I Need Some Help on Alternative Energy Subsidies

Next week I am on a panel talking about alternative energy.  These guys have already told me they don't want to re-fight the global warming science battle at this venue, and my guess is that there will be a lot of pragmatist corporate types who won't really care about individual liberty or role-of-government issues  -- they will only care if there is money to be made, even if it is by rent-seeking.  My best bet, I think, will be to discuss why alternative energy is a bad investment.  My sense is that it is a bubble investment, like goofy Internet stocks in the 1990's or housing in the 2000's.  Already, I think we see the crash in the corn ethanol business.

My two assumptions are

  • I can't think of any industries that were initially heavily subsidized that eventually found their way to competing successfully and growing without subsidies.
  • With the exception of agriculture, the public's tolerance for growing subsidies to a single industry eventually wanes.

I would love for commenters or emailers to send me contra-examples if they have them to either of these assumptions.  In particular, can you think of an industry that could not have grown initially without subsidies eventually prospering without subsidies.

To the second point, I looked at the numbers two ways.

  1. In Germany, which is often held up as the model, feed-in tariff subsidies are between $0.06 (wind) and $0.50 (solar) a Kwh.  If the US reached a goal of 20% of its production in wind and solar (total production today is about 4000 billion KWh) then the subsidy would be between $50 billion and $400 billion a year.  It is hard to imagine these remaining popular for any period of time.  (lots of German numbers here and in the linked PDF)
  2. Venture capitalists and investors are expecting the growth stocks they invest in to grow at, say, 30% a year.   Let's assume alternative energy companies grow at 30% a year and the number of companies, attracted to the growth and subsidies, doubles every two years.  In this scenario, assuming unrealistically that the supply curve for alternative energy is flat rather than upward sloping, the amount of subsidies to support this growth would have to nearly double every year.  They would increase 21-fold in five years and 440-fold in 10 years.   In fact, given the shape of real supply curves, new more expensive capacity at the margin is replacing cheaper and cheaper alternatives, resulting in the need to grow subsidies even faster to keep up.   Never has happened, never will.  Once the industry outgrows the government's willingness to grow subsidies, the whole thing crashes.

(PS - the subsidy could also be in the form of taxes that increase the cost of alternatives, or production and/or import restrictions on the alternatives).

Any help along these lines in the comments is appreciated.

Update: This seems relevant:

First Solar shares skidded 8% Friday to close at $116 after the company issued a murky business outlook beyond June. Until then, however, "orders look very strong," First Solar CEO Robert Gillette said in a post-earnings conference call.

This commentary, along with price pressure and expected subsidy cuts solar panel makers get from the German government is making investors a bit more wary of First Solar, whose shares have been on a bumpy ride the past 18 months....

First Solar, helped by government tax credits extended to businesses for using solar power, has rewarded its investors since going public in November 2006 at $20 a share. The stock peaked at $317 in May 2008. But the shares have been skittish ever since.

Germany, the world's biggest solar market, is weighing a 15% cut on so-called solar feed-in-tariffs. This could make solar installations less attractive.

First Solar projects 60% of its 2010 sales from German-related contracts, according to Wedbush Securities analyst Christine Hersey.

Remember from above, the German feed-in tariff for solar is around $0.58 per KwH, or fully $0.50 above the price paid for the fossil fuel base load.  At this subsidy level, the US would be paying $400 billion a year in subsidies and/or higher prices.

First Solar has grown at over 150% per year for the last 3 years so the 30% assumption above is conservative, as is the assumption about the number of competitors doubling every two years.

Another interesting note - First Solar makes a pre-tax margin around 33% of sales, which is over 6x larger than health insurance companies make (and are excoriated for).  Is it any wonder Germany no longer wants to keep subsidizing First Solar's bottom line to levels far above most equipment manufacturing companies.


  1. rxc:

    The problem with your first postulate centers on the definition of "subsidies". SOme people think these are only direct grants, while others consider all tax breaks, including even allowances for depreciation, to be "subsidies". Without an agreed definition of this term, the rest of the discussion is just rhetoric.


    Electronics. It can easily be argued that the entire electronic business, including computers and semiconductors and radio, and including the Internet, was subsidized at first by the govt, through military programs that threw money at the technology, allowing it to figure out how to make stuff. GPS is probably the outstanding example that everyone understands. Now, I think most people would think the consumer electronic business to be unsubsidized, but some would say that the way we provide landfills for used electronics is a subsidy that insulates the industry from the cost of disposal. (See how the game works?)

    Aerospace. Same military argument, but you could also add the way that airports are financed, and aeronautical infrastructure is maintained, is also subsidy. And then don't forget the tax break on aviation fuel, and the way that the industry is insulated from the consequences of airplane crashes, ala 9/11. Of course they have some insurance, but I don't think the industry has enough insurance to cover a 747 crash into a full stadium or into a big refinery with release of toxics.

    Nuclear. Same military argument, with claims for insurance subsidies and now loan guarantees for new plants. At least they can point to the ~25 billion(?) that they have paid the government to deal with the waste, even though the govt has not figured out a political solution.

    Railroads: They were given ENORMOUS amounts of land in the west to build the tracks, and now are quite successful.

    Chemicals and petroleum. Needed to supply the military war machine. There is a reason we have "naval petroleum reserves" and a "Strategic Oil reserve".

    Note the pattern? LOTS of things are subsidized because they have military uses, and then they become household items. Because only the military is able to take the risk that the idea might work out in order to kill people and destroy things. The less nasty applications follow later (hopefully).

    I think there are LOTS of industries that have been subsidized and then become successful. And in a lot of cases, the subsidies will continue. And unless there are naysayers make a lot of noise about it, the public doesn't think about it, because the public doesn't care unless it hits them directly and heavily in the pocketbook or on the head. Then they complain.

  2. artemis:

    Nuclear Power is profitable in some cases (mostly lack of profits in nuclear relate to stupidly heavy regulation), and nuclear energy was the mother of all subsidies originally (in terms of size and government involvement).

  3. John Hitchcock:

    I agree the definition of the term "subsidy" can be overly broad and needs to be nailed down. I view a subsidy as an ongoing price control, where the government continuously pumps in tax dollars to keep the value of a product artificially high. If this view of "subsidy" is clarified, I can't think of any business sector that was heavily subsidized which remained profitable after subsidies were removed.

    Spain is a good example of the economic damage done by pushing wind and solar and other alternative energy. From my understanding, it takes more energy to turn corn into ethanol than the energy gained from the corn ethanol while this is not the case with sugar cane ethanol, but the US government subsidizes corn ethanol and puts up a road-block for sugar cane ethanol (since the US doesn't grow sugar cane). If the government quit subsidizing corn ethanol or allowed sugar cane ethanol, the corn ethanol business would collapse. And that doesn't even mention the increased cost of government-subsidized corn and lowered availability of the foodstuff due to the high demand for corn for the government-subsidized corn ethanol industry.

    And if you look at the former Soviet Bloc nations, where all business was government business, the picture isn't pretty. There are all sorts of facets of ugly there. But I'm sure none of this helps you in your preparations, other than to note what happens to governments that subsidize everything and the resultant effects to companies.

  4. Jeffrey Ellis:

    Two examples I can think of are aviation and space launch industries. Not sure this counts as subsidies, but aviation did not become commercialy affordable until the government started paying for mail delivery. Same story for space launches.

  5. Chris:

    Telecom - subsidies to encourage rural phone service increased the value of the overall network. Also, the Internet was subsidized / funded by the government for over a decade before achieving commercial adoption.

  6. Russ R.:

    I like the "simple math" approach for discrediting subsidies.

    One memorable example is shown here in relation to coat hanger tariffs. To protect a few hundred $30k US jobs, the government imposed a tariff on Chinese coat hanger imports, which cost consumers more than $120m per year, or >$200k per job.

    The same concept of "means expended vs. ends achieved" can easily be applied to alternative energy. The first, and most obvious metric is "subsidy dollar costs vs. GHG emissions reduced". Unfortunately, the units here aren't exactly intuitive, since most people don't encounter "tons of CO2 equivalent" in their daily existence.

    IMO, better metrics are "subsidy dollar costs vs. percentage of emissions reduction target achieved", or "subsidy dollar costs per degree of warming averted". (The latter is less simple, but can be calculated using the MAGICC/SCENGEN model, which employs the IPPC's preferred climate sensitivity values, thereby avoiding argumentative rabbit holes.)

  7. Max:

    @Artemis: This was only because nuclear energy (and nuclear bombs) were deemed national prestige and security issues. If civil nuclear power plants were not highly controlled by the government, electric companies still would have built some (though not as many as today), because they are perfect for general energy production. They have a constant product, they can generate GWs without taking up much space. Yes, initial investment costs are high, BUT the dynamic costs associated with actually producing energy are very very low.

    Regarding feed-in-tariffs: The problem here is that those feed-in-tariffs only work if the government is forcing the electric distributors to buy it, even if they don't need it. You can only make money on this, if you force the energy market to accept them. Even with subsidies that pushed solar energy to the equivalent of coal or nuclear power, you would have to force the market to take them sometimes, because a dynamic energy source whose actual power is variable is not easily incorporated into the grid. There are moments, when peak solar power forces other power plants (mostly water) to shut down or even worse to let some water rush through because they had to react very fast. So, the ultimate point is, feed-in-tariffs only work if you force the energy market to buy it, which will have negative consequences to other assets in the grid.

  8. Scott:

    The railroads are the only ones that come to mind in terms of being subsidized and then being profitable. And that is only for freight. Passenger traffic is highly subsidized.

    Someone could try to make the claim about hardrock mining being subsidized since we're still operating under the mining law of 1872. If you manage to patent a claim on government land you get title to the land for around $2 an acre IIRC. Not that much land is patented these days.

  9. me:

    Ah, subsidies... they make no economical sense in each specific case, but there is plenty of evidence that they can be used to spur growth and generate new industries. It's hard to argue against that, but I wish that the total number would be limited year over year to a fixes maximum budget percentage and that they came with defined phase-out dates with a maximum proscribed by law.

  10. iceberg:

    Scott mentions railroads as a subsidized project that worked- I would point out to him Thomas DiLorenzo's book 'How Capitalism Saved America' which discusses the failure of railroad and canal subsidies, and the success story of James J. Hill's private railroad 'Great Northern'. See chapter 7, pages 110-134.

  11. Anon:

    The initial development of the Internet was funded through the government. Does that count as a subsidy?

  12. TomB:

    To follow up on Jeff Ellis's comment, I believe the aviation industry is a commonly used example for how tariff, subsidies, and protectionism can be a winning strategy. I think Krugman uses Airbus and Boeing as examples in some article somewhere. My crude recollection is that by protecting the industry or firm, you create a super giant that can be competitive globally. Because of Boeing and Airbus's market power, smaller firms have a difficult time competing. So the idea is probably to do something similar with renewables - build up domestic companies so they can gain market power and then beat start-up competition from abroad.

  13. Captain Obviousness:

    rxc stole my thunder - military research has led to lots of technologies (maybe not entire "industries", with the exception of nuke power). But military (or NASA) spending on technology is different from direct subsidies to industries. Giving money to Boeing or Lockheed (or having them bid against each other) and saying "design a plane that can do X Y and Z" is a lot different than a bunch of bureaucrats deciding that a particular technology is the future and subsidizing it. In the former scenario you have private industry competing for a gov handout, in the latter you just have politically favored institutions getting free money to do what they were already doing.

    Also, there's an argument that much of the manufacturing capacity of the US in the 1950's and 1960's was a result of a "subsidy": WWII. By 1946 the manufacturing capacity of Europe and Japan lay in ruins, meanwhile the US manufacturing capacity had been built up (and not destroyed by bombers) during WWII. When US factories turned from making weapons to making consumer products, while the rest of the world had very little capacity for mass production, they had a huge advantage over the rest of the world. Our labor might not have been as cheap, but we were so much more productive due to our comparative advantage in manufacturing and mass production that no other country could begin to compete with us.

  14. Craig Loehle:

    I think a big issue for rent-seekers is risk. In this case, there is a significant risk that the subsidies will suddenly be pulled. This happened recently I believe for biodiesel. Even a temporary gap in a subsidy program will kill an industry dependent on a subsidy.

  15. Allen:

    The problem with arguing that NASA or military funding lead to XYZ technology is that, well, it didn't. For example, arpanet may have brought about http technology but it did not bring about the internet as we knew it 10 years ago let alone today. The same with pointing out that things like Teflon came out of NASA research. What happened was gov't funding lead to some technology being created but it didn't lead to it being useful. Someone else saw what was there and realized something useful could be done with it.

    It's especially troubling to see the government get the credit for things like the internet. The implication is that without the funding, the internet would've never happened. While this can't be disproven, it can't be proven either. And it doesn't make sense since something like the internet rises out of our basic human desire for fast communication and useful information. It it wasn't http, it most likely would've been something else.

    @Coyote ---> Have you checked out Robert Bryce much? He's got a good book out and publishes a lot of articles on the subject. I'd suspect a source like that would help to show that despite 40+ years of subsidies, Denmark's wind industry isn't any closer to standing on it's own two feet than it was 40-something years ago.

  16. ben:

    Somebody else has mentioned Krugman. I have not read his work, back from before he sacrificed his credibility, but I believe his basic idea is that there can be economies of scale in industries and the market can be tipping. Thus, subsidies can tip the market your way. Once tipped, and scale is achieved and the industry locked in to your country and not somebody else's, the need for subsidies disappears.

    Note that the subsidies are not global welfare enhancing, in fact to the extent they prevent the efficient manufacturer from winning the market they are welfare destroying.

  17. David:

    Re: Nuclear

    Civilian nuclear energy was a special beast from the beginning. All nuclear technology was held by the government and it was against the law for non-governmental entities to do nuclear on their own. Atoms for Peace in 1956 started the framework for sharing this with civilan companies (and also to cooperating foreign firms). The series of demonstration nuclear power plants had some subsidies but mostly were risk shared through industry groups. Fuel at this time was owned by the US Govt (AEC) and leased to the utilities who had to give it back when done. Gradually a more commercial arrangement was achieved where private ownership under regulation was achieved. The subsidy of insurance (price anderson) was a government backup on a very high private insurance pool. This act also granted "no-fault" insurance so that expensive lawsuits would be avoided. There has never been a claim on the gov't part (even after Three mile island). So this is not truely a subsidy like flood insurance but a reinsurance.

    Today you cannot get a bank to loan for a nuclear plant (but subprimes yes) due to fears that the licensing will be hijacked by intervenors and the project stalled or killed. The guarantees are indended to get the first plants built and give confidence that the regulatory process is reasonable. You could have the same impact by reforming the regulatory and legal environment.

    Under cap and trade or other extreme environmental regulation, more and more industries would look like nuclear is today. They will be trapped by their permit process. So they will ask for subsidies to reduce the risk of that regulatory trap.

  18. KTWO:

    The very first comment is correct, you must define subsidies. Virtually everything can and will be called a subsidy by some loose definition.

    Industries that were weaned from subsidies and succeeded on their own? Few come to mind but there may be some.

    Subsidies, at least in theory, provide capital and permissions that are otherwise not available. Thus, almost by definition, it provides them at an artificially low price and demand will be high. That is now the economic policy of our government and many others.

    However much of what is being done is rent seeking rather than subsidy. Groups and individuals try to enlist the force of government to secure private income and/or economic security.

    The rent seeker may provide some useful goods and services, Or he may provide nothing at all. Either way, he attempts to convince others that the rents are crucial and reducing them would be disastrous. Any type of propaganda that seems likely to work will be employed.

    FUD; Fear, Uncertainty, and Doubt will be employed. So will promises created from creative accounting. And more covert efforts will involve corruptions such as bribery, insider knowledge, and collusion.

    Look at public schools, or labor unions, or NASA, or farm price supports, or public transit systems, or any other economic activity with substantial government controls and you will see the tactics at work.

    Look at TARP. Our entire civilization was going to collapse if huge amounts of treasury money was not routed to favored banks and financial firms. And later to General Motors, etc.

    And it was "too bad" for those less favored.

  19. Ian Random:

    I guess the problem with alternative energy, is that a lot of those ideas have been played with for years with no real breakthroughs. I don't see how throwing any kind of subsidy for production will overcome their fundamental flaws that being intermittency and diffuseness. The power they produce is not suitable for the grid with or without "smartness" added. The question I see, is there a process that could handle this second rate power to make an input to another process like compressing air in wells for later generation. I wonder if the electrical generation equipment could be removed and the technique for heat generation with a rotating cylinder inside another used for greenhouses.

  20. Ted Rado:

    What is missing in all this is a straightforward engineering study of each potential energy source. This would lay out the process, technology, raw material supply, etc., and determine capital and operating costs. Sound decisions as to which schemes to pursue could then be made. The fact that standby thermal power must be provided for solar and wind energy should have been part of the original studies. The cost of this standby power (capital, labor, fuel, etc.) would have to be added to the direct cost of solar or wind energy to determine the true cost. For a tiny amount of solar oe wind power, standby can be provided by the existing system. When it becomes substantial, dedicated standby must be provided. Apparently, only recently has all this dawned on the proponents of wind and solar power. (Either that or they are crooks!)

    Private industry does this routinely. Should we build a chemical plant to produce product "X"? Where, what process, what raw materials, who are the customers, market size and growth, probable selling price, etc. What does the existing and potential competition look like? Only after all these studies are done and show encouraging results is any significant money spent on research, development, and engineering work. In this way, wastage of funds is minimized. Had this been done with ethanol or any of the other energy schemes, we would have saved piles of money and avoided collectively looking like idiots.

    The normal economic forces drove mankind's search for better ways to do things for centuries with spectacular results. Government diktats can do better?

    As regards the arguments related to military R&D, this is driven by national security factors. The Germans ran WWII on synthetic fuel. It worked fine, but is not economical and hence is not done in peacetime. The fact that many useful civilian applications come out of military research is a pleasant, unexpected, byproduct that has nothing to do with the original intent.

    If economic forces were left to do their work, profitable alternative energy schemes would be found as oil, gas, and coal prices rise. Government mandated schemes will result in funds being diverted from ideas proposed by knowledgeable technical people to edicts from our dear friends in Washington.

  21. Dr. T:

    "I can’t think of any industries that were initially heavily subsidized that eventually found their way to competing successfully and growing without subsidies."

    You need to add a caveat about defense contractors. They don't get subsidies, but the military pays R&D costs, set-up and retooling costs, and buys each item (jet, missile, tank, body armor, etc.) at cost plus guaranteed profit. Some of the defense contractors were able to make money in the civilian market on spin-off products (such as Humvees), but that's because all the R&D and sunk costs were previously paid by us taxpayers.

  22. Craig Loehle:

    A subsidy for research that led to the internet should not be compared to "clean" energy subsidies. The internet was a feasible idea, just needing to be launched. Wind power and solar will never pay for themselves nor replace regular power sources no matter how long they are subsidized. Pielke Jr. talks about magic solutions--wishing will not make wind overcome the intermittancy problem.

  23. John Dewey:

    Allen: "For example, arpanet may have brought about http technology but it did not bring about the internet as we knew it 10 years ago let alone today."

    Arpanet was certainly not the only packet switched network in existence. SITA, a consortium of international airlines, introduced their packet-switched High Level Network in 1969, the same year Arpanet became operational. Further, the U.S. Defense Department did not even fund the invention of the packet switched technology first used by Arpanet. Rather, they used the method developed by British National Physical Laboratory scientist Donald Davies. Finally, Arpanet was not even an internet. It was not a "network of networks", but rather a means by which university researchers chared computer time.

    Internet historian Ian Peters (www.nethistory.info) expresses best that the U.S. Defense Department did not develop "the internet":

    "Multiple events, multiple players, and multiple points of origin need to be mentioned in any sensible understanding of the emergence of the Internet. Any claim by a nation, project, person, or team of individuals, or participants in any single event to "the beginnings of the Internet" is rubbish."

  24. JBurns:

    One issue from a venture cap perspective. Alternative energy seems to be one of those industries where you not only have to develop the product, but selling the product is dependent on political acceptance, not just public acceptance. This means financial success means ignoring economic reality and delving into the world of political patronage. And in many cases you're not simply talking about lobbying Congress, you're talking about trying to convince local / regional political entities to support your product, etc.

  25. wintercow20:

    You might try to contact Peter Grossman, an economist at (Ball State?) who did a nice paper recently on the history of US alternative energy subsidies.

  26. gadfly:

    I found Peter Grossman's essay that wintercow20 suggested. Grossman concludes:

    Faced with an economic recession, President Obama has focused
    mostly on the vacuous idea of “green jobs” (Morriss et al. 2009) while
    still pledging to spend $150 billion over 10 years to “transition to a
    clean energy economy” (White House 2009). But the grounds for
    these expenditures are no different from the ones that gave us the
    synfuels, fusion, ethanol, and PNGV programs. Government still
    believes that energy markets are deficient because they are not transitioning to “a clean energy economy” on their own. But there is not
    the slightest reason to believe that that analysis is any more correct
    today than it has been for the last 35 years. Even if there is some sort
    of market imperfection, government is not likely to provide an
    improvement. Indeed, government failure, with its attendant waste
    of resources, seems certain to be the outcome.

  27. Daniel:

    Not only has Germany been held up as an example, but also Spain and Denmark.
    Here’s a paper that looked at Spain’s subsidies for renewables. http://www.juandemariana.org/pdf/090327-employment-public-aid-renewable.pdf The study found:

    • For every 1 green job financed by Spanish taxpayers, 2.2 jobs were lost as an opportunity cost
    • Only 1 out of 10 green job contracts were in maintenance and operation of already installed plants, being the rest working positions only sustainable in an expansive environment related to high subsidies
    • Since 2000, Spain has committed €571,138 ($753,778) per each “green job”
    • Those programs resulted in the destruction of nearly 110,500 jobs
    • Each “green” megawatt installed destroyed 5.39 jobs elsewhere in the economy.

    And here’s a paper that looked at Denmark’s promotion of wind http://www.cepos.dk/fileadmin/user_upload/Arkiv/PDF/Wind_energy_-_the_case_of_Denmark.pdf. This study found:
    • We hear that Denmark gets nearly 20% of their electricity through wind. This is incorrect. Nearly 20% of Denmark’s electricity is generated by wind, but because the wind doesn’t blow when people need the electricity, less than 10% of the electricity used in Denmark comes from wind.
    • Subsidies. Government subsidy of wind producers over the past decade amounts to roughly $376 million per year. As the decade has advanced, the rate of new building in Denmark has declined sharply — and to maintain their sales, just as in Spain, manufacturers have been forced to concentrate on exporting their technology to foreign markets (USA) where the subsidy potential is higher.
    • Employment. The public subsidy in Denmark per wind-related job created is 600,000-900,000 DKK per year ($90,000-$140,000 USD). This subsidy constitutes 175-250 percent of the average pay per worker in the Danish manufacturing industry.
    • Electricity rates. Thanks to a combination of expensive base power, taxes and additional charges, Danes pay more for their electricity than anyone in the European Union.
    • Emissions. The wind power exported from Denmark saves neither fossil fuel consumption nor CO2
    emissions in Denmark, where it is all paid for. By necessity, wind power exported to Norway and Sweden supplants largely carbon neutral electricity in the Nordic countries. No coal is used, nor will you find power-related CO2 emissions in Sweden and Norway.
    • Exports. Over the last eight years West Denmark has exported (couldn’t use), on average, 57 percent of the wind power it generated and East Denmark an average of 45 percent. Denmark sells this power to its neighbors at almost no cost, asking only that its neighbors sell some of their baseload power back to Denmark on the frequent occasions in which the wind does not blow there

  28. LRE:

    This doesn't directly address the rent seeking aspects, but it's the best back-of-the-envelope summary of the practicality of alternate energy. Written by a warmer too - but nice and factual.

    Sustainable Energy – without the hot air


  29. richard:

    In the Netherlands, the feed-in for solar power for 'small producers'(i.e. individual people, families etc) is 47 euro cent. For large scale producers (i.e. businesses) it is 42 eurocent.

    If you read dutch:


  30. JM:

    This blog writes cogently on alternate energy & why much of it is poor investing

  31. Scott:

    For some of the basic engineering on alternative energy, go look around Steven Den Beste's USS Clueless archives.


    There's a whole lot of stuff if you look around a bit.

    For a start, try


  32. Craig Loehle:

    Here is an example of a subsidy suddenly being pulled:
    as another example, there was a complete stoppage of wind tower construction in UK sometime last year due to funding issues, if I recall. You can't run a business when your only customer stops buying for some indefinite period of time.