When Incentives Go Too Far

Geoffrey Styles at Energy Outlook yet again has an incredibly insightful analysis on how policy affects energy production. In a recent blog post, he analyzes how feed-in tariffs (FIT – basically a price floor support) that Germany implemented to spur growth in its solar panel producers has gone too far, and caused them to be complacent in the international solar market (due to the generous policy support at home). Styles summarizes:

… the subsidy remains extravagantly generous, even after having been significantly reduced in recent years. It currently stands at a range of 34-43 €cent/kWh, depending on the kind of installation involved. At current exchange rates, that equates to $0.50-0.635/kWh. A recent study comparing levelized power costs for a variety of power technologies puts the cost of unsubsidized solar power between $0.26-.32 for the crystalline silicon photovoltaic cells that most German solar firms produce, based on an average capacity factor above 20%. After adjusting for Germany’s much poorer solar intensity, the cost of solar power might rise to as much as $0.40/kWh, still well below the level of the FIT.

His blog post goes into quite a bit more detail, and summarizes the situation as follows:

At the end of the day, German politicians appear to have spent billions of Euros of German consumers’ and businesses’ money to build a solar industry that has thrived on the installation of high-costs solar panels in one of the least suitable countries for solar power imaginable, and that may not be able to compete internationally without drastic restructuring. This initiative has also failed dismally as climate policy, purchasing less than 5% of the emissions reductions that could have been bought had this money been spent on other, more cost-effective power technologies or on energy efficiency.

I think the lesson of the German FIT-subsidized solar industry is government should create policy it order to solve a specific problem. Upon creating the policy, they should create metrics through which the success of the policy is judged. When the policy is successful, it should be fazed out. In regards to the German solar industry, you have to ask yourself what was the intent of the original policy? To spur growth within an emerging sector of the economy? To decrease Germany’s dependence on nuclear power (which it is planning on phasing out)? To decrease the country’s carbon footprint? It seems like in this case it was meant to do a whole variety of things at once, which while obviously successful at first, now seems to causing complacency and waste. This reminds me of Harvard Economist Robert Stavins’ contentious claim that you cannot take a shower and eat at the same time — in other words, one piece of policy should address one problem and not try to be all things to all people. He was arguing against the Waxman Markey Bill trying to address both climate change issues and energy issues at the same time. While I still think that there may be a way, it is interesting to draw lessons from Germany’s experience with the FIT-subsidized solar industry.