Renewing The Dream for Renewables

When it comes to renewable energy, the world seems rife with hypocrisy.Countless climate conferences might have made it seem like there is globalconsensus on the importance of renewables. Yet governments remain so drunk withfossil fuels that tangible transition to renewables seems like a distant dream.In Canada, Prime Minister Trudeau let the province Alberta approve $4 billionworth of new oil sands projects1. Hydraulic fracking, which is thetechnique of pumping high-pressure fluid to crack open rocks containing gas andoil, has also found warm reception in the US as the Obama Administration allowsmultiple drillings. Meanwhile in the developing world, one coal-fired powerstation is constructed every week in China2.

 

It is understandable that ditching fossil fuels for renewables issomething too drastic to do now. After all, the world economy needs energy tokeep running and growing. Our system of production and consumption is stilloriented towards fossil fuel and there is no way we can change that overnight,especially without disrupting the economy. The environment must take thebackseat, as always. Fortunately though, the backseat does not mean stopping.In fact, the march for renewable energy continues impressively, albeit in aless concerted manner. Manyrenewable energy projects, like the deal recently made by Indonesia and Denmarkto build a 60 megawatt wind farm in Sulawesi, are being initiated all aroundthe world. Many renewable energy projects are being initiated all around theworld, from small-scale solar panels on the rooftops of Mali to vast wind farmsin Sulawesi. What are the factors behind this progress? Aside from strong politicalpush, there are many economic forces at play here.

 

The cost of renewable energy, particularly solar and wind, has been freefalling. According to the International Renewable Energy Agency, prices ofsolar panels have plummeted by 75% 

since 2009. For onshore wind turbines, the average global cost fell by2.4% in just six months in 20153. What first drove these fall wereintensive research and development that 

continuously seek to make these technologies more efficient and cheaperto install. Right now, disruptive start-ups like SolarCity and United Wind arecompeting to provide the cheapest way of harnessing renewable energy.

 

Economies of scale also contribute in making renewables cheaper. Asresearch and development drive down price, demand for renewable technologyshoots up, leading to more panels and turbines being set up. Then with more andlarger renewables farms, economies of scale kick in and costs fall evenfurther. Falling cost then leads to even more renewables technology put inplace, which becomes a self-perpetuating cycle of falling prices until thetechnology stagnates and economies of scale end. It doesn’t seem like that’sgoing to happen anytime soon, though. Most renewable energy farms are stillsmall enough to be expanded further, and there remains much room for renewablestechnology, especially storage technology, to improve.

 

Government policies that subsidize renewables play an instrumental role.In the Philippines, solar projects are queuing for approval thanks to itsgenerous feed-in tariff (FIT) program. FIT is a common form of incentive forrenewables which guarantee long-term contracts, fixed pricing and prioritizedaccess to the power grid. Countries from Algeria to Switzerland implement someform of FIT. It protects renewable energy producers from risks of instabilityand high costs. It also stimulates investment by making it actually profitableto invest in renewables. In the UK, the program even pays entities who produceand use their own renewable energy.4

 

This is where renewable energy becomes tricky, however. The money spentto incentivize renewables, whether it be in the form of subsidies or taxcredits, does not come from nowhere. In most cases it is the society that endsup footing the bill while producers reap large benefits. For example inGermany, FIT requires electricity suppliers to buy renewable power athigher-prices, who then spread the costs to consumers. Consequently,electricity in Germany is among the most expensive at 39.5 cents per kwh,compared to only 12.5 cents in the US.5 In the Philippines,consumers are using high-priced electricity generated from renewables sincerenewables-sourced electricity gets connected to the grid first before cheaperfossil fuel electricity. Such high electricity price is even accused ofrepelling foreign 

investors6. Despite this, we don’t hear much complaints.While the society are paying extra for the same amount of electricity, they getthe benefit of externalities. Renewables might be more expensive but it helpsavert the catastrophic externalities that come with fossil fuel electricity —global warming and air pollution to mention a few — so it is worth it. One problemis that expensive, subsidized renewable electricity might be less accessiblefor poorer communities in developing countries. 

 

What the government can do is gradually phase out these FITs as costsdecline further. Any policy change, however, must be careful to not prematurelyscare off investors. One consideration is to wait until infrastructures andinvestment climate for renewables have been well established in the country.That is one reason why Germany, already a frontrunner in renewable energy,dared to reform its generous FIT program into a bidding system7.Under this system, Germany would auction the subsidies to those who can buildfarms and provide power for the lowest cost, hence lower price for consumers. 

 

While the share of electricity produced with renewables has increased,electricity is only a part of the everyday energy we consume. Fuel fortransportation needs to catch up with the trend. For now, electric cars arestill so rare and expensive. In all countries except Norway, electric vehiclesonly make up less than 2% of total vehicles8. There is still a longway to go for renewable energy. After summits on green electricity, the worldmust now come together to pool up funds to invest in green transportation.Governments must also prepare the necessary infrastructure (current electriccars need charging stations) and incentive programs, like Germany’s recentlyapproved cash incentives (over €3000 per car) for electric vehicles9.We also face an important momentum because many developing countries,previously notorious for putting economic growth as a sacred priority, are nowincorporating the green agenda into their development plan. Hopefully such governmentpolicies, scientific breakthroughs and yet more international summits will keepthe dream for renewable energy alive.

By:  Gede SthitaprajnaVirananda | Ilmu Ekonomi 2016 | Trainee KajianKanopi 2016

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References:

1 http://www.cbc.ca/news/business/alberta-approves-three-oilsands-projects-worth-potential-4-billion-in-investments-1.3765197

2http://www.bbc.com/news/science-environment-37409069

3 http://www.irena.org/DocumentDownloads/Publications/IRENA_RE_Power_Costs_Summary.pdf

4http://documents.worldbank.org/curated/en/270621468251374183/pdf/wps6376.pdf

5 http://www.forbes.com/sites/michaellynch/2016/02/19/negative-electricity-prices-are-not-a-sign-of-renewable-success/#414bd5b456d1

6 http://www.philstar.com:8080/business/2016/09/20/1625388/consumers-burdened-over-incentivized-renewables

7 (2016, August).It’s not easy being green. The Economist, 41.

8 http://www.cnbc.com/2016/05/24/this-country-has-hit-a-major-milestone-for-electric-cars-heres-how.html

9 http://www.dw.com/en/germany-sets-out-major-cash-incentive-for-electric-car-buyers/a-19266326