Subscribe to Money Morning get daily headlines subscribe now! Money Morning Private Briefing today's private briefing Access Your Profit Alerts

Energy Prices 2013: Renewable Power Could Cause Your Electric Bill to Plummet

As we come to the end of an election campaign cycle, something else will be ending as well.

Wind subsidies.

A poster child for the ongoing debate over government support for renewable energy, the wind subsidy will expire at the end of 2012. Amidst the fog and din of a political war, Congress is not going to renew it.

The wind subsidy amounts to a tax credit of some $22 per megawatt hour. Critics note that the wholesale price of electricity in many parts of the U.S. costs $44. That means the credit accounts for 50% of the grid cost.

On the solar energy side, the primary federal subsidy provides a tax credit of 30% for the cost of installed equipment. That will drop to 10% at the end of 2016. Already, a separate cash grant for up to 30% for solar energy equipment expired at the end of 2011.

Of course,  both approaches have generated a considerable amount of criticism from mainly conservative opponents.

These critics claim that the only reason wind and solar are even in the game is because of these subsidies. Without them, they argue these sources of energy are not cost effective otherwise.

Then, there are others who prioritize environmentally friendly energy sources. But the penchant against government involvement and the assumption that federal subsidies are always an inefficient usage of taxpayer funds are at the core of the argument.

So, who is correct?

The Hidden Cost of Green Energy Production

On Monday, Pilita Clark wrote an interesting piece in the Financial Times exploring the net effect of renewable subsidies in the U.S. and Europe.

She highlighted a little considered result of wind and solar production: it runs the risk of destroying profit margins for conventional producers.

In fact, according to Clark, “Some utilities risk having as much as half their power generation profits wiped out by 2020 as renewables reshape energy markets say analysts at UBS, which recently downgraded RWE, the German power company, EDF of France, and the Czech Republic’s CEZ Group as a result. Other effects are only starting to be understood as the growth of renewable power soars.”

The result could be a dramatic decline in electricity costs.

That may seem like a great effect for a house or small business owner wrestling with high energy expenses.

But it is a very different matter for the other side of the equation.

Market prices could actually crash, as Clark notes, “because renewable power generators, which have large subsidies, low operational costs and free fuel, can offer cheaper prices than owners of plants running on conventional fossil fuels.

The crucial element revolves about prices during peak times. These are weekday periods in which demand is highest and where power providers make the bulk of their revenues. Prices and volumes are always elevated during peak times.

Yet the experience in Germany, where a government is moving a portion of the nation’s energy infrastructure from reliance on nuclear to wind and solar, is of some concern to conventional generators. Evidence has already surfaced that solar power is diminishing the traditional peak profit opportunity.

Clark observes that wind power has demonstrated an ability in the American market to produce “negative prices,” situations in which power ends up begin sold at a loss. This has been the case in Texas, where more wind power has been installed than in any state. A recent study released by the Northbridge Group indicated negative pricing has increased sharply as wind farms spread over the past four years.

Not all observers accept such, and what defines an actual market impact remains contentious.

Nonetheless, subsidies reaching 50% of the wholesale price of electricity does provide an obvious incentive to sell electricity below generation costs.

Why not, if the taxpayer is footing at least some of that bill?

Two matters, however, are becoming clear. The first points out that the consumers are still footing a higher cost from the power because it is being generated via taxpayer subsidies. And on that score, while the tax credit for new equipment is expiring, other subsidies of the electricity generated using existing plants will continue.

Second, the largess from lower prices is not yet being experienced by the end user.

There are only indirect connections to the monthly bill. Even in a place like Germany, where renewables are apparently having a major impact, there are moves to blunt their effectiveness in lowering prices.

As profit margins decline, German power transmission companies have announced an almost 100% increase in fees on renewable-sourced electricity. Now, many observers point out such additions will disappear once the infrastructure is completed. But in the interim, these new duties will hit retail consumers hardest. That is because many businesses have an exemption to protect their international competitiveness.

Ultimately, electricity rates may be coming down because of government subsidies. Just how much of that ends up in the pocket of a normal consumer is unknown.

On the other hand, this may not be an encouraging signal for the retail investor.

As Clark aptly explains, “On the upside, more renewable energy should mean fewer carbon emissions. But if you invested your pension money in what you thought was a solid, safe utility, you may want to reconsider. And lower market prices could discourage new power plant investment.”

Seems one hand giveth, and the other hand taketh away.

Related Articles and Links:

Join the conversation. Click here to jump to comments…

About the Author

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle

Read full bio

  1. jim | October 24, 2012

    are you saying that investing in utilities today is not a safe investment ?

  2. Jeffrey Michel | October 24, 2012

    Here in Germany, the present 26% contribution of renewable energies to electrical power generation has definitely reduced price volatility. The country would otherwise be at the mercy of coal and gas imports, which as a result would concurrently be exerting upward pressure on the global pricing of these commodities. Yet the "almost 100% increase in fees on renewable-sourced electricity" cited by Dr. Moors is only partially due to capital costs for new solar and wind power installations. A major price boost next year will result from feed-in tariff carryovers from 2012. Furthermore, industrial facilities are exempted from paying these fees, even though 26% of the electrons they receive from the grid have likewise been provided by green power suppliers. Private households thus carry an excessive share of renewable energy price increases. One kilowatt-hour of electricity currently costs 32 US cents for retail customers, increasing to a half a dollar by 2020 according to some estimates. This prospect reflects the technical replication necessitated by intermittent decentralized power sources. Even if Germany achieves its goal of 80% renewable power by 2050, 60% of current conventional generation capacity could still be required to insure grid stability under all meteorological conditions. Perhaps Dr. Moors should organize a US-German conference on some of these issues.

  3. ed the grocer | October 24, 2012

    Someone said the new gas turbines are coming on at 3.4c/kilowatt to break even. Won't that be fun.

  4. Steve | October 24, 2012

    How does this differ from the US government building the Hoover and other dam projects? They used public money, sold the power they generated cheaper than other producers, and had zero fuel costs. Whenever something new comes along those who are part of the status quo will howl and whine, because they were not forward looking enough to see it coming, then with their deep pockets they will try to prevent the others progress. There is a huge environmental cost associated with fossil fuels, which the public now pays indirectly, none of this cost is borne by the producers, it is an indirect subsidy to them.

  5. EdInvests | October 24, 2012

    Dr Moors,
    It seems to me that you left out the projected power demand vs projected power availabiliy. You seem think it important in crude, why not equall important in power?I know that here in Texas we are running at only a 4% surplus during peak demand months, and we have a lot of peak months. We are also having to de-commission some older, polluting coal plants. In the long term, it also seems a lot easier to maintain a power plant that is confined to a relatively small area, compared with the thousands of wind generators spread over many square miles. The vast remote areas are also a problem in getting the transmission grid connected to them. Solar is great, but we get some really bad hail storms around here that could wipe out a solar farm in minutes. I like alternative energy, especially solar, and progress is being made in efficiency and cost. It makes a lot more sense to put solar at the demand point (houses and buildings).
    It seems the residential demand for power is dropping due to higher efficiency A/C and appliances, but business demand is going up steeply due to the concentration of large computer systems and data storage units that gobble it up in both power consumed and necessary cooling that comes with the high power/heat generation. My DFW area has high growth, more housing and more corporation growth, but the wind farms are 150 to 400 miles away, and really don't make a dent.
    I also have no problem with subsidies with an end point for an industry, but not a specific company. I am hoping the disfunctional Congress will finally do somthing with HR1380, or whatever it might become, to stimulate the switch from gasoline to natural gas. It would be a win for all of us.
    In general, I think power companies will be fine for many years here and in the rest of the US. I won't be selling any of mine for quite some time.

  6. ed the grocer | October 24, 2012

    We always justify the process because we 'can afford' it. We have tonnes of gas, the tar sands, the US dollar is still used, so why not use the stuff? Oh, it 'creates jobs and adds to the GDP. Jeffery suggests that the Germans don't want to be at the mercy of the importers. That is the place to start. why not a real effort to become efficient. Look at the benefits. Way less war, warm homes, clean air. clean water, work with purpose, investment at home, improved technology, the list is endless. Which politician comes close?

  7. Andrew Levitt | October 25, 2012

    Dr. Moors dabbles in electricity economics at great risk to his reputation. Let's start with a small list of errors:

    * $22/MWh is a tax credit, not money. It's generally worth somewhat MORE than $22 to the owner of the credit, since they don't have to pay tax on it.
    * Lets not forget all the direct and indirect subsidies that go to every other energy source.
    * Wind power is cost effective without subsidy in plenty of areas. It's just that you can get MORE wind in MORE areas with a subsidy. This is an identical situation to all the other energy subsidies: more is often judged better.
    * Lower profit is not a 'hidden cost', because it's not a cost. It's just lower profit. And lower profit compared to what?
    * And why are you using an EU/UK study for a US analysis? Here and now, electricity economics is totally dominated by super-low natural gas prices from high shale gas production: EU and UK gas prices are 5x higher than here. Generators ARE hurting here, but it has .01% to do with renewables and 99.09% to do with shale gas.
    * And almost half the country is deregulated now anyway, and the utilities don't own any generators any more, and so their profit isn't affected by wholesale electricity prices. And the part of the country that IS regulated, well profit there are fixed at a regulated level, so again, no impact.
    * Neither solar nor wind has *ever* been the marginal generator during peak times. Ever. On any grid. On that day in the distant future when it is, the "utilities" will mostly own solar plants, and so their profits will be just fine.
    * Consumers are not footing a larger bill, even including their contribution to subsidies. Due to the aforementioned lowering of profits for generators, consumers end up paying less, including subsidies. See numerous studies on the merit order effect of renewables.


  8. Chris | October 31, 2012

    Excellent points guys ! I have similiar good views on renewables although I am not much of a tree hugger. (Environmentalist are mainly fat cats at the top used by big oil to restrict supply and thereby push up prices or limit oil competitors). I like renewables like solar more because the average consumer can just say screw you to the grid utility companies and oil giants sucking them dry with high prices and can erect a solar panel to power their house (with optional battery backup) and have an electric vehicle (which are getting better over time). It's about putting the power in the people's hands and not big corporations price fixing ! Financial freedom. Its about being able to say screw you, I'm going to make my own power/"oil" !

    However I still think that conventional power and oil & gas, etc have a role to play – the world is not going to change overnight to green and that means peak oil is going to have a massive impact and there are still lots of profits to be made by investing in companies exploiting traditional sources (preferably the ones that damage the environment less than other and have a good track record).

    Therefor it makes sence to have a good exposure to clean and traditional energy company stocks over the long term to reap the benefits. Maybe 70 percent tradional and 30 percent green (at the moment, but more green and less dirty over time) and incuding solar, wind, car battery companies, etc. But go for the biggest of these green companies as they are the least to go bankrupt in a world that can't make up its mind between green and traditional energy.

    I agree with a lot of the comments on here. Also, the more solar and wind we use the more the prices will come down – mass production. The subsidies are also not permanent and just a means to a better end – they SHOULD become less and less over time and prices come down for green tech.

  9. Sheri | February 14, 2013

    Isn't the oil industry receiving subsidies too?

Leave a Reply

Your email address will not be published. Required fields are marked *

Some HTML is OK