Wednesday, September 24, 2014

Industrial Policy and Renewables Market

NYT has a nice essay on how Germany transformed the global solar and wind power markets. The article documents the adverse impact of renewables on the conventional power generators. A more interesting insight is how German public policies have incentivized a dramatic breakthrough in global renewables market,
Over the past decade, the Germans set out to lower the cost of going green by creating rapid growth in the once-tiny market for renewable power. Germany has spent more than $140 billion on its program, dangling guaranteed returns for farmers, homeowners, businesses and local cooperatives willing to install solar panels, wind turbines, biogas plants and other sources of renewable energy. The plan is paid for through surcharges on electricity bills that cost the typical German family roughly $280 a year, though some of that has been offset as renewables have pushed down wholesale electricity prices. 
The program has expanded the renewables market and created huge economies of scale, with worldwide sales of solar panels doubling about every 21 months over the past decade, and prices falling roughly 20 percent with each doubling. “The Germans were not really buying power — they were buying price decline,” said Hal Harvey, who heads an energy think tank in San Francisco.
In many respects, this is classic industrial policy and an example of why government initiative is critical to enable mass adoption of completely new technologies. For a long time the renewables market was stuck in a grid-lock. On the one hand, the lower price of conventional power made renewables an unattractive option for users, while on the other, the price of renewables could decline only as economies of scale kicked in and the market expanded and matured (leading to technological innovation).

The governments of countries like Germany and Spain took the initiative to break the stalemate by subsidizing the cost of production and guaranteeing an assured and growing demand. The result was a sharp convergence in the prices of conventional and renewable power. By this, they may have done more than any other country to advance the cause of renewable power sector and in fighting climate change.

The Chinese government too deserves some credit for this. Spotting the opportunity, the Chinese government supported domestic solar and wind equipment makers, who established dominance in the global market. The massive competitive advantage enjoyed by Chinese firms came by way of cheaper (subsidized) cost of capital and utility services, lower cost of land, fiscal concessions etc which made them runaway leaders.

While in both cases, these policies often resulted in wasteful and inefficient allocation of resources, its overall outcome has been undoubtedly positive. In other words, the industrial policies of German and Chinese governments have, unwittingly, subsidized and provided the thrust for the sustainable development of global renewables market. 

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