Are Renewables Poised to Lower Energy Prices in 2013?

by | published October 23rd, 2012

As we come to the end of an election campaign cycle, something else will be ending as well.

Wind subsidies.

A poster child for the ongoing debate over government support for renewable energy, the wind subsidy will expire at the end of 2012. Congress is not going to renew it amidst the fog and din of a political war.

The wind subsidy amounts to a tax credit of some $22 per megawatt hour. Critics note that the wholesale price of electricity in many parts of the U.S. costs $44. That means the credit accounts for 50% of the grid cost.

On solar energy, the primary federal subsidy provides a tax credit of 30% for the cost of installed equipment. That will drop to 10% at the end of 2016. Already, a separate cash grant for up to 30% for solar energy equipment expired at the end of 2011.

Now both approaches have generated a considerable amount of criticism from mainly conservative opponents. These critics claim that the only reason wind and solar are even in the game is because of such subsidies. They argue these sources of energy are not cost effective otherwise.

Of course, there are others who prioritize environmentally friendly energy sources. But the penchant against government involvement and the assumption that federal subsidies are always an inefficient usage of taxpayer funds are at the core of the argument.

So, who is correct?

The Hidden Cost of Green Energy Production

On Monday, Pilita Clark wrote an interesting piece in the Financial Times exploring the net effect of renewable subsidies in the U.S. and Europe. She highlights a little considered result of wind and solar production.

It runs the risk of destroying profit margins for conventional producers.

In fact, according to Clark, “Some utilities risk having as much as half their power generation profits wiped out by 2020 as renewables reshape energy markets say analysts at UBS, which recently downgraded RWE, the German power company, EDF of France, and the Czech Republic’s CEZ Group as a result. Other effects are only starting to be understood as the growth of renewable power soars.”

The result could be a dramatic decline in electricity costs.

That may seem like a great effect for a house or small business owner wrestling with high energy expenses.

But it is a very different matter for the other side of the equation.

Market prices could actually crash, as Clark notes, “because renewable power generators, which have large subsidies, low operational costs and free fuel, can offer cheaper prices than owners of plants running on conventional fossil fuels.

The crucial element revolves about prices during peak times. These are weekday periods in which demand is highest and where power providers make the bulk of their revenues. Prices and volumes are always elevated during peak times.

Yet the experience in Germany, where a government is moving a portion of the nation’s energy infrastructure from reliance on nuclear to wind and solar, is of some concern to conventional generators. Evidence has already surfaced that solar power is diminishing the traditional peak profit opportunity.

Clark observes that wind power has demonstrated an ability in the American market to produce “negative prices,” situations in which power ends up begin sold at a loss. This has been the case in Texas, where more wind power has been installed than in any state. A recent study released by the Northbridge Group indicated negative pricing has increased sharply as wind farms spread over the past four years.

Not all observers accept such, and what defines an actual market impact remains contentious.

Nonetheless, subsidies reaching 50% of the wholesale price of electricity does provide an obvious incentive to sell electricity below generation costs. Why not, if the taxpayer is footing at least some of that bill?

Two matters, however, are becoming clear. The first points out that the consumers are still footing a higher cost from the power because it is being generated via taxpayer subsidies. And on that score, while the tax credit for new equipment is expiring, other subsidies of the electricity generated using existing plants will continue.

Second, the largess from lower prices is not yet being experienced by the end user.

There are only indirect connections to the monthly bill. Even in a place like Germany, where renewables are apparently having a major impact, there are moves to blunt their effectiveness in lowering prices.

As profit margins decline, German power transmission companies have announced an almost 100% increase in fees on renewable-sourced electricity. Now, many observers point out such additions will disappear once the infrastructure is completed. But in the interim, these new duties will hit retail consumers hardest. That is because many businesses have an exemption to protect their international competitiveness.

Ultimately, electricity rates may be coming down because of government subsidies. Just how much of that ends up in the pocket of a normal consumer is unknown.

On the other hand, this may not be an encouraging signal for the retail investor.

As Clark aptly explains, “On the upside, more renewable energy should mean fewer carbon emissions. But if you invested your pension money in what you thought was a solid, safe utility, you may want to reconsider. And lower market prices could discourage new power plant investment.”

Seems one hand giveth, and the other hand taketh away.

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  1. Cheryl
    October 23rd, 2012 at 10:15 | #1

    So what does that mean for Oil and gas ?

  2. October 23rd, 2012 at 10:21 | #2

    I am expert in wind power looking for work. I have over 30 years of experience in wind energy. resume
    Ken Bosley, M.A.
    410 472 1081
    PO Box 585
    Sparks, Maryland 21152 USA

  3. October 23rd, 2012 at 12:10 | #3

    Some very safe and solid utilities like Southern Energy are getting into solar energy. Its a no-brainer. Why take energy indirectly out of the earth in form of fossil fuels or algae with all its costs and inefficiencies when you can take the energy directly from sunshine. There are three problems that need to be worked out. Efficient conversion technology, storage and distribution, all involving the development of very profitable technologies. Whoever solves those problems will be able to tap an infinite source of low cost energy.

  4. Greg Kuipers
    October 23rd, 2012 at 12:19 | #4

    What is coming on line in 2013 in Alberta Canada is super efficient natural gas fired facilities, over 92% conversion, we are not subsidized and need $32/MW to break even, plants can be on and sync to the grid in 10 seconds. The facilities have a special emission system that produces 50 liters of drinking water per kWh produced. These facilities compete hands down with subsidized clean energy facilities. Cheaper clean power for the consumer is our moto

  5. October 23rd, 2012 at 13:53 | #5

    @Greg Kuipers
    I would like more info on this power plant it sounds rather interesting.

  6. Charles Ronayne
    October 23rd, 2012 at 16:26 | #6

    Greg Kuipers :
    What is coming on line in 2013 in Alberta Canada is super efficient natural gas fired facilities, over 92% conversion, we are not subsidized and need $32/MW to break even, plants can be on and sync to the grid in 10 seconds. The facilities have a special emission system that produces 50 liters of drinking water per kWh produced. These facilities compete hands down with subsidized clean energy facilities. Cheaper clean power for the consumer is our moto

  7. October 23rd, 2012 at 17:35 | #7

    What is not realised is that the subsidies, particularly relating to Solar have helped set off a worldwide expansion of the renewable energy industry, which has had enough volume to vastly lower the price to the level that now the subsidies are not really required, at least with Solar.
    It should be taken as a balancing point that Nuclear had had incredible subsidies and is still getting them, and also there are subsidies and concessions for the coal and oil industries which should be criticised just as much.

  8. October 23rd, 2012 at 17:54 | #8

    My heart bleeds for the electricity companies – seriously…! We have been extorted long enough on our supply prices, it’s no wonder more and more people are switching to alternative energy. As for the end of the government rebates (wind)that’s just typical of the election cycle isn’t it.

  9. Tim Goeders
    October 23rd, 2012 at 20:10 | #9

    Regardless of the source of the electrical energy, improved distribution infrastructure technology, in the form of soon to be available nano-enhanced high voltage transmission lines (with greatly improved voltage and amperage capacity) would improve the bottom-line of the various utility companies and also thereby reduce costs to the consumers.

  10. Todd J. Smith
    October 23rd, 2012 at 20:24 | #10

    One thing that is overlooked when we compare fossil fuel produced energy from renewable sources such as wind and solar is the fact that burning fossil fuels damages our air, water and climate, all of which are commonly owned (not owned by the fossil fuel industry). We all pay the price for particulate matter (causing child hood asthma and premature death and sick days), mercury and arsenic pollution from fallout from power plant (don’t eat the fish) and there is now plenty of data and science to show that we are changing the acidity of our oceans and our climate by burning fossil fuels. We all pay the price for these things. The cost that we have paid and will pay in the future (external costs of burning fossil fuels) will be far greater than the cost of subsidizing our renewable energy until it reaches parity with traditional fuels.

    We have the ability to change to 100% renewables with the current technolgy we have now. We simply lack the political will.

    Simple solutions such as battery swapping stations for electric vehicles (charge at home or when you are out, drive through a battery swapping station and get a fully recharged battery)see the company called “Better Place”. This would brings electric vehicles into mainstream. Auto companies could build inexpensive electric cars without the batteries and another would give you the battery and charge you for recharging it, all cheaper than oil.

    Electrify our railroads to get them off oil and create the electric grid to transmit electricity from wind and solar farms in the midwest to urban areas, then use the batteries in the battery swapping stations to store the excess wind and solar energy. Putting a truck on a electric powered railroad substitutes 18 btus of diesel for 1 btu of electricity.

    A 4 cent tax on a gallon of crude for two years will build out the whole system of battery swapping stations across the US. A 4 cent tax for 5 years will electrify half of our railroads (the strategic portion that the military would like to see electrified for national security reasons in case of a future oil shock)

    By the way this 4 cents is how much Ken say that building the Keystone pipeline will increase American gas prices nationwide (permanently). Seems like we are missing a opportunity don’t you think?

  11. Ed Nichol
    October 23rd, 2012 at 23:58 | #11

    How do you spell Fushiyama, Fushiyaga, Fushifushi, darn, does it matter? It may be extreme but shouldn’t we consider all of the costs when considering the final price of something. Or heck, maybe we could actually consider whether the risk is worth taking at all!

  12. Clarence Baskin
    October 24th, 2012 at 07:43 | #12

    We need to move towards renewable energy. Non-renewable fossil fuels are really a waste of energy.

  13. Thermodyne Tom
    October 24th, 2012 at 09:48 | #13

    @Charles Ronayne
    The only thing that could come close to that kind of overall efficiency wold be a methane / air fuel cell and (nat gas fired) implies a steam turbine/ele generator setup of which that combo will never do much better than 50%… You’re full of it bud and i don’t live in alberta but i dont think they need the extra 50 liters/kwh of h20 awyway. Which is obviously BS also

  14. November 2nd, 2012 at 17:59 | #14

    Too repeat what I have been saying for about five years electricity should be generated in the centre of the city with solar backed up by fuel cells run on natural gas because the electricity is consumed in large amounts in the city centre by office towers . This would reduce powerline infrastructure cost which everyone even the politicians are now talking about. frank

  15. Chuck S
    November 2nd, 2012 at 21:31 | #15

    “very profitable technologies” – very profitable unless they’re so expensive nobody wants them. The extra components all take money – resources, energy, to make. It may take more energy to make them than to build a conventional power plant. In fact, you may have to build a conventional power plant anyway as a backup, and then build everything else. If you use energy storage instead, it would be VERY expensive, especially if you allow for days of cloudy weather. Government subsidies are just a way to hide the inefficiencies.

  16. Dan Smolko
    November 3rd, 2012 at 14:51 | #16

    @Tim Goeders

    Power Connectivity from multiple sources has to be key. There has to be a system of “plug and play” power with simple connectivity and disconnect. If anyone wants on or off the grid or to supply or use power, it would be an easy connect and disconnect. That way utilities will have to allow individual, small or large players in alternative and renewable energy direct access and provide power.

  17. Carolyn
    November 13th, 2012 at 00:35 | #17

    I don’t see any efficient solar cars, big trucks, airplanes, heavy equipment to build roads, buildings, farm equipment for food, aircraft carriers, jets to defend us. We have natural gas which is clean, efficient, and inexpensive that has the power to run cars and heavy equipment etc.if the government does not regulate it to death. Coal power plants do not pollute like they use too and it can be cheaper than gas. Also we need oil and gas for plastics fertilizer and many other products.

    What will happen to our farmers and food supply without fertilizers and heavy equipment. These are some of the few examples of why solar and wind will not provide. If we are not careful we may use our financial resource to no avail and may go back to using fire to cook and heat. Then you will have very polluted air.

  18. Craig
    November 17th, 2012 at 16:23 | #18

    The way that solar and/or wind is most efficient is with small scale installations on individual properties with on-site storage capacity. This minimizes the cost of large installations and the incredible waste of power due to cable resistance over long distance. Individual generators can be upgraded efficiently and locally on a small scale as technologies improve. There is also a huge savings that can be realized locally by designing and building heat and power efficient homes oriented towards sun for heat in the winter and with proper sunshades and tree plantings for cooling in the summer. That is where the most energy savings can be realized not with arguing about subsidies for massive generating plants. The sun is a free eternal source of power for every need.

  19. Sumflow
    December 7th, 2012 at 01:12 | #19

    Geoff Thomas :
    ..subsidies, particularly relating to Solar have helped s

    Richard Kinder says alternative energy should be allowed to form publicly traded partnerships.

  20. Sumflow
    December 7th, 2012 at 01:15 | #20

    Clarence Baskin :
    Non-renewable fossil fuels are really a waste of energy.

    Natgas has been called a bridge fuel, to get us from where we are now, to renewable sources.

  21. Sumflow
    December 7th, 2012 at 01:18 | #21

    Carolyn :
    What will happen to our farmers and food supply without fertilizers and heavy equipment.

    THe same thing that happened in Cuba, production will increase, pollution will go down.

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