The European Commission has decided today to slap an import tax on solar panels from China. It is claimed that Chinese panels are sold at a price below their cost of production thanks to subsidies for solar manufacturers by the Chinese government. The cost of PV-cells has indeed dropped remarkably sharp since Chinese manufacturers have started to mass-produce them. And the flood of cheap Chinese panels has pushed European manufacturers out of the market and in some cases into bankruptcy. So, if it is indeed the case that this was due to subsidies, an import tax seems justified.
The fact that the solar panel market is now dominated by Chinese manufacturers is a particularly painful story for Germany. The country launched an ambitious subsidy scheme for the usage of solar power more than a decade ago. When the technology cost of solar panels was still 4 to 5 times higher than currently, Germany obliged its grid companies to pay as much as 450 euro as a feed-in tariff for the solar power produced on the grid. That is more than 10 times the current (wholesale) market value of that power! These stiff subsidies caused Germans to mount solar panels on their roof more rapidly than any other nation in Europe, or even the world. For your information, Germany isn’t a particularly sunny place. But all these costs of feed-in tariffs high above market values had to be compensated. Through electricity bills, German consumers pay EEG-Entgelte, and this payment for the green power has risen as high as 52,53 euro per MWh in 2013 and might rise to 75 euro per MWh next year. A large part of these costs are there for compensating solar power plants built when technology cost was still much higher than today, plants that continue to receive high feed-in tariffs.
With the heavy subsidies, the demand for solar panels soared and a market was created in Germany. Out of the blue, solar technology champions arose. And as these companies applied the robust German engineering capabilities, the sector saw a rapid increase in economies of scale and rapid decrease of technology cost which brought PV to the point where the Chinese took over. Adding their low-cost manufacturing capacities and – as assumed by the European Commission – subsidies, they brought down the cost of solar panels even lower, below the costs at which the German companies could produce. So, from a German point of view, this is more or less how the situation looks like. A German electricity consumer still pays a massive EEG bill, as a sort of pay-down on the capital necessary to develop economically viable solar technology. But now the wealth and jobs in the solar industry are delocalizing to export subsidizing China. Germany invested (and continues to invest) massively in the development of solar technology, and now other are running away with the bounty. Hurray to import taxes then?
Not really. The decreasing cost of the panels has brought solar technology near the ‘grid parity’ level. Households, with their higher power bills than industrial consumers, can pay back the investment in solar panels within a reasonable timeframe with the economies on power bills only, they no longer need subsidies. In those countries where generous subsidies were granted earlier, like Germany, Belgium and Spain, they have been brought down thanks to this. Grid parity means that the solar power production can continue to expand without the need for extra subsidies that continue to push up the green power bill for end consumers. Import taxes on the cheaper solar panels will push their price up again, away from that grid parity level.
If European countries want to continue to expand their solar power productions without cheap Chinese panels, they will have to raise the subsidies again. We should expect this to happen, if Europe is serious about its climate policy ambitions (20% renewable power production by 2020). In that perspective, this move to increase the cost of renewable energy production seems like an act of masochism. No country or group of countries is anyway near as ambitious as Europe in terms of climate policies. And even if we don’t always realize it, the results are quite spectacular. On some days, Germany is producing as much as 50% of its electricity with solar panels. For some environmentalists, the cost argument of this greenery is hardly valid. They see only benefits. I agree that in the long term, the green transformation of our power production apparatus will be a great asset for Europe for several reasons:
- In economic terms, you have to take into account that even if they have high investment costs, solar panels and wind power have very low operational costs. That means that once the investment costs have been amortized, the cost of producing electricity with them is quasi zero. We are already seeing the effects of this in terms of decreasing wholesale prices for German power. So, in the long term, large shares of renewable power production will result in lower energy prices.
- In environmental terms, the positive effects on carbon reduction are undeniable. However, we have to take into account that Europe’s reductions in carbon emissions are more and more just a drop in the ocean of extra emissions from emerging economies. Still, if Europe’s carbon emissions went down again last year, the many solar panels that you can see on European rooftops now contributed to this. Moreover, producing more energy with solar panels (and windmills) also generates extra environmental benefits, such as reduced emissions of other pollutants such as mercury.
- As the wind and the sun are not to be imported from the Middle East or elsewhere, increasing renewable energy production will also have beneficial effects on Europe’s security of supply.
However important these long term benefits might be, we should not be naïve about the economic impact of expanding renewable energy consumption in the short term. The high investment costs will continue to be pushed through to end consumers in terms of subsidy compensation schemes. And on top of that, the delocalized and intermittent character of the solar (and wind) power will necessitate extra investment in grids and in back-up power production facilities and/or storage, pushing up the non-commodity part of the electricity bill even more. In this perspective of rising short term costs due to greenery, it looks foolish to push an investment cost increasing measure such as import taxes on cheap solar panels.
The EU needs to become more adult about its energy policies. Several countries want to shut down their nuclear power plants. Coal-fired power plants are also under pressure because of ever stricter emission regulations. And we refuse to add more home-produced natural gas production from our shale layers. That means that Europe is counting heavily on its climate policies for reducing consumption and increasing the share of renewables. There are many figures to support that this policy is quite successful. The good news is that the technology cost has fallen. This means that we can continue along this road at a cheaper (extra) cost. In the middle of a crippling economic recession it looks like utter foolishness to spoil that by introducing stupid import taxes. The EU policymakers have to listen very carefully at the local politics in the Member States. When renewable power subsidy schemes are introduced, all is glory. Politicians proudly open the first renewable power plants. But later on, as the cost for the public is revealed, they become more critical. Many countries are now at that saturation point. An increase in the cost of solar panels could kill off their last enthusiasm for renewables. It would be a pity if Europe stops its road towards more renewable energy exactly when that energy has become so much cheaper. Pragmatism about the short term economics can help us achieve the larger good of our long term goals regarding renewable energy.