There were two blockbuster pieces of energy news last week that I’m going to discuss as the renewable and nonrenewable poles in our global debate about the future of energy — and in particular what we mean by cheap/affordable/economical energy sources — and I’m afraid this may take a little time. As the Twitterverse puts it, it’ll be a #longread. If the idea of 2,800 words in one go freaks you out, I’ve helpfully inserted an entirely unrelated animated gif of the Toronto Raptors mascot wiping out on Rollerblades at about the midway point, which will not only give you a pause and a laugh but signal to you that it might be time to click away from this page and look at random Tumblr feeds or whatever till you’re ready to digest another couple of blog-sized hunks of commentary.
Okay. Let’s get on to the energy news.
The first piece of news is a study to be released at the Seismology Society of America's conference later in April, finding that the central United States is experiencing earthquake activity at a level without precedent, and that human activity has “almost certainly” caused the increase. (The most likely cause is the extensive use of hydraulic fracturing or “fracking” to unearth marginal deposits of natural gas and oil embedded in shale.)
As Alexis Madrigal reports at The Atlantic, there were 134 earthquakes in the region in 2011 measuring 3.0 or higher on the Richter scale – six times the average annual rate for any given year in the 20th century. The only significant change in seismic activity in the central U.S. since 2000 has been the largest drilling and fracking boom in history. Still, the report stops short of citing oil-and-gas extraction as the probable cause of the change, leading Madrigal to ask, “But if it is not fracking, then ... What is it? At the moment, we don't have a whole lot of other hypotheses, just a lot of unexplained earthquakes in places where they don't normally strike.”
This, then, is one side of the energy equation: Significant evidence that a side effect of our continued reliance on fossil fuels has been to create volcanic levels of seismic activity in middle America. Even with the link as yet unproven, think of the potential liability of an externalized cost of that magnitude. If there were any chance the drilling companies might be held accountable for its impact, would any sane insurance company on earth indemnify this business?
Our second piece of energy news comes from Germany: Last week, German solar PV cell manufacturer Q-Cells filed for bankruptcy. The filing came at the end of a steep slide for the company and the German solar industry in general. As recently as 2009, Q-Cells was the world’s largest manufacturer of solar cells (the constituent electricity-generating engines of a solar panel). Competition from cut-rate Chinese manufacturers had eroded the business, and the German government’s decision earlier this year to substantially decrease the feed-in tariff for solar energy pulled the last vital support from the industry’s foundations in Germany.
So here we are, in this overheated spring of 2012: Natural gas is cheap and plentiful, subterranean explosions are at an all-time high deep beneath Pennsylvania and North Dakota and many other places besides, and the German solar industry, unable to compete with cut-rate Chinese wares, is in freefall. The magic force of the free market’s invisible hand shapes our world in mysterious but eminently reasonable ways yet again. Right?
Well, this is, to be sure, the most common lesson being drawn from Germany’s woeful solar news. The ever-sober, congenitally small-c conservative German weekly Der Spiegel (Germany’s version of The Economist or Time Magazine), framed its analysis of the solar collapse with the headline “Twilight of an Industry.” Some key quotes:
The company, it turns out, simply wasn't prepared for the fast changes that have buffeted the industry. ... The worst hit in the German solar crisis are companies that made bad business decisions. Most of the companies effected failed to wean themselves from reliance on government subsidies.
To my surprise, this line of thinking has been embraced even by some cleantech-booster types in the U.S. Marc Gunther of Greenbiz.com, for the most part a reliable commentator on green business, argues that the first lesson of Germany’s solar industry shakeout is that “Solar PV is too costly to subsidize on a scale that matters.” Germany, he asserts, was a victim of its own success, making and installing so much solar power that its energy regime was threatening to collapse under the weight of its own inflated costs. Gunther then proceeds to quite a lot of vague talk of “smarter subsidies," citing the Breakthrough Institute and building to their standard line that what’s needed is a whole new reinvented Wheel 2.0 for the digital energy age. Sorry, a “breakthrough innovation” (boldface in the original text).
In the meantime, the good times continue to roll for that breakthrough innovation known as the fracking business. Natural gas is cheap and abundant once again, and concerns about the industry’s need for staggering quantities of fresh water and its possible connection to earthquake activity without precedent are far off anyone’s radar. (Indeed the majority of Americans still don’t know what fracking even is.) We continue to burn natural gas (and coal and oil) because, so it’s assumed, they continue to win the energy battle on the level playing field of the free energy marketplace. If and when solar and whatever cold-fusion gee-whizmos the Breakthrough Institute dreams up are ready to match conventional fuels cents-per-kilowatt-hour for cents-per-kilowatt-hour, maybe we’ll see a real role for renewable energy on our grids.
This is, at its core, simply another strain of free market orthodoxy. Subsidies are bad; good technologies succeed or fail on their own terms in a free marketplace; if solar power’s on the wane, then the technology failed to compete, or the business model did. The problem, in any case, is intrinsic to the solar business.
This entire line of thinking so completely and fundamentally misconstrues what feed-in tariffs like the one that created Germany’s solar industry are – what they are intended to do – that I’m going to have to run on quite a bit more on this subject.
First, though, take a breather if you need to. Watch the inflatable tail of the Raptor mascot deflate with the world’s most perfect comedic timing. (I like to think of the tail as an embodiment of the logic underpinning our dinosaur-bone-burning energy economy.) Go follow me on Twitter (@theturner) and tell me to get to the point already. Then join me below as we go through the looking glass, people.
Okay. So let’s get two things clear from the outset:
1) There is not a single free and rational market for energy anywhere on earth. Never has been, likely never will be. We decide what fuels are readily available, abundant, useful and desirable, and we build the market to suit the exigencies of those fuels. (To cite just one case in point, the vast majority of North American power bills are calculated using a blended pricing process where a kilowatt-hour bought at peak demand on a hot day and generated by a dirty, inefficient, soon-to-be-shuttered coal plant costs as much as one bought in the middle of the night from a wind turbine or hydro dam or nuclear plant. We do this to make sure those old coal plants can pay themselves off over their full life and so forth. In short, we rig the market to support the status quo.)
2) The German government passed its feed-in tariff in 2000 for the expressed purpose of creating a new market for renewable energy manufacture and installation in this deeply skewed marketplace. The legislation was intended to change the status quo, dramatically so – and also to offset the astronomical externalized environmental costs of fossil fuels.
There are two ways to level the energy playing field. The first is to internalize the almost unmeasurably dire cost of fossil fuels, which as a byproduct of their use are radically altering the planet’s climate in ways increasingly inimical to life as we know it, through carbon taxes and cap-and-trade schemes and such. In Germany, doing this to a sufficient level to make coal more expensive than renewable power would’ve made the domestic coal industry furious. It would’ve been a ferocious political battle. So the Germans under the left-wing Red-Green Coalition in 2000 went another way.
The other way – which gave rise to the feed-in tariff – is to incentivize renewable energy sufficiently to offset the avoided cost of the greenhouse gas it doesn’t create. In a sense, you’re internalizing the practice that has emerged in carbon-priced markets worldwide, in which polluters buy offsets from green energy facilities. Instead of doing such elaborate market gymnastics, you simply build the desired offset into the green energy price through a pricing obligation. Grid operators in countries like Germany buy wind and solar and other renewably generated power at costs high above the cost of coal-fired power, and the added cost is passed on to consumers. In the case of the German energy market, the average household saw energy bills rise by about 40 euros per year (fifty bucks or so) in the first decade of the feed-in tariff.
This is important to remember when purveyors of conventional wisdom like Der Spiegel and Marc Gunther talk about Germany’s solar subsidies. When we think of subsidies, we usually imagine taxpayer dollars being funneled into expensive, long-term projects with little near-term benefit. (This, for example, is the nature of the lion’s share of the many billions of dollars pumped into nuclear energy in every jurisdiction where it has thrived.)
The feed-in tariff is a different kind of incentive; the extra cost of solar power isn’t collected and distributed by government but by electricity retailers. Among other things, this has created enormous incentives to save energy, which is why Germany has, since the passage of its feed-in tariff, become a world leader not just in solar panels and wind turbines but in building insulation, passive-solar architecture, and the manufacture of heat-trapping windows.
The reason Germany’s citizens were by and large willing to bear this cost was because it gave them opportunities to become power producers (more than half a million German homes offset their power bills with rooftop solar arrays), because it created jobs (more than 300,000 in the renewable energy industry since 2000), and because it was the most effective climate change mitigation policy the world had ever seen, and the German public was (and remains) broadly in favor of ambitious measures to combat climate change. The feed-in tariff was indeed so popular that Angela Merkel’s conservative government, which opposed it at its passage and called its targets “unrealistic,” embraced it fully after being elected in 2005 and has since doubled down on those targets in the wake of the Fukushima disaster.
(Another point that evidently needs underscoring for North American commentators, and which I’ll come back to again in a minute: Germany did not abandon the feed-in tariff earlier this year; it scaled back its solar commitments while substantially increasing its support for wind power, especially the offshore kind.)
Now, let’s talk market orthodoxy. Germany expanded its solar industry so aggressively that it all but rationalized the business all by itself. The cost of making a panel plummeted. China saw a huge opportunity in a fast-growing consumer market that few other countries were invested in, and so it copied the German tech and subsidized its own solar industry to a staggering level. In fact, it’s a widely acknowledged truth in the solar business that Chinese companies are selling their panels at prices well under their cost of production. The Chinese now own more than half of the global solar market not because (as with, say, cellphones or dollar-store junk) they can make this stuff more cheaply but because they’ve out-subsidized their competitors.
It’s my understanding that economists call this predatory pricing, and they are usually opposed to it because it is a gross distortion of the free market. It’s also my understanding that there are all manner of global trade agreements in place that at least in theory would not allow this kind of thing. If, for example, the Chinese were making cars and selling them in the United States and Germany at far below production cost, causing the shuttering of GM and Volkswagen factories hither and yon, I’m reasonably sure there’d be intervention by even the most conservative of governments. But again, I’m a free-market apostate at the best of times, so maybe I’ve missed something here.
(In fact, the U.S. Commerce department has belatedly begun to act, imposing a small tariff on Chinese solar panels to counteract what it has ruled to be "illegal export subsidies.")
Even in the face of Chinese competition, though, Germany’s domestic solar industry could likely have continued to thrive at the rate Germany was installing solar power. (Last year alone, as I’ve noted elsewhere, Germany added more solar energy to its grid than existed everywhere on earth in 2005.) The German government and the Der Spiegel small-c conservative party line argues here that you simply couldn’t keep going at that rate indefinitely, while failing to note that the original feed-in tariff explicitly acknowledged that and was designed to scale down slowly as production costs dropped.
Earlier this year, however, Merkel’s Conservatives decided pretty much deliberately to pull the rug right out from under the solar industry, slashing back the feed-in rate for solar to a level that every single person in the industry I spoke with in Berlin last year was telling them would lead to widespread collapse. At the same time, they amplified the feed-in tariff for wind and opened up billions of dollars in other subsidies and loan guarantees for large-scale, centralized offshore wind projects.
I’ve put that in bold and italics and would make it blink if I could, because it’s the 800-pound gorilla that no one at Der Spiegel or elsewhere will acknowledge. As I’ve reported before, the offshore wind business is absolutely roaring along Germany’s North Sea coast. Steel companies are opening up serial production facilities for components at colossal scale, and the going’s so good that two of Germany’s biggest conventional energy companies, RWE and E.ON, have recently abandoned plans to build new nuclear plants in the U.K.
None of this is coincidental.
As Hermann Scheer, the father of Germany’s feed-in tariff, often said, the intent of his disruptive law was to fundamentally restructure the German energy industry. Energy technologies, Scheer understood, came with their own “techno-logic.” Coal and gas and nukes and hydro were top-down and centralized, their profits earned by securing and exploiting scarce, expensive fuels.
Shifting to renewables isn’t a megawatt-for-megawatt swap between energy sources but a paradigm shift from one techno-logic to another. Renewables encourage smaller scale and decentralization; they reward efficiency over consumption; and they centralize the value at the level of technological development and implementation, thus to exploit free fuels.
In a market where small-scale, decentralized renewables thrive, you’ll invariably find angry conventional energy companies. They mastered a game and rigged a market for themselves, and now it doesn’t work quite as favorably for them. (Notice that none of Germany’s big energy giants, even the ones paying those big tariffs, went bankrupt during the solar industry’s heyday.)
So what just happened in Germany? Under a conservative government long suspicious of the feed-in tariff and staunch in its defense of big conventional energy companies, energy giants like E.ON and RWE just got hundreds of billions of dollars – some of it in the form of, yes, direct subsidies – and the solar industry was pushed off a cliff. And every conventionally wise observer in the energy world, it seems, believes this is simply the market doing its job, shaking out the weak so the strong may fight on.
Which brings me back, finally, to the fracking game. The reason I included it was to underscore a point about the purported rationality of markets, the way they dole out risk and opportunity. For a solar company – whether in California or Germany – the risk of doing business is enormous. Miss a technology trend or fail to keep pace with the massively subsidized Chinese, and you’ll not only be out of business, you’ll be held up as a cautionary tale for all to see. Remember how Q-Cells was going to be the next Siemens? Remember Solyndra? Beware those pipe dreams, green energy dreamers, for they simply can’t handle the realities of the modern marketplace.
But if you’re already in the conventional energy game, and you’ve come up with a way to extend your hegemony through a practice whose risks are incalculable? Incalculable in the most literal sense of being so great in scale and unknown in impact as to be impossible to properly calculate? Well, that’s just the market doing its magic.
Even if we don’t even know what the risks of fracking are, why should we make oil and gas companies assume the possible costs? Make them pay even a nominal fee for the pulverized subterranean bedrock, the hundreds of millions of gallons of water, the possible cleanup costs of a leak into New York City’s water supply? Make them cover the cost of their emissions, the reclamation of the land they run roughshod across and under? Sorry, that’s not part of the rational marketplace. That’s not the way the invisible hand works. If we did any of that, it wouldn’t be cheap energy anymore, would it?
What I’m trying to say is that are two invisible hands at work in the energy marketplace. One, operating from Germany’s North Sea to the Marcellus Shale, pats purveyors of the status quo on the back. The other shoves solar upstarts off a cliff. And that is what we’re talking about when we’re talking about fairness in the energy marketplace. The short answer: there isn’t any. Frack all, in fact.
To level the energy playing field 140 characters at a time, follow me on Twitter: @theturner.
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