Solar silliness

Today's New York Times has an article on Germany's solar power industry that holds a number of lessons both for public policy in general and economic policy in particular. You'll recall that this is the same German solar power industry that Thomas Friedman cited as an example for the U.S. to follow. Assuming Friedman reads the newspaper that publishes him I wonder if this will cause him to reconsider his position. According to the article:

Thanks to its aggressive push into renewable energies, cloud-wreathed Germany has become an unlikely leader in the race to harness the sun’s energy. It has by far the largest market for photovoltaic systems, which convert sunlight into electricity, with roughly half of the world’s total installations. And it is the third-largest producer of solar cells and modules, after China and Japan.

Now, though, with so many solar panels on so many rooftops, critics say Germany has too much of a good thing — even in a time of record oil prices. Conservative lawmakers, in particular, want to pare back generous government incentives that support solar development. They say solar generation is growing so fast that it threatens to overburden consumers with high electricity bills.

There are a couple of items here that should raise reader's eyebrows. The first is why "cloud-wreathed Germany" has taken such a big interest in solar energy. Intuitively it doesn't make sense. It's akin to reading about a burgeoning ski industry in Tunisia. Second, if solar generation is growing, why would electricity bills be going up? Why would increased supply result in higher prices? It makes no sense.

The article continues:

Solar-energy entrepreneurs warn that reducing incentives will deprive Germany of its pole position in an industry of the future. As proof, they point to the United States and Japan, which were once solar stars but have faded as their government subsidies became less enticing.

Speaking of eyebrow-raising, this one is huge. If an industry fails without government subsidies, it probably doesn't deserve to exist. If I can't be profitable without a government handout (which, remember, is simply a wealth transfer from someone else -- the money doesn't come from thin air) then it means that no one wants my product or that better alternatives exist. Why governments should be giving money to make things that no one wants is beyond me.

Second, there is the reference to solar energy as an "industry of the future." Maybe it is and maybe it isn't. If it is, it stands to reason that plenty of private sector dollars would be available to help develop it without government assistance. After all, if there is money to be made you can bet that venture capital money will be all over it. In order to justify government expenditures you have to therefore believe that the government is a better predictor of what industries are likely to succeed in the future than capitalists in search of profits -- a proposition that is highly dubious to say the least.

Moving along:

At the heart of the debate is the Renewable Energy Sources Act. It requires power companies to buy all the alternative energy produced by these systems, at a fixed above-market price, for 20 years.

This mechanism, known as a feed-in tariff, gives entrepreneurs a powerful incentive to install solar panels. With a locked-in customer base for their electricity, they can earn a reliable return on their investment. It has worked: homeowners rushed to clamp solar panels on their roofs and farmers planted them in fields where sheep once grazed.

The amount of electricity generated by these installations rose 60 percent in 2007 compared with 2006, faster than any other renewable energy (solar still generates just 0.6 percent of Germany’s total electricity, compared with 6.4 percent for wind).

This, in a country that gets an average of only 1,528 hours of sunshine a year, less than a third of the total daylight hours. That figure is comparable to London’s but it is one-third fewer sunshine hours than in Florence, Italy, and only half San Diego’s, making German solar installations less efficient, and their growth all the more remarkable.

...Christian Democrats, however, say the law has been too successful for its own good. Utilities, they note, are allowed to pass along the extra cost of buying renewable energy to customers, and there is no cap on the capacity that can be installed — as exists in other countries to prevent subsidies from mushrooming.

At the moment, solar energy adds 1.01 euros ($1.69) a month to a typical home electricity bill, a modest surcharge that Germans are willing to pay. That will increase to 2.14 euros a month by 2014, according to the German Solar Energy Association.

But the volume of solar-generated energy is rising much faster than originally predicted, and critics contend that the costs will soar. Mr. Pfeiffer, the legislator, said solar power could end up adding 8 euros ($12.32) to a monthly electricity bill, which would alienate even the most green-minded. With no change in the law, he says, the solar industry will soak up 120 billion euros ($184 billion) in public support by 2015.

So, the way that Germany has persuaded people to use solar power, an industry that doesn't make any sense, is by coercing power companies to buy the stuff, thus jacking up prices for everyone. This is really the model that Friedman wants us to embrace?

Continuing:

Meanwhile, solar advocates are testifying before Parliament and publishing articles defending the law.

Eicke R. Weber, a prominent physicist, said the estimate of 120 billion euros in subsidies was too high because it did not take into account the rising price of conventional electricity. That, plus a gradual decline in the cost of solar, will close the price gap between conventional and solar-generated electricity by 2014 or 2015, he predicted.

The actual subsidy, Mr. Weber said, will be 40 billion to 60 billion euros, a third of what the German state is paying to prop up its superannuated coal industry.

“If we’re willing to burden the population with 180 billion euros of support for a dying industry, who do we worry about taking one-third of this to make Germany the world leader in photovoltaic technology?” said Mr. Weber, director of the Fraunhofer Institute for Solar Energy Systems in Freiburg.

Maybe the gap between conventional energy and solar will close and maybe it won't. If it does then there is no need for government assistance since it will be competitive on its own merits., and if it doesn't then why support it when a cheaper alternative exists?

The second explanation is even more laughable, with Weber apparently declaring that because Germany is already engaged in one stupid policy -- subsidizing coal -- that it should justify subsidizing another one. You know, if Germany really wanted to do the environmentally responsible thing it would end coal subsidies all together and close the coal mines. But since it is unwilling to offend the coalminers it instead has decided to engage in two nonsensical policies by both subsidizing dirty coal AND solar power, possibly to assuage their guilt over the former.

Then there's this:

In the former East Germany, where scores of state-subsidized industries were shuttered after reunification in 1990, the solar industry is a welcome tonic for a depressed region. Signet Solar, an American maker of photovoltaic modules that use thin-film technology, chose to build its first factory and research center near Dresden.

This is a classic example of Bastiat's parable of the broken window. What we see is that new factories and research facilities have opened in an otherwise depressed region. What we don't see, however, are the other factories and industries that have been harmed because consumers have been forced to divert their money away from these goods to pay for something -- in this case solar power -- that they otherwise wouldn't have paid for.

Almost at the end:

Still, there are constant reminders of how quickly Germany could lose its status. Signet is building its next factory in Madras, India; Q-Cells is building one in Malaysia. Other German companies are exploring the Mediterranean markets, particularly Spain.

With more sunny days a year, Spain is likely to have a competitive solar industry that can stand on its feet before Germany’s does. And now it has put in place its own German-style incentives.

I'm willing to bet a fair amount of money that solar power proves far more successful in Spain than Germany because, well, there's more sun there. The likely outcome here is that Germany is going to end up throwing a lot of taxpayer money away in a bid to develop a supposed industry of the future only to ultimately lose out to Spain or another country with a more hospitable climate -- you know, somewhere where it actually makes sense.

Concluding:

“To develop a technology, you’ve got to create an industry,” said Mr. Milner, the chief executive of Q-Cells, referring to the German success story. “You can wait and wait and wait for costs to come down, but it takes too long.”

This strikes me as putting the cart before the horse. To have an industry, you first need a technology that both works and does so on a cost-effective basis -- something Germany still seems to lack.

The German model? Nein danke.