to renewable energy operators of over 200 kilowatts (kW), who currently receive 60% of the country’s FITs. They must either extend their 20-year contracts to 24 years with no additional compensation, or keep them as is, but with an 8% cut.

The proposed move to retroactively slash FIT agreements, which mainly affect solar photovoltaic (PV) operators and whose cost to Rome has ballooned from $1 billion in 2010 to more than $9 billion in 2013, may fly in the face of not only Italian law, but the EU’s Energy Charter Treaty as well. It may also significantly curtail renewable energy investment in Italy, whose 20% to 34% jump in share of power generation between 2008 and 2012 was the most of any major European economy in that period.

It is perhaps little coincidence that Japanese electronics giant Sharp has just announced a $141 million retreat from a solar power generation joint venture with a subsidiary of major Italian utility Enel.

Renzi failed to learn from Spain, which enacted a similar move last year to purge debts from its FIT program – $12 billion in 2013 alone. Madrid entirely scrapped its FITs and capped the profit of renewable producers at a 7.4% return retroactive to when their plant was first built, after which they would have no governmental support and would be forced to sell their power at market rates. Even more startlingly, all subsidies for wind farms built before 2005 were abandoned.

As a result, Spain has seen its solar investment drop 90% in 2013, leading one analyst to proclaim that its once-fancied solar market is “practically dead”. Furthermore, it is facing massive litigation both at home and in Brussels over its actions. If a recent British High Court ruling over a temporary downsizing of the UK’s own FIT program is any indication, Madrid may eventually be liable for significant damages.

It is not just southern Europe, however, which is currently witnessing a threatened retrenchment of FITs.

Germany’s Energiewende has been the global poster child for simple yet effective FIT design, and has resulted in the cheapest solar power in the world. Its green-friendly policies are why it set a remarkable renewable energy milestone last month, generating over half of its total energy requirements from solar panels.

Yet, even Berlin, which boasts arguably the most ambitious national goal of meeting 80% of the country’s power needs through renewables by 2050, is suffering from high household energy bills (triple the US price) as a result of utilities being forced to subsidize an ever-growing legion of PV producers, many of whom are homeowners who install panels on their roofs.

In response, Berlin is attempting to cut its FIT by three cents euro per kW hour, incorporating competition (and thus a measure of price risk) for new renewable energy plants, limiting renewable growth targets across the board, and increasing taxes on PV production. Couple this with its massive post-Fukushima phase-out of nuclear reactors, and it becomes clear why coal-fired power plants are making a huge comeback across Germany.

These cases are only a snapshot of a much wider European trend that has seen the continent’s share of new solar photovoltaic installations rapidly diminish from 74% in 2011, to 55% in 2012, to 29% last year.

From the green capital exporter to the solar panel importer, the end of Europe’s flirtation with FITs, if confirmed by politicians and the courts, is sure to have sizeable ramifications.

Categories: Economics, Europe

About Author

Kevin Amirehsani

Kevin is a Denver-based policy and public engagement consultant. He was previously the head of operations for a solar energy startup in Lagos, researcher for the US Commercial Service in Cape Town and the Institute for Democratic Governance in Accra, and Peace Corps volunteer in Cameroon. He holds an MSc. in International Political Economy from LSE along with a B.S. and B.A. in Industrial Engineering and Political Science from UC Berkeley.