Subsidies for renewable energy could drown private enterprise

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In a recent report (PDF) published by RenewableUK and Energy & Utility Skills, the authors suggest that the wind and marine energy industries have the potential to contribute heavily to job creation given that a correct policy and legislative framework is implemented. Although this is an encouraging message, we ought to study the lessons to be learned from Denmark, the once so promising first mover in renewable energy.

Three market development scenarios, measured by the extent of deployment of wind and marine energy, are set out in the report. By 2021, the low growth scenario envisages the support of 44,000 jobs, medium growth is anticipated to result in the creation of 67,200 jobs, and high growth may well create 115,000 jobs, most of which require a particularly skilled workforce. These numbers account for full-time employees whose jobs are directly or indirectly (i.e. in the supply chain) created by the growth of these industries. For this growth to be possible, however, the authors call for substantial investments in the workforce in order to facilitate the provision of much needed skills.

If this growth, partly at least, relies on government involvement, we must be aware of the achievements and failures of foreign governments. In 2009, CEPOS, an independent Danish think tank, dared to slaughter a sacred cow when it commissioned a report (PDF) on wind energy in Denmark. The main argument of the report is that the successes of Danish wind energy are heavily overstated. More specifically, the use of government subsidies to support the development of wind energy has merely detracted labour from other sectors, and Denmark will as a result fail to observe a net increase in employment in the long run.

If the figures below are correct, CEPOS has certainly highlighted an important issue in policy-making in this specific area:

Allowing for the theoretical possibility of wind employment alleviating possible regional pockets of high unemployment, a very optimistic ballpark estimate of net real job creation is 10% of total employment in the sector. In this case the subsidy per job created is 600,000- 900,000 DKK per year ($90,000-140,000). This subsidy constitutes around 175-250% of the average pay per worker in the Danish manufacturing industry.

In terms of value added per employee, the energy technology sector over the period 1999-2006 underperformed by as much as 13% compared with the industrial average.

This implies that the effect of the government subsidy has been to shift employment from more productive employment in other sectors to less productive employment in the wind industry. As a consequence, Danish GDP is approximately 1.8 billion DKK ($270 million) lower than it would have been if the wind sector work force was employed elsewhere. [Emphasis mine]

Thus, had the market forces been allowed to function freely, the resources could have been used more efficiently elsewhere. It should be mentioned that the authors of the report published by RenewableUK and Energy & Utility Skills emphasise the promotion of incentives for private sector investment in wind and marine energy industries. Whilst this is essential, there is a risk that private sector initiative will drown in government subsidies. The politicians should indeed allow the wind and marine energy industries to flourish, but let us not accept an unwise use of subsidies that is bound to destroy the long-run potential.