Green balloons

For years, economists have been warning that the model of supporting renewable energy sources is ineffective. Subsidies have a high opportunity cost and an energy bubble is inflating. Industry and households are paying more for electricity. Data for Spain and Germany show that the criticism is justified and the green fairy tale is coming to an end. And where are we?

Reality has shown that the predicted negative effects of the current legal frameworks in European countries are coming true. Studies of the opportunity cost of green employment in Spain[1], Italy[2], the USA[3] and other countries[4] show that the resources spent on subsidizing renewable energy could create many more jobs in other sectors of the economy. For Spain, each job in renewable energy deprives the economy of 2.2 jobs in other sectors. For Italy, these numbers are between 4.8 and 6.9.

In addition to indirect job losses, green energy subsidies also have a direct negative effect on labor markets. In recent years, they and the increased cost of electricity for industry have already led to the relocation or closure of production facilities in other sectors. Metallurgy and heavy industry are the most affected, because they consume the most electricity for their production. Ferroatlántica, a producer of ferroalloys, is moving its production from Spain to France and closing its plants in Galicia. ThyssenKrupp, Germany’s largest steelmaker, is also selling some facilities, some of which – for example, the Krefeld plant – will be closed by the end of 2013.

While supporting renewable energy destroys production in other sectors of the economy, it still supports green production itself – by inflating bubbles in the sector. This is observed in every country that has passed laws to subsidize this type of energy production. In the case of Spain, investments since 2004 have amounted to €69 billion. These investments would never have been made if investors had not been motivated to orient their behavior towards earning rents in the form of guaranteed profits.

But as even green social engineers may have already realized, the tale of endless growth of “green” production at the expense of taxpayers and industry cannot go on forever. Germany and Spain have sensed this. As a result of laws promoting green energy, Spain has accumulated a deficit of €26 billion over the past 15 years. In the first few months of 2013 alone, this debt has increased by almost €800 million. Germany is also accumulating deficits at a breakneck pace. In 2012, they amounted to €1.748 billion, according to the German system operator.

Due to huge deficits, Spain has already decided to limit renewable energy production (by introducing a 7% tax on production and cutting subsidies for renewables), thus almost bursting the green bubble. Almost, because what it achieved by cutting subsidies was:

1) investor anger (due to job losses and uncertainty) and

2) suspension of new investments in the sector.

But while the government has managed to reduce the production of green energy, it has entered into long-term contracts with a number of producers. The Economist estimates that servicing these contracts will cost between €7 and €8 billion per year[5]. In other words, the problem created by the irresponsible increase in the feed-in tariff over the past few years has not been solved at all. And the debts that are accumulating will have to be paid by taxpayers.

The distortion of the economy has direct negative effects on other sectors as well. Fooled by the belief in a bright green future, private companies that invested in turbine and solar panel factories lost billions when the bubbles burst. For Siemens, these losses are estimated at around €1 billion, and Bosch is expected to lose more than twice that amount - €2.4 billion. Traditional electricity producers - nuclear power plants and thermal power plants - are also losing.

Where are we?

As a result of the legislation, Bulgaria has also seen a large increase in renewable energy capacity over the past few years. The effects of this are similar to those in other countries.

In Bulgaria, there has been a persistent increase in electricity prices for industry since 2007. This is due to the mandatory purchase of production from certain types of capacity and, according to Konstantin Stamenov from the Bulgarian Federation of Industrial Energy Consumers, to the subsidization of households at the expense of industry. Even on the free market (where medium-voltage energy has also been traded since the middle of this year), 35% of energy from renewable sources must be traded by obligation. The result of the legal regulation is clear – high prices (the highest prices for industry in Europe after the Czech Republic) and a decrease in the competitiveness of Bulgarian industry.

Chart 1: Electricity prices for industry (Germany = 100)

Source: VIK

As a result of supporting renewable energy, we have an overproduction of energy – with an installed capacity of around 17,000 MW, gross consumption for May and June hit record lows of 2,300 – 2,400 MW. The difference is too large to be compensated by exports. The result of this may be the closure of other energy capacities that simply cannot trade the electricity they produce. This is a process that is already being observed in Germany, where E.On has shut down 6.5 GW of capacity[6].

The subsidy system creates deficits in our country as well. Although we do not have accurate data on the accumulated deficit in the NEK system, the expectations are that for the next period it will be at least 680 million leva. That is, for the entire period of subsidization it has exceeded one billion leva. Electricity distribution companies are also accumulating deficits. Creating deficits will hinder innovations and renovations in the sector. And they are not at all unnecessary, given the fact that Bulgaria is in 95th place in “quality of electricity supplies” out of 142 countries in the world[7].

Ultimately, the payment for today's losses will be borne by taxpayers in a future period – that is, political irresponsibility today burdens economic growth in the future.

Of course, it could not have come to this. It would be much more efficient and less burdensome with debt and low competitiveness to let consumers determine from which power plants they buy their electricity. We can doubt whether anyone would be happy with a higher electricity bill, reassured only by the assumption that the power plants they buy from do not pollute the environment.

The EU's central planning policy is achieving the opposite effect of the goals it sets itself. Spain and Germany have already suffered seriously from these plans. Bulgaria is also suffering the negative consequences of supporting RES. Although our country does not have such phenomenal investments in the sector, we are already losing jobs and our economy - competitiveness. Added to this is the "green energy tax", which directly reduces the disposable income of all households, and the payment of debts, which will slow down the economy in the future. The bursting of the Bulgarian green bubble may not be so spectacular, but the promotion of renewable energy and central planning required by the EU will inevitably lead the system to complete collapse - a state that may not be so far away.

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