Prof. Machiel Mulder: ‘Subsidies for wind and solar power have no positive effect on the environment, and are bad for the electricity market’

Subsidies for sustainable energy like wind and solar power will not reduce CO₂ emissions as long as there is an emissions trading system. This is the thrust of the inaugural lecture by FEB economist Machiel Mulder on Tuesday 11 March 2014. However, these subsidies do disrupt the European electricity market and endanger supply security. Mulder states that governments would be able to use their resources more effectively by stimulating fundamental research into energy savings and sustainable energy.

Mulder: ‘The percentage of sustainable energy is growing, with the main aim to reduce CO₂ emissions because of the climate problem. One of the ways governments stimulate sustainable energy is by making subsidies available. The best-known example is probably the solar energy grant system in Germany, whereby producers get a guaranteed allowance for the solar power they supply.’

No environmental benefit

‘At first sight the environment seems to be the clear winner with these investments in sustainable energy. However, the opposite is actually the case. This is because the European Union has set up an Emissions Trading System (EU ETS) to limit CO₂ emissions: only a limited number of CO₂ rights are available and polluting companies have to buy additional rights on the market, while companies that only emit a bit can sell their surplus emission rights.’

‘Energy companies are currently investing in solar energy with subsidies; they then sell their emissions permits thus keeping the price of CO₂ low. Polluting companies can thus buy extra permits at dirt cheap rates. This is why subsidizing green energy has had no nett result on CO₂ emissions.’

Disrupting the market

‘Subsidies for sustainable energy thus lead to serious disruption of the energy market because there is no stimulus for energy companies to react to the demand for energy. The price of a unit of solar or wind power could even drop to zero because the costs for the windmills or solar panels have already been paid. Production itself costs virtually nothing. However, energy companies always receive a guaranteed allowance and thus continue to invest in sustainable energy. It’s free profit for them. This in turn leads to overcapacity and huge price differences between, for example, the Netherlands and Germany, resulting in situations like the Aldel one. These subsidies are ruining the European electricity market.’

Supply security

‘At the same time, this one-sided focus on sustainable energy is also endangering supply security. Because electricity prices are very low, energy companies will no longer invest in gas or coal-fired power stations. And these power stations are needed to guarantee good supply security. After all, the supply of wind and solar power fluctuates enormously and is uncontrollable. If the wind doesn’t blow or the sun doesn’t shine, power stations will be needed to meet demand.’

Alternative policy to limit CO₂ emissions

‘This is not to say that governments cannot do anything to limit CO₂ emissions. CO₂ emissions are a global problem. The greatest effect is achieved by making environmentally-friendly investments from which the whole world can benefit. Fundamental research into energy savings: cleaner cars, better central heating boilers and new insulation technologies are just a few examples. Another option would be more efficient conversion technologies for engines and power stations. If such knowledge was openly available, everyone in the world would benefit and you would really be doing something towards limiting global CO₂ emissions.’

Curriculum Vitae

Prof. Machiel Mulder (1960, Schoonebeek) is professor by special appointment of Regulation of Energy Markets at the University of Groningen. The chair was endowed by the Energy Academy Europe. In addition to his appointment at the University, he is associated with the Authority for Consumers and Markets (ACM) as specialist in Regulatory Economics. He previously worked for the Netherlands Competition Authority (NMa) and the CPB Netherlands Bureau for Economic Policy Analysis.

Read the full inaugural lecture (in Dutch): ‘Balanceren in onzekerheid; zoektocht naar de optimale regulering’. [Balancing in uncertainty; in quest of the optimum regulations] (is no longer available)