Thursday, September 24, 2009

Spain and the green energy push

Near Sevilla

From today's Washington Post:
Green jobs have become a mantra for many governments, including that of the United States. But few nations are better positioned -- or motivated -- to fuse the fight against recession and global warming than Spain. The country is already a leader in renewable fuels through $30 billion in public support and has been cited by the Obama administration as a model for the creation of a green economy. Spain generates about 24.5 percent of its electricity through renewable sources, compared with about 7 percent in the United States.

...Though the Spanish government estimates that the alternative-energy sector generates about 200,000 jobs here, about double the number in 2000, critics contend they have cost taxpayers too much money.

In some instances, the government's good intentions have distorted the energy market.

Take, for example, the recent Spanish solar bubble.

Though wind power remains the dominant alternative energy here, the government introduced even more generous inducements in recent years to help develop photovoltaic solar power -- a technology that uses sun-heated cells to generate energy. Lured by the promise of vast new subsidies, energy companies erected the silvery silicone panels in record numbers. As a result, government subsides to the sector jumped from $321 million in 2007 to $1.6 billion in 2008.

When the government moved to curb excess production and scale back subsidies late last year, the solar bubble burst, sending panel prices dropping and sparking the loss of thousands of jobs, at least temporarily.

"What they're talking about now -- creating a new sustainable economic model through alternative energy -- is going to be exactly the opposite of sustainable," said Gabriel Calzada, a Spanish economist and critic of the government's alternative-energy policy. "You're only going to create more distortion, more bubbles. It isn't going to work."

...A new $300 million thermo-solar plant in the arid mining town of Puertollano, about 100 miles south of Madrid in the Don Quixote country of Castile-La Mancha, offers a glimpse into Spanish hopes. The partnership between the large corporate utility Iberdrola and a national energy agency employed as many 650 workers to build the plant over the past two years. The huge plant was like manna from heaven for a host of companies stung by the recession. A maker of car mirrors retrofitted its assembly lines to produce the plant's massive reflective panels, for example.

But Calzada's recent study -- which has come under fire by green advocates here and abroad -- suggests that the government's cost to create one job in leading alternative-energy sectors has averaged $855,000. It notes that although hundreds may be temporarily employed to build plants, a far smaller number gain permanent positions.

Because alternative-energy plants are more expensive than traditional power plants that burn fossil fuels, the government here has made green generation profitable by promising big subsidies for years to come. Though most Spaniards have so far seen only modest increases in their electricity bills, even government officials are warning that prices might suddenly jump in the coming years as more of the real costs are passed on to consumers.

In the meantime, some power distributors in Spain have converted their government guarantees for higher-than-market energy prices into complex financial instruments, then sold them off to the highest bidders in a manner similar to the repackaging of subprime mortgages in the United States. If the government doesn't make good on those guarantees, critics fear, the securities could suddenly devalue, soaking the investors who hold them.
What a mess. What arrogance. Politicians in the Spanish government believe they have a better handle on how to meet the country's energy needs than those in the private sector who actually work in the industry.

Let's review all of the ways in which this approach is flawed and how it all likely went down:

1. Politicians argue the country needs an alternative energy industry. But if alternative energy made sense -- i.e. was financially viable -- the private sector, constantly in pursuit of profits, would have already invested in this area. The fact they do not should serve as a major warning sign that the economics of alternative energy don't add up.

This, however, is ignored by politicians who -- likely in possession of no more expertise on the subject than having read a magazine article or Thomas Friedman column -- are confident their plans will pay massive dividends. After all, everyone knows that alternative energy is la industria del futuro.

2. Legislation is approved for tax breaks and direct subsidies for companies which engage in approved alternative energy projects such as solar panels and wind turbines. Politicians burnish their green credentials and brag about how they are preparing the country for the 21st century and boosting its competitiveness.

3. Plans are announced to open factories and green energy plants. Some of these are likely located in the same districts as politicians that pushed for the tax breaks and subsidies. Government officials highlight all of the jobs that are being created. Left unremarked upon, except perhaps for a few economists, is the fact that each job created required hundreds of thousands of euros that could have been left to taxpayers to spend as they see fit.

4. The energy produced by the power plants and the solar panels from the factories cost too much, with the prices much higher than that of conventional energy sources. Politicians offer subsidies to make them competitive, arguing this is merely a temporary situation until the industry takes off and economies of scale are reached. In the meantime the country is stuck paying higher prices for the same amount of energy, in effect achieving less with the same amount of money.

5. Politicians are then faced with the choice of raising taxes to pay for the subsidies given to the green energy industry -- further harming the economy -- or cutting them off, which would add to the unemployment rolls and create angry voters.

The fact that the Obama Administration is looking to Spain -- a country with unemployment pushing 18 percent -- as a model for how to create jobs speaks volumes.

Other posts about the Spanish model here and here.

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