Commentary: Renewable energy lessons from Europe

Europe has seen tremendous activity in the development of renewable energy as a response to climate change. As a result, some of the most important renewable energy firms operating in the U.S. are based in Denmark, Germany, and Spain. Stable, high-level policy is one reason Europe dominates this sector.

Over the past two years I have been collaborating with a German colleague to compare how the U.S. and Germany support renewable energy, trying to understand why the two countries have such different policies and what they can learn from each other. One thing we’ve learned: Sometimes the policies that get the most media coverage don’t have the biggest impact. Take cap and trade.

The limits of cap and trade

The European Union (EU) has a cap-and-trade system, an effort to limit greenhouse gas (GHG) emissions by issuing emission permits and allowing trading in those permits. Environmentalists criticized the initial round of permitting because the EU gave away the permits and put so many of them into circulation that the system had very little effect on energy prices. Not surprisingly, utilities had little incentive to shift toward renewable energy.

Europeans are now in the midst of highly contentious negotiations on the next round of cap-and-trade rules and limits, with various sectors arguing for exemptions, grandfather clauses, and other concessions. It’s impossible to predict the end result of these negotiations, but it’s clear that various industries are resisting a cap-and-trade scheme that will significantly raise energy prices.

Despite these difficulties, the EU will likely meet its Kyoto Protocol obligations, but not because all EU countries have reduced emissions. At the time of the Kyoto negotiations, the EU had only 15 countries. Since then, it has added 12 more, most of them former Warsaw Pact nations, all of which saw their economies collapse and their emissions decline after the Soviet Union broke up — around the time of the Kyoto agreement’s base year, 1990. Hence, those countries, such as Bulgaria and Hungary, are well below their Kyoto emissions goals, so when you add together the emissions of all 27 EU countries, the region as a whole is meeting its Kyoto target. But it is unclear how much lower emissions can go if these countries only use regulations to force them down.

Germany’s winning model

A better approach is to aggressively promote renewable energy technologies without tying them specifically to regulations for GHG reductions. Germany has a variety of policies for doing this that have had great success.

The German government promotes renewable energy for broad policy reasons, seeing it as part of employment and export policy, as well as central to energy security and environmental policy. The government is eager to support the industry because it creates jobs in an export-oriented manufacturing sector. For that reason, support for renewable energy extends across all the major political parties, and the sector has enjoyed a stable policy environment. Unlike U.S. renewable energy policy supports — which can change with every year, Congress, or administration — policies in Germany remain in place for a long time. They did not shift wildly when a new coalition came into power in 2005. The value of that policy stability — which also creates a less risky environment for investors — may be the most important lesson the U.S. can learn from Germany.

Germany and other European countries have a portfolio of policies to support renewable energy, many of which will be familiar to U.S. utilities, including tax credits, low-interest loans, and renewable portfolio standards (which they usually call quotas). But the most important German policy is one that does not yet exist in the U.S.: the feed-in tariff. This policy mandates that firms operating the electrical grid must connect up any renewable energy generator and pay that generator a premium for its output.

The size of the premium depends on the technology, and premiums are all, by U.S. standards, quite generous. Once a facility qualifies for a feed-in tariff, its premium stays in place for more than 10 years, and feed-in tariffs are available for facilities built as far out as 20 years from the time of the most recent law’s passage, 2000. A government body revises the size of the tariffs every few years, mostly lowering them, to keep up with changes in technologies, so the sooner a firm builds its facility, the larger its payment. The cost of the feed-in tariffs is spread among all German ratepayers, so no one region gets economically punished because firms locate renewable energy facilities in it.

Observers in Germany and elsewhere credit the feed-in tariff with the dramatic growth of renewable energy industries in the country, and its firms have become world leaders that produce for both domestic consumption and export. A government ministry estimates that the renewable energy industry has created 240,000 jobs in Germany — a substantial number for a country of only 80 million people.

Feed-in tariff coming to America?

Creating a U.S. feed-in tariff would be challenging, especially given the state-by-state regulation of the utility sector. Nonetheless, legislators have introduced bills in several states and in the U.S. Congress to do just that, though none has yet passed. A new organization, the Alliance for Renewable Energy, has sprung up to promote the idea. It is worth considering the feed-in tariff — whether we translate it from the German word for word or idiomatically.