off_grid_solar_pvThis post examines the case against subsidies for renewable energies recently made in the WSJ, which opined that renewable energy should focus on the small niche off grid market currently largely served by diesel generators where renewable energy has a clear advantage.

by Joel West, professor of innovation and entrepreneurship at San José State University’s College of Business. Connect with Joel on Linkedin.

In Wednesday’s WSJ, engineering consultant Josh Prueher argues that the way to promote renewable energy is to encourage adoption in self-funding niches rather than proffering government subsidies to help spur adoption in mass markets.

Prueher points to the inherent problem with any subsidies:

In the renewable energy industry, subsidies typically involve federal and state governments imposing a small tax or an electricity rate hike on each one of us. The government then awards the proceeds to a few winners that, in the best case, have demonstrated the technical and business potential to grow into competitive companies. In the worst case, they’ve demonstrated little more than superior lobbying capability. In all cases, subsidies deny the market its proper role of directing capital. It’s important to note that the traditional energy industry also receives billions of dollars in government subsidies each year; perhaps it’s more effectively hidden from public scrutiny.

Prueher points to the inherent problem with any subsidies:

To read about some of the financing and perception challenges that the renewable energy sectors need to meet in order to compete with the much better organized and currently profitable fossil energy sectors, see our related post: “What Renewable Energy Companies Need to Do to Compete – A Tale of Two Conferences“.

The PV entrepreneurs and managers say that subsidies are a necessary evil in the short term but they look forward to when they are no longer necessary. Some seem more sincere than others.

Instead of these subsidies, Prueher notes that we already have a fully functioning unsubsidized market where RE has a cost advantage: the off-grid market. This market — whether rural US or military outposts — is typically served by diesel generators.

The logistics cost of supplying fuel to these generators — whether on an offshore platform or the military front lines — are “staggering”:

For instance, unlike you and me, who pay on average from 3 cents to 16 cents for a kilowatt hour of electricity from the grid, these large consumers pay between 50 cents and $2.

From this, we already know what an unsubsidized RE market looks like:

Those high costs are sending a strong, clear price signal to the energy market to provide cheaper and more reliable sources of electricity and fuel. Namely, we need to develop renewables, energy storage and energy-efficient technologies that do not require expensive logistical support. While the off-grid market is small relative to the on-grid energy behemoth, it is of sufficient size and depth to justify strong competition, private investment and product development—without subsidy.

While he’s right in principle, in practice I don’t see how we get from here to there. The venture-funded SV PV companies and the Chinese-funded Big Five are addicted to purchase subsidies, whether as taxpayer rebates or (as in feed-in tariffs or RPS standards) mandated wealth transfers from electricity users.

If I were doing a bootstrap startup, I’d make a self-funded startup that targeted a cost-effective niche. But the nature of venture-funded startups is that their founders/owners have to bet it all on double-zero — to swing for the fences — because it’s better (at least for venture investors) to have a small chance of huge success rather than a good chance of a modest success.

See our relatedpost: “DOE SunShot Initiative Aims for Cost Competitive Solar Energy by 2020“, to read on the road map to cheaper Solar power that is envisioned by the DOE SunShot program that seeks to spur innovations and rationalizations that will together slash the total system cost of solar photovoltaic systems.

© 2011, Joel_West. All rights reserved. Do not republish.

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Author: Joel_West (3 Articles)

Joel West is professor of innovation and entrepreneurship at San José State University's College of Business. His research and industry experience focus on profiting from technological innovation. He is a chronic blogger, including at his Cleantech Business blog, which focuses on the economics of renewable energy and energy efficiency from a Silicon Valley Perspective

  • http://greeneconomypost.com Chris de Morsella

    Personally I think that Prueher is making a somewhat biased argument. Every energy system out there enjoys some form of subsidies and the subsidies and tax breaks etc. enjoyed by the big oil companies is a far bigger bag of money than the much smaller subsidies, tax incentives etc. that promote wind or solar.

    I wonder what Prueher has to say about all the sweetheart leasing deals, accelerated depreciation, and other incentives that the oil & gas sector is the beneficiary of?

    What does he have to say about the huge loan guarantees, mandated liability caps, and public backing for insurance of nuclear power.

    Or is it just the small crumbs of public largess that fall off the table into the solar and wind sector that trouble him?

    Keeping my own views in the comment section. We like to publish views we don’t necessarily agree with both because in many cases they are news worthy and because it is important for to see what those other views are.

  • daniel maris

    There is more to economic development than price. Nowhere is there a perfect market. Big international companies subsidise internally all the time in all sorts of way – very often to drive out competition.

    In addition to price you have to look at the benefit to your economy of exploiting an indigenous resource if it is substituting for an imported one. You have also to look at the impact on employment. You have also to look at the hidden costs. I am willing to wager that the impact of green energy on say our road network is far less than the impact of either fossil fuels or nuclear. There are plenty of hidden costs in terms of health and the environment from fossil fuel use.

  • http://greeneconomypost.com Chris de Morsella

    Is renewable energy more expensive than other forms of electric energy? Not according to the US Energy Information Agency that has published figures that account for the lower capacity factor of wind and have found that the levelized cost of new utility scale wind power is the cheapest form of energy except for gas and coal without any carbon capture. It came in a lot lower than advanced coal with CCS or nuclear.

    The cost of solar — especially solar PV — is on a very steep downward unit cost glide path and it will become cheaper than advanced coal with CCS or nuclear within a few years.

    1) It is a widely spread myth that all renewable costs more than fossil or nuclear generated thermo electricity.

    2) Wind/solar has a lower capacity factor than coal or nuclear. Yes… and so what. It is factored into the cost of wind and solar already. Why this need to double count it again after it has already been baked into the cost calculations?

    The truth is that the variable nature of wind resources doesn’t matter all that much.The the exact cost of this variability can be precisely quantified, and it turns out to be very modest. The extra cost that is being kicked around as if it was the death of Wind amounts to less than half a cent per kilowatt hour. It is a small fraction of the cost of wind electricity and does not make wind electricity appreciably more expensive. Variability is an issue to be sure, but it is solvable, quantifiable and does not amount to very much incremental extra cost.

    By comparison the cost of carbon capture and sequestration, which everyone except for rabid climate change deniers believes is necessary for coal adds somewhere on the order of TEN TIMES the extra incremental cost to coal as intermittency adds to the cost of wind, pushing the cost of coal with CCS far above new wind.

    Again this is a big ado about nothing. This whole variability thing has been blown [pun intended] way out of proportion to its actual weighted impact.

    3) Alternative energy and especially the wind sector IS growing at a very high rate.

    In fact averaged over the past three years, wind power has been the #1 or #2 choice for new generating capacity in the United States, accounting for about 35% over this period. Nearly as much new wind generating capacity (adjusted for capacity factor) has been added as natural gas and much more than any other form of electricity generation (including coal, nuclear, and so on).

    Renewable energy generation in combination with added gas fired electric generation capacity is where the market is actually moving. And it is only going to become more pronounced as the actual real costs of both wind and solar continue to decrease wile the costs for coal and nuclear continue to rise.

  • daniel maris

    “Renewable energy generation in combination with added gas fired electric generation capacity is where the market is actually moving.” I couldn’t agree more and that’s where it should be moving. There is plenty of natural gas to supply residual energy needs over the next say 20-30 years before we have a total renewables solution in place. We could have a total solution in place in 10 years if we wanted but a less demanding pace would be over 2 to 3 decades.

    The worst thing we could do is move into nuclear power – a disastrous and expensive long term commitment. Nuclear is finished. Kiss it goodbye.

  • Mike Simms

    Although Clean Energy opponents argue against subsidies like they are the death knell of the nation’s economy, there is hardly a modern convenience that was not subsidized by the US government before democratization and mass production. Automobiles, airplanes, microwave ovens, laser printers, the internet, synthetic down, carbon fiber, titanium bike frames, GPSs, Cell phones, microprocessors, guns….The list goes on and on. If someone says we should not subsidize the cleantech industry, ask if they are willing to give up every modern convenience that has not benefited from a subsidy…They will need to find a good mud hut to move into, and hunt down their dinner with a rock and a stick…