Creative market destruction

The energy, my friend, is blowin in the wind

It is not fair.

A friend of mine – a young bloke full of energy and ideas – was living his dream. A steady job within the renewable industry was something many would find compelling – to be in the heart of the global megatrend.

The high hopes came down fast. The government of Finland announced their intention to cut down on incentives for wind power last summer. He was laid off almost immediately thereafter.

The long term prognosis seemed promising. If one looks at practically any outlook, the future of wind and solar power looks like the best investment environment – and an excellent industry to found one’s future on.

But then there’s the political aspect.

Total of 2500 MVA so roughly 700 wind turbines was promised to receive a tariff worth 83,50 EUR for every megawatthour produced for the first 12 years after installation. The opportunity for a higher over hundred euro tariff was already gone. Still the momentum was good. It was a race toward fool proof profits ensured by the government.

Fool proof or foolish?

The critical taxpayer is of course furious. How can this be? Why would we put common money on private pockets? There are multiple social media accounts, web pages and discussions dedicated on evaluating the impact of renewable energy incentives on Finland’s economy.

Usually these discussions revolve around large numbers. Perhaps more seldom is to try to understand, how much that pile of cash actually is. Let me list a few figures that should bring the discussion to context.

On the downside

  • The cumulative cost for wind power incentives by 2020 is expected to be 3 billion euros, meaning an average annual cost of 300 million euros in 2011-2020.
  • In 2014 the cost was about 80 million euros. In the budget proposal for 2016 the renewable energy incentives (feed in tariffs) are around 250 million euros.

However as a recent study shows, there’s an upside. Wind and solar power with low margin cost lower the electricity market price.

  • The benefit via cheaper electricity to consumers by 2020 is in the order of 3 billion euros per year, as evaluated by the study made in Aalto University.

So on the other hand the tariffs can be debated to be useful. The taxpayer gets some remuneration via lower electricity costs, that are result of increased amount of wind power in the grid. Whether or not the benefit is greater than the cost, is under debate.

The situation is of course difficult to the utilities. It’s so difficult that also the Aalto University study ponders whether the market change will force a profound change in the market structure.

A market reform, strong carbon market or both?

Even though the widely applaud Paris Climate agreement sets a clearly visible path toward clean energy future, the market model is debated. Should we get rid of all incentives and focus on strong carbon price instead?

The government of Finland has an answer. The new structure for renewable energy incentives is under research. A working group has been nominated by Ministry of employment and the economy to propose a new structure of incentives for boosting Finland’s Cleantech sector.

Pretty safe is to guess that the new model will be less abundant than the current one.

Are the incentives truly necessary?

I have had this question in my my mind for some time now. Is the wind technology of the year 2016 still so bad that only incentives are able to support this green dream?

According to the studies I have seen, an average wind turbine today can deliver electricity with the cost of 40 to 50 EUR for MWh. This is among the cheapest available. Should some grid balancing cost be added due to wind’s intermittency?

Just as comparison: Rosatom – the Russian nuclear company that is to build Finland’s sixth nuclear reactor to Pyhäjoki, located about two hours’ drive from Vaasa to the North along the coastline, has promised the plant will produce electricity to its shareholders at the cost of 50 EUR per MWh.

Unfortunately for both the average electricity market spot price is less. In 2015, the average price was roughly 35 EUR per MWh. There’s no business in these numbers.

So what should the government do?

Hit the big red panic button and close down the incentives for renwable energy once and for all? Or should it continue paying incentives that according to critics are a seriocomic overkill?

We are living some interesting times. The strong winter winds are blowing.

And that friend of mine is eagerly waiting.