Subsidy cuts show that renewable energy is coming of age

Subsidy cuts show that renewable energy is coming of age

By Maria van der Hoeven, Executive Director, International Energy Agency

A number of governments in Europe are introducing measures limiting their financial support for renewable energy. These moves should not be viewed as a backlash against renewables, argues Maria van der Hoeven, Executive Director of the International Energy Agency (IEA). On the contrary, they show that renewable energy is coming of age. Van der Hoeven does warn, however, that policy changes should be made in a transparent and predictable way.

Maria van der Hoeven: 'Problems arise if policy changes are seen as signs of policy instability and uncertainty'

Government incentives have helped renewable energy become the fastest-growing sector of the energy mix. Now, many countries - especially in Europe - are slashing subsidies for renewables. Observers who attribute these cuts solely to government belt-tightening in an age of austerity are missing the bigger picture: Renewable energy is swiftly coming of age, reducing the need for public support.

Wind, solar, hydro and other forms of renewable energy account for almost a fifth of all electricity produced worldwide, and my agency sees that share expanding to at least 32 percentpercent by 2035. Much of that growth to date has been encouraged by government incentives, and some of that must remain the case going forward. But keep in mind that government support for renewables pales in comparison to the amounts paid to encourage the use of fossil fuels: Some $66 billion in economic incentives were spent worldwide on renewable energy in 2010, less than a fifth of the $409 billion in fossil-fuel subsidies the same year.

In Europe, one of the main forms of support for renewable energy is a set of incentive programs in which generators, including individual households, can sell energy to the grid at a guaranteed price. The sales are generally financed by a tariff on consumers' electricity bills. These so-called "feed-in tariffs" have existed for many years, and helped foster a broad set of renewable energy sources - including bioenergy and onshore wind.

The incentives worked well. But in the case of the solar panels easily installed by households and businesses (solar PV), they worked too well. After implementing feed-in tariffs, deployment of solar PV boomed in some countries at an unsustainable rate: Falling costs and sticky tariff rates offered much bigger profit margins to investors than planners had foreseen, at the public's expense.

The original schemes should have been more flexible in terms of being able to respond to prices, and better prepared for the speed with which investors could rush into the market. But also, advances in technology and developments in the supply chain (including a Chinese manufacturing boom) have slashed costs for technologies like solar PV. In many markets, this technology is rapidly approaching competitiveness with retail electricity prices. As the industry moves from its infancy into adolescence, governments are essentially reaping the dividends of that maturity by trimming public support.

Cuts may therefore be appropriate, to correct policies ill-equipped to deal with the rapid pace of

Cuts may be appropriate to correct policies ill-equipped to deal with the rapid pace of development

development. Recently Chancellor Angela Merkel's cabinet in Germany - home to the most solar PV installations in the world - presented a plan to cut solar PV support by up to 30 percent. At the end of January, Spain halted tariff applications altogether. The UK, Italy, and Switzerland are instituting further cuts for new installations.

While policy changes are necessary, they need to be designed and communicated in the right way, and they should never be retroactive. Problems arise if they are seen as signs of policy instability and uncertainty. This can undermine investment security, drive up the cost of finance and harm the domestic industry.

The trick is to make corrections in a way which is careful, selective, smooth, collaborative, and transparent. Changes should be implemented in close coordination with industry and other relevant stakeholders, which have their own interests in maintaining the sustainability and health of the market. Germany is working hard to do things right in this way. And plans for future one-off cuts should be transparent. The UK, for example, has warned that it reserves the right to cut tariffs between the mandatory 6-month reviews, with 2-month notice to the market.

The bottom line is that feed-in tariff reductions do not mean diminished policy support to renewable energy. Rather, the cuts are a sign that some renewable energy technologies are coming into their own and moving towards a stage where public support will no longer be necessary.