If renewable energy is getting so cheap, why do we still need policies and subsidies to support it?

The question is raised by Kate Gordon, vice chair at the Paulson Institute in a blog on the Wall Street Journal website. What do you think?


Why Renewable Energy Still Needs Subsidies

The wind-energy sector won a long-fought battle in mid-July, when the Senate Finance Committee voted to extend the production tax credit, the most commonly-used subsidy for wind project development in the U.S., for another two years. But the road to credit extension wasn’t easy: The tax credit has been on-again, off-again for years, as has the parallel Investment tax credit for solar-project development. Meanwhile, in the U.K., the government has decided to effectively end the country’s “feed-in tariff” system for renewable energy, which requires utilities to buy the renewable power at a set rate, by significantly cutting funding to this program.

These subsidy debates come at a time when renewable energy is available at a historically low cost. A recent analysis from Lazard LAZ +1.19% of the levelized cost of various forms of energy shows wind, solar and biomass already cost-competitive with most fossil fuels. Even battery storage, the most expensive energy on the Lazard chart, is fast coming down in price; the Australian Renewable Energy Agency just predicted a 40-60% price drop for some battery technologies by 2020.

All of which raises the question: If renewable energy is getting so cheap, why do we still need policies and subsidies to support it?

Here’s why. Even if they’re now, finally, cost-competitive at the point of sale, low-carbon technologies are still working with an infrastructure—a utility regulatory system, a power grid, a highway system, a combustion engine-centric fueling system—built for a world powered by fossil fuels. These massive infrastructure projects were built up with public-sector support, including tax credits, low-cost loans, and outright grants from the federal government.

Companies designing new energy sources, in contrast, often have to build their own infrastructure and factor it into their costs. Take electric vehicles, for instance, which at the moment have a battery life that requires frequent charging on long trips, but which operate in a world of gas stations serving conventional vehicles. This mismatch of technology and infrastructure requires either significantly more R&D investment into electric vehicles to extend their battery life, or promotion of EV charging stations that will allow for these cars to compete on the open road.

Not only was the playing field built for carbon-intensive energy technology; it is still tilted strongly in that direction by ongoing government subsidies for fossil fuels. Despite the pledge by G-20 countries in 2009 to end handouts for fossil fuels, those subsidies continue to grow. Here in the U.S., the International Monetary Fund has found that the government provides $700 billion a year in subsidies to fossil fuel companies, equivalent to every American handing these companies a check for $2,180 each year.

The world’s citizens are increasingly clear about the major risks we face by continuing our dependence on carbon-intensive energy sources. Innovators and entrepreneurs are stepping up to the plate with amazing new low-carbon technologies to move us forward in a more sustainable direction. But just as with any other major economic transition—the Industrial Revolution, the Marshall Plan, the fall of Communism—there is a role for government policy, finance and investment in speeding the adoption the new, while easing the phaseout of the old.

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