Renewable energy: victim of subsidy discrimination?

Why does renewable energy get criticised for receiving subsidies that are far smaller than subsidies and expenditure on other sectors of the economy?  History, Future. Now. examines why this bias exists from a historical perspective and concludes that there are six main reasons.  First, we look at what other parts of the economy get subsidised.

An extreme libertarian would suggest that all government expenditure is unnecessary and distorts the market.  If there is a requirement, the private sector should provide it.  That view is not widespread, but from a historical perspective governments have restricted their activities to three core areas: defence of a country’s borders, maintenance of peace at home and provision of a reasonably fair judicial system.  Even 150 years ago the US federal budget prior to the Civil War was incredibly small, with only 16,000 personnel in the military and a fleet of antiquated naval vessels.  Prior to the First and Second  World Wars the US military had been similarly curtailed.  Historically, in the event of war it was assumed that militias would be assembled for national defence (and thus one of the mainstay arguments for the NRA’s defence of the right to bear arms).

If we look at the UK Government’s £683 billion 2012-2013 budget, however, it becomes clear that defence at £39bn and public order and safety at £32bn only represent about a tenth of government spending.  From a historical perspective, all of the other expenditure is unprecedented and provides services that were never offered by the government historically, or may never have been provided by the private sector either.  All government expenditure is effectively a subsidy on that activity.

What are these expenditures, exactly?  The UK government budget for 2012-2013 has provided a convenient chart, below:


The biggest expenditure, a whopping 30% of the budget at £207bn, is social protection.  Since the Budget does not provide an easy breakdown or explanation as to what “social protection” is, and an electronic search of the entire document only results in one hit – the table above,  we have to make some assumptions as to what this, and other terms, mean.  Our best guess is that this is unemployment insurance and benefits.  As we have established, none of those benefits existed historically, but it is likely that they have been around since the end of the Second World War.

Next up is the £130bn spent on health care.  History, Future. Now. is a firm advocate of government funded health care where citizens are covered for their health needs.  The actual services can be privately supplied, based on lowest cost bids, with quality thresholds, by the private sector.  Japan has an excellent model which follows this system.  The UK’s National Health Service came into being at the end of the Second World War and despite its occasional criticism is generally highly regarded in the UK.

Education takes up £91bn of the budget.  An educated population is in the long term interest of a country and is an investment in the earning potential of future tax payers.  Unlike most other expenditures, which are for maintaining the quality of life of this year’s taxpayer, education is arguably a capital expenditure as the benefits (except for paying for someone else to look after your children all day) will be realised decades in the future.

Payment of interest on government debt is next up, at £46bn.  This is clearly one to watch.  As we borrow more the interest will go up and we still need to repay the capital.

Other, whatever that is, follows at £43bn.  Then come the two historic government expenditures:  Defence at £39bn and Public order and safety at £32bn.  Transport is £22bn, Housing and the environment is £21bn, and Industry, agriculture and employment at £19bn.  That is it.  Note that government income from public sector receipts is expected to be £592bn, meaning that there will be a borrowing requirement of at least £91bn.

Also note that this budget does not include “non revenues”  such as tax credits and allowances which reduce the Government’s income. If the government does not receive £5bn in due to tax allowances it is effectively the same thing as paying out £5bn.

Once upon a time, all of these expenditures would have been new, with the exception of the defence of a country’s borders, maintenance of peace at home and a provision of a reasonably fair judicial system.  Even the cost of defence is probably significantly higher that the peacetime average over the past 150-200 years.  Presumably these expenditures would have been controversial at the time?

Which brings us back to the renewable energy question – why are its relatively small expenditures deemed so controversial?  History, Future. Now. thinks that the following might be in effect:

  1. Subsidies for renewables are relatively new.  When renewables were not even close to being economically viable, the subsidy levels were so tiny that they could be safely ignored, or supported as a “good thing” for sometime in the future.  Now that the future has arrived, they are being looked at more critically.  Because the subsidies are relatively new, they mask the fact that other activities in general are being subsidised (all government expenditure is effectively a subsidy on that activity) and that other conventional energy sources are specifically being subsidised by 17-37 times more (see article).
  2. They threaten to take budget away from other sectors.  Money going to renewables may be perceived as diverting funds from social security benefits, or schools and hospitals, etc.  There is a lack of awareness that in the UK the “subsidies” don’t even come from the government and don’t compete with other government expenditure – they come from increased electricity prices to consumers.  They are only linked to the government budget as the government has legislated that electricity companies have to pay renewable energy producers a premium price.  This means that it is guaranteeing that these laws will remain in place for the life of the project.  That guarantee forms part of the government’s national debt calculations, even though no interest is paid and no money is repaid by the government.
  3. Subsidy levels are not large enough.  If renewable energy subsidies were huge, on the scale of expenditure on social housing, defence or social protection, the sector would be a major political force.  It would employ hundreds of thousands of people directly and several million indirectly.  So many people would have a vested interest in protecting the expenditure level that it would have widespread public support and would make it very hard politically to remove.
  4. Renewable subsidies are perceived as temporary.  The historic view was that renewables would need support while they were more expensive than conventional power sources.  Once the costs dropped and they could compete “on a level playing field”, the subsidies would be removed (as is happening in Spain – see article).  So the question is always asked: when will renewables be weaned off their subsidies?  This is a particularly interesting question as coal mining, oil and gas exploration and extraction, nuclear power and farming all get massively more subsidies and tax credits than renewables and yet there is no expectation that those subsidies will ever go away.
  5. Renewable energy is seen as ineffective and expensive.  The sun does not always shine and the wind does not always blow. What then for solar and wind power? Few people are aware that solar and wind farms only generate subsidy revenues when they produce electricity.  Second, they are also not aware that the cost of the subsidy is relatively minor compared to the retail price of electricity.  For example, the total revenue on a kilowatt hour basis, including subsidies, for an onshore wind farm in the UK is about 9-10p/kWh, which is lower than most home owners will pay for their electricity, about 11-15p/kWh.
  6. Subsidy complaints are proxy for NIMBY-ism.  In crowded countries, like the UK, Not In My Back Yard-ism  about the location of wind farms in particular is a real issue – something that History, Future. Now. is sympathetic to. It you are opposed to a wind farm being built near you anything that helps support your argument as to why it should not be there seems legitimate, including complaining about the fact that it is getting subsidies.

The fact that renewable energy is good for the environment, good for jobs, good for national security, good for balance of payments etc is frequently overlooked, perhaps because its contributions to any one country are still relatively small.  What does this mean for the future of renewable energy subsidies and renewables in general?

At some point, in the not too distant future, wind and solar power will no longer require subsidies in most markets.  There will be a longer term requirement for other renewables and ancillary services like battery storage.  If conventional energy sources stopped getting their subsidies and had to pay for the costs of their environmental damage and military support (see article) then that point will happen even sooner.

In the meantime, it is important for people in the industry to continue to explain why the support is worthwhile now and they can feel smug in the knowledge that at some point no subsidies will be required at all.  When that happens, people in renewables can happily complain about the continued subsidies to the oil, gas, coal and nuclear power sectors without feeling like hypocrites.


Note to readers: We really welcome your comments on this particular subject.  Are there other reasons that we should be aware of? Should something be expanded in more detail?  Let us know in the comments section below.

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