RENEWABLE energy enjoyed a “remarkable growth” in investment last year, says a recent UN report, rising by one-third to a record $211 billion worldwide. Ebullient press releases aside, there is little hyperbole to the description, with China alone splurging $48 billion on new green energy projects to consolidate its position as the world’s leader. And, for the first time, developing countries collectively spent more on renewables than their richer counterparts. Though wind was the big winner, led by China’s enormous “green stimulus” package, solar power also had a good year, with installed capacity increasing in more than 100 countries last year. German homeowners, propelled by generous government subsidies, installed more solar panels on their rooftops in 2010 than the entire planet had managed in the year before.
But curiously, this building frenzy coincides with a wave of cuts to solar subsidy schemes across Europe. The future of sun-power does not look so bright in Spain, for instance, where retroactive cuts to “feed-in tariffs” – a type of subsidy where the state guarantees producers a set price for energy sold to the grid – have been made to tackle the enormous debts run up by the scheme. Spain’s electricity regulator recently reported its annual electricity-tariff deficit (ie, the amount by which costs exceed revenues) had climbed in 2010 to a record €5.6 billion ($8.3 billion) as a result of the surge in subsidy payments. The government now faces lawsuits from its own renewables sector, which had invested heavily on the promise of such profits. More recently, France has drawn criticism from the EU over its reduction of solar subsidies, which is seen to have damaged investor confidence. Even in Germany, state handouts have been curbed.
In fact, the positive and negative trends share a cause – the steep drop in solar photo-voltaic (PV) panel prices. That has left many fixed-price incentive schemes looking absurdly generous, prompting enormous spikes in investment. Countries which, like Germany, allowed for a degree of flexibility in their subsidy rates have been able to adjust accordingly. But handouts in many countries are often guaranteed for 20 years or more, leaving governments forced to take drastic measures – such as reneging on agreements – to cover their costs.
“They’ve underestimated the demand and the potential response – absolutely,” says Virginia Sonntag-O’Brien, co-author of the UN report. “The devil is in the detail. Not just the amount of the tariff, but also how it is going to work over time and react to the market.” Although China’s ability to afford its $46 billion stimulus package is not likely to be tested, many other developing countries experiencing booms would do well to take note. “There’s always a danger, but we hope lessons will be learned,” says Ms Sonntag-O’Brien. “Many countries are already revising their solar PV feed-in tariffs to dampen the explosive rate of installations.”
Indeed, some are already experiencing problems. Last year India, where feed-in tariffs are now being used, launched its “National Solar Mission”. It aims to get 20,000MW of solar power onto the grid by 2022, from a current baseline of less than 40MW. Though the frenzied uptake was welcomed by those organising the bidding process for commissions, others believe subsidies have been set too high. More worrying are indications that state governments are already defaulting on payments to wind energy producers under a similar scheme, and may not be able to afford more such tariffs.
Renewables may never achieve cost parity with fossil-fueled electricity without years of heavily-subsidised development. But overly-generous and rigid guarantees may do more harm than good. More flexible feed-in tariffs, or indeed off-grid solar panels, may offer more appealing solutions. “It is quite similar to the Californian gold rush,” says Ritesh Pothan, Managing Director of a Mumbai-based renewable energy advisory organisation. It is to be hoped not so many are left empty-handed.