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After years of breakneck expansion, Solar Energy is finally starting to face serious challenges to its unbridled growth as many governments around the world look to cut back on subsidies and expenditures related to green energy. The policies of the UK exemplify this evolving industry situation as the Tory government there is being accused of undermining green energy and even conventional energy sources.
Solar giant SunEdison exited the market selling its Mark Group back to management saying that recent cuts in renewables subsidies “will essentially eliminate the solar PV market in the UK”. The Mark Group then entered administration and cut jobs to trim costs substantially. These corporate actions come as the UK’s move to trim renewable subsidies is garnering particular criticism by many. The UN’s environmental program chief scientist cited the UK’s policy of cutting support for wind and solar power as inconsistent with environmental pledges made by almost 150 countries as part of a Paris Climate Change deal.
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The FT quoted Jacqueline McGlade, the UN scientist as saying “What’s disappointing is when we see countries such as the United Kingdom that have really been in the lead in terms of getting their renewable energy up and going — we see subsidies being withdrawn and the fossil fuel industry being enhanced.” The response from the British government is that these subsidies are no longer necessary and that it makes sense from an efficiency standpoint to push renewable power industries to stand on their own rather than relying so heavily on subsidies. Wind and solar cost competitiveness have dramatically improved against conventional fuels from oil to fracking in recent years.
The level of critique by companies and environmental experts might lead one to think that the UK was the only country considering these moves, but that is far from true. Germany, Spain, and the Czech Republic have all been looking to cut back on subsidies while even the U.S. is closely considering whether continued tax subsidies make sense in the current economic climate.
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There is a long debate in economics as to whether subsidizing industries makes sense especially when compared with the alternative of an unsubsidized free trade market. Subsidies for industry can make sense for nationally vital industries or for industries that are in their infancy and need help scaling up to an economically sustainable positon.
It is hard to make a case that solar and wind power are particularly vital to any given nation, but the infant industry argument may make more sense. Yet the issue remains as to when an industry should no longer be considered in its infancy. Should solar and wind power which are increasingly competitive or close to competitive with conventional generation sources still be considered infant industries? The answer probably varies from country to country but for wind power in Britain in particular, the answer is probably no.
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Wind power in Britain is particularly effective given the climate and the problem with continued subsidization of any particular power source is that it discourages needed efficiency gains in the industry. If the solar and wind industries are ever to be economically viable, they need to face real market pressures including the same pricing structure that confronts other generation sources in the wholesale market. For a while, this might be a form of death by a thousand cuts for the industry, but over time supply chain costs will fall and the industries will emerge stronger than ever.
By Michael McDonald of Oilprice.com
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Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…