Economists call it market failure, but for those involved in green energy, ‘the valley of death’ seems somehow more appropriate.

Developing new technology in a profitable way can be impossible for companies competing with mature large-scale energy providers. The gap they face between the conception and commercialisation of new energy is dauntingly large and littered with past failures. For many, finding finance is the hardest part. Clean energy may have a certain tug for the city’s financiers, but early-stage projects are rarely completed within the mandated time frames of venture capital or the risk parameters of Wall Street.

The first modern wind farm, built in 1980 by US Windpower, produced electricity at around 30¢/kWh – a price that reflected the production conditions at the time. Wind turbines were extremely expensive, and their capacity output was relatively low.

Things improved dramatically in the decades that followed. According to research by Bloomberg New Energy Finance, since 1984, the cost of levelised wind energy has fallen by 14% for every time installed capacity has doubled. That success is the product of immense technological improvement. Today’s turbines are bigger than ever before, blades are longer and more aerodynamic, and gearboxes are vastly improved in terms of
efficiency. Together with the experience taken from three decades of work, the quality of modern technology has also helped lower the rate of failure, and reduced many of the costs associated with operations and maintenance.

Return on investment

2012 was a record-breaking year for the US wind industry. According to research by the American Wind Energy Association (AWEA), $25 billion of capital was funnelled into the industry by the private sector, with 13.1GW of power capacity installed. Europe did equally well – 12GW of capacity was added in spite of lingering economic uncertainty across the continent.

The economic achievement of wind power is about far more than the industry’s technological innovation, however. Much of the sector’s success is predicated on a system of state subsidies that have existed since its inception.

There are good reasons for this. Without central support mechanisms, the costs required to produce a single kilowatt-hour of electricity remain totally uncompetitive. After all, manufacturers of wind are competing with the traditional suppliers of electrical power.

These industries are the beneficiaries of vast capital investments – with huge national infrastructures and established business models. They’re also the beneficiaries of their own state subsidies; today, through reliefs on capital expenses, exploration and development, and in the past, through central research programmes. Nor are fossil fuels usually taxed in a way that reflects their environment externalities – an implicit subsidy, according to some critics.

None of this stops established energy companies from criticising government attempts to ‘skew the market’. Speaking after an announcement to scrap expansion plans at one of its nuclear plants, Excelon Corporation spokesman Paul Elsber was clear about where the blame lay. "We removed these previously deferred extended power uprate projects from our programme in response to market conditions and artificially depressed power prices resulting from subsidised wind energy," he said.

Those companies that criticise state support for wind power would do well to bear in mind the source of their own success as well as their natural
advantages. Where power plants can be built close to their point of consumption, the location of offshore and onshore wind farms are driven by natural, rather than commercial, grounds. The transmission lines needed to support the sector are, at least at this stage, an expensive addition to the costs of production that requires offsetting.

Market forces

Even with generous state subsidies, the price differences among wind, natural gas and coal reflect industries at very different stages of technological and economic maturity.

According to the US Energy Information Administration, the price of advanced natural gas in the US is 6.3¢/kWh, significantly lower than wind
power, currently sold at 8.2¢/kWh. It’s hardly surprising that the core utility companies favour the lower-cost solution.

Of course, demand exists from corporates such as Bloomberg, Google and IKEA. But it is subsidies from central government that appear to prop up this demand – mitigating the additional costs of a new industry with naturally higher production costs. The importance of these public finance initiatives in driving the early success of wind power is hard to underestimate. But understanding the precise dependence of today’s market on state subsidies is more difficult and certainly more controversial.

Some analysts, such as David Kreutzer, a researcher at the Heritage Foundation, think the benefits are a myth altogether. "Subsidies don’t make these unaffordable energy sources affordable, they just change who pays," he said in the Wall Street Journal.

Others, including CEO of the Tang Energy Group Patrick Jenevein, claim subsidies might even keep prices higher. "Government subsidies to new wind farms have only made the industry less focused on reducing costs," he claimed in another Wall Street Journal op-ed.

It poses an important question: is investment dwindling because government subsidies are removing incentives or is policy uncertainty – stoked in part by the critics of government action – the cause of underinvestment? Recent events in Europe and the US suggest Jenevein’s analysis is back to front.

Suggestions that the PTC – a federal tax credit that has shaved around 30% off the cost of manufacturing turbines – might be rolled back as a response to the US fiscal cliff sent shockwaves through the industry. The amount of activity crammed into the fourth quarter of 2012 – at the point of possible expiry – suggests just how valuable the industry perceives these subsidies to be.

AWEA’s own view is clear. Without the production tax credit, many of the jobs and factories set up by the industry would be lost. Christopher Helman, an energy writer for Forbes magazine, was apocalyptic. "The end of the tax credit could very well mean the end of the wind industry," he said.

Tight margins

Uncertainty over subsidy regimes has increased outside of the US, too, as different governments announce their own contractionary fiscal policies. In the UK, public finance for onshore wind fell by 10% in April after political infighting caused a string of delays to the energy bill. The short-term effect was similar to that in the US – a ‘dash to wind’ that saw manufacturers exploit the existing regime, constructing 60% more turbines than the same time last year.

The long-term effect is considerably less rosy. Together with tax breaks for shale gas and an army of well-organised conservationists, policy uncertainty is likely to affect the industry’s development.

"The government’s shambolic review of support for renewable energy has done huge damage to investors’ confidence in the UK," said UK shadow energy and climate change secretary Caroline Flint.

None of these trends are likely to disappear. The wind industry in Europe and the US will need to get used to a future where its dependence on subsidies is questioned, and where the wider renewable sector is included within the category of things to be cut. At the same time, governments need to understand the difficulty wind energy faces in competing with established fossil fuel companies and traversing the so-called valley of death.

Few people believe that subsidies have no part to play in the future of wind. What’s disputed is whether they help or hinder its development. Those who view their presence as an obstruction would do well to avoid ideology. A certain corner of US and European thought will always be devoted to criticising state intervention regardless of its social and economic utility. It’s often said that if an energy source – or any business for that matter –
needs help from government, then it shouldn’t exist in the first place.

Anyone who truly appreciates the value of wind power knows this logic is flawed. The need for diversification in the energy supply has become critical as the world experiences converging crises of climate change and fossil fuel depletion. This is the point at which debates about the effect of subsidies on the wind market should really begin.