Updated Febraury 2012
A common criticism of renewable energy is that it requires subsidies to be economically viable.
Like most renewable energy supporters, here at yes2renewables.org we have two main answers to that:
- Most new technology needs some level of support to get off the ground, and in this case it’s well worth the cost of some subsidies until the technology is established. But the actual subsidies to renewables have been ineffective due to inconsistency and poor design.
- Fossil fuels receive far more support in direct and indirect subsidies than renewable energy and climate programs ever have. This creates a serious economic distortion that operates against renewable energy.
Below we outline some of the issues relating to these two points. This page will be updated with more information as our time permits.
Sections:
What renewable subsidies are there in place?
Fossil fuel subsidies: $12.173 billion in 2010-11
Effects of fossil fuel subsidies vs renewables support
Renewable support mechanisms unreliable
Are subsidies unfair or inefficient in principle?
References
Update:
We published a two-part article on how the energy sector works and how renewables integrate into it in December 2011. Click on the links here:
What renewable subsidies are there in place?
There are two key areas where renewable energy is subsidised: Renewable Energy Certificates, under the Renewable Energy Target (RET), and state Feed-in Tariffs.
Essentially, under the RET renewable energy producers are given a Renewable Energy Certificate (REC) for the production of a set quantity of electricity, which may be redeemed at the going rate for RECs. This scheme has provided some support to ensure large scale renewable projects (mainly wind power) can operate, but has been plagued by so many problems that it is no longer driving new projects at the same rate as it initially did.
State feed-in tariffs guarantee that rooftop solar panels will be paid a higher than market rate when they feed energy back into the grid. Over the 2009/10 to 2012/13 period, the Australian Energy Market Commission forecasts a 19% total increase in household electricity costs. Over this period, feed-in tariffs that support rooftop solar panels are expected to add only 0.6%.
Fossil fuel subsidies: $12.173 billion in 2010-11
On the other hand, there are many incentives to fossil fuel use which may not always qualify for a strict definition of “subsidy” but do amount to huge economic support.
A range of reports over the years have established that many billions per year in various economic incentives (subsidies, if you like) are given to support fossil fuel users. A comprehensive review is found in the report “Energy and transport subsidies in Australia” (Chris Riedy, Institute of Sustainable Futures, UTS 2007). The report was prepared for Greenpeace, and subjected to peer review.
More recently, the Australian Conservation Foundation produced a report that shows the total climate change expenditure is $1,078.8 million for the 2010-2011 year, while total fossil fuel incentives are more than ten times greater at $12.173 billion.
The largest subsidy is not in electricity generation, but transport. 74% of the incentives to fossil fuels identified in Riedy’s report relate to transport – things like FBT (Fringe Benefits Tax) exemptions for company cars, and so on. From Chris Riedy’s report:
“The largest identified subsidy results from the failure of governments to capture sufficient revenue from the road network to cover the cost of maintaining the network and to achieve an appropriate rate of return. In other words, motorists do not pay as much to access and use the road network as they should. In 2005-06, the cost of providing the road network was $4.7 billion more than the revenue received from road users. This shortfall – the road user deficit – is a major subsidy in the transport sector.”
The subsidy to fossil fuel use is fairly obvious since, after electricity production, the transport sector is one of the largest (and fastest-growing) sources of greenhouse emissions in Australia.
But coal is a serious recipient of government support. Riedy writes:
“The next largest subsidy is associated with fuel subsidies at coal-fired power stations. There is evidence that coal-fired power stations pay much less for their fuel than the international market price. This indicates the existence of a subsidy to coal-fired power stations, amounting to between $450 million and $1.1 billion in 2005-06, depending on the assumptions used to calculate the subsidy. The subsidies received by several electricity generation companies with a large proportion of coal-fired generation in their portfolio appear to rival or exceed the profits made by those companies in 2005-06. In other words, government subsidies appear to be directly creating profits for coal-fired generators.”
These subsidies may do wonders for corporate profits, but they aren’t having a huge impact on keeping electricity prices down:
“Based on some simple calculations, removal of the identified subsidies in the electricity sector would increase electricity prices by about 0.5 cents per kilowatt hour or 3.9%. A price increase of this magnitude would be expected to lead to a fall in long-term electricity demand of about 1.4% and a reduction in greenhouse gas emissions of about 2.7 Mt CO2-e [CO2 equivalent].” (Riedy)
Despite the dispute in Australia about whether all these measures constitute subsidies, international bodies are not so doubtful. The following is from ABC radio’s PM program:
LEXI METHERELL: According to the International Energy Agency, governments around the world spent US$312 billion subsidising the consumption of fossil fuels in 2009. The OECD (Organisation for Economic Cooperation and Development) says that ending those subsidies could reduce emissions by 10 per cent by 2050.
Acknowledging a problem, leaders at the G20 meeting in Pittsburgh in 2009, including the then prime minister, Kevin Rudd, agreed to take an axe to those subsidies. But the following year Australia returned to the Toronto meeting, saying it didn’t have any subsidies to cut.
(… )
CHRIS REIDY: The fuel tax credit scheme which refunds fuel excise for off-road use of diesel fuel, for example, could be placed under the definition of subsidies.
LEXI METHERELL: The Government decided the scheme is not a fossil fuel subsidy, even though the OECD says it is. Last financial year, the mining sector received about $1.9 billion in fuel tax refunds.
Effects of fossil fuel subside vs renewables support
The government has sometimes claimed it does not want to “pick winners” in renewable technology. But their level of fiscal support for fossil fuels clearly is picking a favourite. The existence of such a large network of subsidies/incentives over time represents a serious investment in maintaining the current systems of energy use.
New technologies usually struggle to compete with established ones in their early years, but our current situation exacerbates the difficulties for renewables. It also represents a lot of revenue (or foregone revenue), and perhaps investment, that could have otherwise been funding a transition to clean energy.
Extrapolating from the ACF’s study, Bernard Keane of Crikey.com did some further analysis which details more about trends in fossil fuel incentives. According to his calculations (based on very conservative assumptions), even with the projected revenue from the (now axed) Carbon Pollution Reduction Scheme, subsidies to fossil fuels would still outstrip funding for climate programs.
Renewable support mechanisms unreliable
Keane also pointed out that climate change programs tend to be programs of limited time frame, liable to be changed or pulled with changes in government priority, and therefore not very reliable. On the other hand, fossil fuel subsidies – because they are built into the tax system – are far more reliable, allowing industry to make longer term plans based on these incentives.
The RET is a good case study in how poorly planned and administered programs can stifle development.
The Howard government’s RET (then known as the MRET, Mandatory Renewable Energy Target) was a victim of its own success. The renewable industry met the target in half the expected time. By 2007, the scheme was stalled as the government would not increase the target further, claiming it had been “too successful”. Renewable energy investment fled the country.
Many hoped for improvement with the election of the Rudd government in 2007, but problems continued. The viability of large-scale renewable projects was thrown into doubt when the government included domestic solar panels and solar hot water systems in the RET, flooding the market with small installations. As a subsidy to homeowners, the scheme also gave five times the RECs for solar PV, which became known as “phantom RECs”. Large-scale renewable energy projects remained stalled without access to enough RECs. This problem has now been remedied with a separate market for domestic scale renewables, but renewables investment has yet to recover.
Solar panel rebate schemes have also seen highly disruptive policy changes, such as when minister Peter Garrett announced virtually overnight a cut to the rebate scheme.
Are subsidies unfair or inefficient in principle?
According to free-market fundamentalist ideologues, maybe. But if renewable energy is needed to stop dangerous climate change, subsidies to ensure it develops are a reasonable measure.
We should also remember that the existing coal-fired power stations which generate most of our electricity were built by government departments not by private entrepreneurs operating in a “free market”.
References
A summary of how the RET works can be found at http://www.climatechange.gov.au/en/government/initiatives/renewable-target/need-ret.aspx
Energy and transport subsidies in Australia – 2007 update
By Chris Riedy, Institue for Sustainable Futures, UTS 2007
http://www.greenpeace.org/raw/content/australia/resources/reports/climate-change/energy-and-transport-subsidies.pdf
ABC radio’s PM program interviews Chris Riedy and others:
http://www.abc.net.au/pm/content/2011/s3216583.htm
ACF: Australia spends $11 billion more encouraging pollution than cleaning it up
http://www.acfonline.org.au/articles/news.asp?news_id=3308
http://www.acfonline.org.au/uploads/res/climate_expenditure_and_subsidies.pdf
Our Carbon Addict Tax System
Bernard Keane, Crikey, March 3 2011
http://www.crikey.com.au/2011/03/03/our-carbon-addict-tax-system-is-stronger-than-a-carbon-price/
Renewable energy targets: 10 years on, will we ever hit them?
Giles Parkinson, Crikey, April 4 2011
http://www.crikey.com.au/2011/04/04/renewable-energy-targets-10-years-on-will-we-ever-hit-it/
Our costly obsession with aircon
Giles Parkinson, the Climate Spectator, 14 June 2011
http://www.climatespectator.com.au/commentary/our-costly-obession-air-con
Future Possible Retail Electricity Price Movements: 1 July 2010 to 30 June 2013
Australian Energy Market Commission, 10 June 2011
http://www.aemc.gov.au/Market-Reviews/Completed/Future-Possible-Retail-Electricity-Price-Movements-1-July-2010-to-30-June-2013.html
peter masters
July 6, 2011
Yes lets subsidise new technologies, we need dispatchable electricity, i have no argument against this. But lets not give money to things that are not new and have been around for years without basically any improvment in performance (except getting bigger) This only breeds complacency and does not let new technologies get a foot in the door.
Ben Courtice
July 7, 2011
Peter, I’m working on stats on wind efficiency which I’ll also post here, feel free to comment on that too. I would argue it is a technologically mature energy source, hence the lack of huge strides in improvement. If we took your approach to its logical conclusion, we would have to abandon every energy source we developed as soon as it reached technological maturity!
I think to be fair we should also note that all our coal power stations were given no subsidies at all when they were built, because they were built by the government simply because they were judged to be needed. It’s hard for any new technology to compete with that level of established inertia!
Blair Donaldson
July 7, 2011
So Peter, are you arguing for a cut in the obscene subsidies paid to the fossil fuel industries now? While the guardians complain about subsidies for wind energy, they are curiously silent on the subsidies that go to propping up the fossil fuel industries. Any chance you could enlighten us on that contradiction please?
gbr5244
June 22, 2012
Why not more private investors? Why not support events like the Australian CleanTech Competition which helps cleantech innovations and start-ups? I read that the 2011 Australian CleanTech Competition winner has seen a huge increase in business and funding just through the positive exposure from the competition. Why wouldn’t we then encourage people and start-up businesses in the CleanTech industry which are helping the environment and creating jobs to participate in the CleanTech Open (http://www.cleantechopen.com.au/enter.html)? Then subsidies are not as much of an issue correct?
Patience people, patience
January 31, 2013
“Most new technology needs some level of support to get off the ground..”
True, unless of course it is absolutely necessary, then the cost is borne by those who actually need it.
Take, for example, any technological advancement spurring an “age” throughout history.
Steam engines, automobiles, telephones, electricity, computers. These were all useful things that were paid for by those who actually needed them.
Renewable energy, sadly, is not needed yet. Hurrying it along and trying to spur a new “green age” because we’ve had nothing new since the IT age and short-attention-span’d people are getting bored and need something new to spend their money on is not the right thing to do. The latest mobile phones and computer upgrades are so passe. What we need to spend our money on is solar panels and wind towers… hmm. no.
Patience is required, you can’t rush an age. Wait another 10-50 years and let the technology pay for itself when the green age is actually required.