David Edwards - guest public speaker providing 
					talks for your school, club, business or society guest speaker with stories and insights from around the world
David Edwards' energy blog

Subsidising energy production and consumption

Working out levels of subsidy

Opponents of wind farms, and sometimes all non-fossil fuel alternatives, often try to suggest that economically it isn't a level playing field: that sustainable energy is only economic because it is heavily subsidised. This is a knotty area to get a handle on, and this piece is only the starting point.

First of all, it is hard to find a simple definition of subsidy and there can be confusion about what is meant by the term. It is commonly seen as a direct cash payment by a government to an energy producer or consumer. But there are other ways governments can stimulate the production or use of a particular form of energy. For example, an Organisation for Economic Co-operation and Development (OECD study defined a subsidy as "any measure that keeps prices for consumers below market levels, or for producers above market levels, or that reduces costs for consumers and producers". The International Energy Agency (IEA) has a similar definition of energy subsidies. "What matters in practice is the overall impact of all subsidies and taxes on the absolute level of prices and costs and the competitiveness of each fuel or technology."

Governments may help finance initial Research and Development expenditure but also help with ongoing operational subsidies for various forms and sources of energy. Where utilities are controlled by the government, or the markets are regulated (such as in the USA until the mid 1990s or the UK until the 80s and 90s) energy utility costs can simply be added to consumers' bills, which in effect means they are paying a subsidy relative to other, perhaps cheaper, alternatives. As soon as a market becomes deregulated and open market competition kicks in, this approach has to change. Now government policies have to be drawn up to support particular generation options such as renewables. As well as direct subsidies, support may be manifest by other instruments such as feed-in tariffs, quota obligations and energy tax exemptions. To provide disincentive for fossil fuel alternatives there can be targeted taxes including carbon taxes, or emission trading schemes for carbon.

The OECD's mission is to promote policies that will improve the economic and social well-being of people around the world. Founded in 1960, it now has 34 member countries around the globe. They are concerned that heavily subsiding the fossil fuel energy sector is bad for a nation's revenues, and also discourages switching to clean energy, and misses out on the job creation to be gained from manufacturing and support in the renewable sector. They report that in 2010, just over $500 billion was spent by governments and taxpayers supporting the production and consumption of fossil fuels. this compares with subsidies for renewable energy supplying electricity of $66 billion. Of course, fossil fuels contribute more energy globally than renewables so perhaps a more meaningful subsidy comparison would be pro rata. For 2010, 13% of the world's total primary energy supply came from renewables. Some simple maths shows that renewables claimed c. 12% of the subsidies provided for energy. So, no imbalance by that marker. Which? performed an analysis of a typical annual UK energy bill and found that 3.9% (£50) goes toward low-carbon i.e. green, energy initiatives. So I'm not sure sustainable energy can take the flak for the fact UK household gas prices have doubled since the start of the century, and electricity has risen by 70%. Government policies – such as subsidising energy for low income households - were found to contribute more to the typical energy bill (4.8%).

Of course renewable energy probably won't create millions of jobs for a country: few sectors do. But renewables can contribute substantially to a nation's economy. Denmark has been committed to wind energy for decades: it now generates a third of its export income. One of the reasons the Scottish Government is so supportive of wave technology is not just for the energy produced but because it can see job creation opportunities in the manufacturing sector, utilising existing skills in marine engineering from the north sea oil rigs, and potential export income as it hopefully becomes the leader in wave as Denmark has in wind.

I haven't looked at externalities in this piece i.e. the additional costs to society that energy generation (particularly fossil fuel) creates. When we factor those in, renewables start to look very good value. But that's for another post.

This is just one of the stories from my energy talk

Contact public speaker