IEA Misses the Point on Renewables
The International Energy Agency (IEA) this month expectedly forecast more healthy growth for global renewable energy this decade.
But in beefing up its headline, itself conditioned by several caveats, it glossed over the most important conclusion that could, but wasn’t, extrapolated from its report: it’s time to unwind costly public subsidies for the maturing industry and to allow it to compete openly with other technologies.
The IEA’s Renewable Energy Medium Term Market Report is a thorough analysis and forecast of the sector between 2005 and 2017. All the numbers are there, but its empirical conclusions fail to offer a critical analysis and realistic policy advice -which is precisely the IEA’s mission.
Renewable energy is already a reality. In some European countries, like Spain, wind and solar power supply close to 30 percent of electricity demand, although in the United States it doesn’t even reach 5 percent. It just all depends on each country’s economic and energy security concerns.
But the IEA breezes through what should be its main conclusion: renewable power is an alternative source that should only be exploited when there is a net gain, economic or geopolitical, not because of an ideological imperative.
The report reads like a pro-renewable exercise in number manipulation. To begin with, hydroelectric power is included as a renewable, despite that most governments and even environmental groups exclude large hydro from the renewable label because it’s not subsidized and because it generally generates a lot more power than renewable from its nominal installed capacity.
Hydropower in 2011 accounted for 80 percent of global renewable output, and by 2017 it will decrease its share to 70 percent. Without it, the total contribution of renewable power to global power demand is less than 5 percent.
Renewable generation including hydro grows at an annual rate of 5.8 percent between 2012 and 2017, faster than the 5 percent growth between 2005 and 2011, but annual output growth excluding hydro from sources that most people think about when referring to renewables -wind, solar, biomass, biofuels for power, geothermal and ocean- slows through 2017 to 14 percent from the previous 16 percent between 2005-2011.
But the most telling lesson can be extrapolated from the geographic expansion of renewable. Non OECD countries will obviously drive growth going forward because they had very little to start with, while growth in mostly mature OECD markets will be sluggish, not just because of the crisis, but because most renewable energy -excluding hydro- can’t economically compete in most countries, even if it remains politically attractive.
Around 40 percent of global growth in renewable energy output as defined by the IEA is driven by China, but for its very specific reasons. Its output will grow at more than 11 percent annually, more than twice faster than Europe and the US. It will lead in renewable growth in almost every technology.
But China needs to significantly increase power output. Renewable growth is driven for the same reasons as nuclear power: it’s a national security priority to address its dependence on foreign energy supplies. Thus anything that’s not imported pays out geopolitically.
Many developing countries would benefit from tapping renewable energy. Chile, for example, needs more of it because it’s more cost effective than paying for alternative fossil fuels in the form of liquefied natural gas, especially because it’s gifted with wind and hydro capacity potential.
The IEA also said that “while renewable electricity remains generally more expensive than conventional sources and economic incentives play a large role in sustaining development, leading technologies are becoming increasingly attractive. In general, established technologies such as large and small hydropower, geothermal and onshore wind compete well with new coal- and gas-fired plants in many areas.”
China and others have geopolitical or even economic reasons to continue spurring a renewable energy boom, like the OECD already did, but there is little in the IEA report that would justify its member countries to extend the unconditional support for renewable, and as its energy advisor it should recommend phasing out subsidies.
“The more recent, quarterly trend has shown a fall-off in global investments. In the first quarter of 2012, new investments in renewable electricity dipped by 35% quarter-on-quarter, to their lowest level since the first quarter of 2009. This period followed a fourth quarter of 2011 that itself was down by 25% versus the third quarter of that year.”
“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.
In the United States for example, a natural gas boom from new fracking technologies would require subsidies and tax cuts to make renewable technologies profitable, but is it worth it? Europe too is unwinding because it overdid it. The three European renewable leaders Germany, Italy, and Spain for example have backtracked on public support.
OECD countries are backtracking on public support not only because they’ve reached maturity, but because they have become an economic drain. Wind power can indeed stand on its own two feet, but utility scale solar power is unprofitable in most parts of the world, on top of contributing a sliver of global power production.
Spain overshot its objectives at a huge expense for tax payers. It already generates 30 percent of its power needs from renewable, and thus the government’s decision to impose a moratorium on new subsidies is only logical. Its renewable subsidy debt is similar to the tax hikes it imposed amid a crippling recession.
Another big question is whether China will actually meet its renewable objectives. It’s adding five times more wind power than the US between 2012 and 2017, but a big share of its existing wind power remains off grid, thus raising doubts about its ability to meet future targets.
OECD experience also suggests an urgent need to recalibrate priorities. A disproportional part of public subsidies for example has gone to solar power, but its contribution to generation is tiny. Even the wind power sector in some countries is demanding a revision.
But policymakers don’t even need to read the IEA report to extrapolate conclusions. If until recently taking the lead on renewables technologies was the driving motivation for OECD counties, it should be clear today that job creation and deficit reduction trumps all other considerations.
Markets are already adjusting to that reality. It’s time for OECD leaders to take bold decisions that improve its energy security, rather than pursuing short-term political gain.