The New Dark Continent
Wind and solar mandates are breaking Europe's electric utilities.
WSJ.COM 10/16/13: Before the Obama Administration marches America to renewable-energy nirvana, it may want to inspect what success looks like in Europe. The Continent is much closer than the U.S. to realizing its dream of replacing carbon energy sources with wind and solar, and the dream is starting to look like a nightmare.
Last week the CEOs of Europe's 10 largest utilities finally cried uncle and called for a halt to wind and solar subsidies. Short of that, they want subsidies of their own. They want to be paid, in essence, not to produce power.
The root cause of all this is the Continent's so-called feed-in tariffs for renewable energy, which began in Germany in 1990. A feed-in tariff is a form of mandate that gives solar and wind installations a guaranteed price, usually well above the market price, and ensures that any energy they produce gets priority on the electrical grid. When solar and wind plants are producing, their energy must be taken first, ahead of other kinds of power.
By requiring utilities to take this power—and requiring consumers to pay for it—Germany has increased renewables to 25% of its overall capacity. Berlin wants to push that to 35% in 2020 and 80% by 2050. Not every country in Europe has been as ambitious as Germany, but the European Union's renewables target across the entire Continent is also 20% by 2020.
These wind and solar subsidies have increased Europe's energy costs by 17% for consumers and 21% for industry in the last four years. But more ominous is the havoc the mandates are creating for utilities. Old-fashioned power plants, especially coal and nuclear, have traditionally provided what is called "base load" power. These plants produce the power to run refrigerators and street lights and the rest of the 24/7 needs of a modern economy. This was the power that consumers used first—until Europe went mad for renewables.
The trouble is, no one knows how much power renewables can provide at any particular moment. Imagine having a car that runs on gasoline, with a solar array on the roof. But instead of using the solar power when you needed it, the car was required to add this solar power to the engine's output whenever it was available.
So you're driving down the highway at 60 miles per hour, but then the sun comes out and suddenly you're doing 80 unless you take your foot off the gas. Now imagine trying to run a whole economy on that sort of power, except it takes hours or days to adjust the throttle every time the weather changes.
The utilities have seen their once-predictable power needs replaced with demand that is every bit as unpredictable as the weather. When conditions are poor, they need to step up generation to keep the lights on. But because of the priority given to renewables, they have to be mindful of the possibility of being pre-empted. They still have high fixed costs and capital needs, but thanks to the renewables' privileged position, demand for what they produce waxes and wanes with the wind.
All of this is a drag on growth and has taken 55% off the market capitalization of utilities in the Europe in the past five years, according to The Economist. The utility executives who issued their demarche last week may be content to stay in business as wards of the state, standing by—at taxpayer expense—to pick up the slack when wind and solar fall short.
But consumers and taxpayers deserve better. Ending the feed-in tariffs and the forced purchase of renewable power would reduce energy prices and might even help European industry get back on its feet. It would be a pro-growth reform that wouldn't cost national treasuries a cent.