Subsidized Solar: How Not To. A Texbook Example from Slovakia

J.M.W. Turner: Sunrise with Sea Monsters (1845) // Public domain

There are a number of ways to reduce greenhouse gas emissions. We will use the example of photovoltaic subsidies in Slovakia to show how not to do it.

Imagine that you are given an assignment to design a roadmap to reduce country’s emissions. What would you do first? You would probably try to take stock of where emissions are generated. Since you are thinking economically, you would try to find areas where you can save enough emissions for the least amount of money.

Politicians often fail to make such considerations. They don’t like to set targets and what they don’t like even more is to choose between alternatives. They are interested in other ‘variables’ such as grandeur, media visibility or payback. Unfortunately, not the payback to the taxpayer.

Slovak subsidies for photovoltaic power plants are a textbook example of the above-described approach. They were introduced more than a decade ago. The system was set up so that the owner receives a guaranteed price of roughly EUR 400 for each megawatt hour produced.  If the market price was EUR 50, the owner of the power plant therefore received a subsidy in the amount of EUR 350.

Such a contract was set for 15 years – the intention of politicians and investors was to pay for the construction and financial costs of the investment in the solar power plant. And it should not be forgotten that, more than 10 years ago, solar panels were significantly more expensive than they are today.

Unfortunately, politicians did not ask the basic question back then. What is the reason to introduce subsidies for solar power plants in the first place? If the answer had been: to reduce greenhouse gas emissions, this subsidy scheme would never have passed.

How much emissions have solar power plants saved in the first ten years of operation? Let’s imagine that their entire production was replaced by a natural gas-fired power plant in Malženice. This would mean that we were able to save 210-220 thousand tonnes of CO2 annually by using the solar plants.

This represents 0.5% of all Slovak emissions. To give you an idea – to meet the Green Deal commitments, we need to reduce emissions by over 6 million tonnes by 2030 – 30 times more than the savings from the supported solar plants. Every year.

This solar subsidy model will have a negligible impact on total emissions. But let’s take a look at their cost. Between EUR 170 and 210 million is paid out in subsidies each year. The contracts have now been modified – extended by five years, and the subsidy system will therefore continue for another ten years from today. This corresponds to the expected lifetime of the solar power plant.

Today it is quite difficult to estimate how high the subsidy will be in the future because electricity prices have skyrocketed and there are days when they exceed EUR 500 per megawatt hour. Then the owner of the solar power plant receives no additional payments (since according to the contract he has to be paid the extra amount to get EUR 400 per MWh).

The Ministry of Economy recently estimated that the subsidies would total EUR 3.2 billion over twenty years. Is this a lot or not enough? Well, an economist asks – how much is it per tonne of CO2 saved? A staggering EUR 750.

Why is it a lot? There are about a million economists and analysts trying to determine the price of a tonne of CO2. They proceed by trying to determine the future cost of the climate getting warmer. It is easy to see why they cannot agree. Warming of the climate will have different effects in different areas, sectors, or individual lives.

In fifty years’ time, we will have different technologies in our hands than we have today, and we will be able to respond more effectively. Or not. So the uncertainty is huge. We must therefore settle for the value of a tonne of CO2 emissions that is generated on the market when emission allowances are sold. There, emitters have to buy allowances to cover their emissions.

It is, in fact, a market for the sake of appearance only. Because the amount of allowances available to be traded is regulated by the European Commission. Today, the price of this allowance is EUR 85 per tonne. The European Commission does not interfere in the market; one might say that the EC is satisfied with the price. Or in other words – there is no other price.

I suppose it’s clear to you now, what I mean to say. One tonne of CO2 is worth nine times less on the market than we pay for it in subsidies to solar power plants. So not only are we saving terribly little emissions through subsidised solar, we are also saving terribly dearly.

At the very least, a student of economy should learn at school is the following: Every euro spent has an opportunity cost. What we did not buy with the euro we spent (since we bought the solar) we had to sacrifice. If the “sacrificed” is worth far more than the gained, we have become poorer. And not only that. In this case, we have emitted more emissions than in the alternative world where politicians behave economically.

What Are the Alternatives?

The easiest way is to buy allowances. The government could have bought 200,000 allowances from the market every year. Total emissions would have decreased, and since not long ago allowances cost 20-30 euros per tonne, the government would have achieved huge savings. They would have bought the same result ten times cheaper.

Someone could argue that the market in Slovakia is developing by investing in solar panels, and thus, these subsidies have additional value. The opposite is true for two reasons. Mandatory purchase of solar energy caused this type of production to freeze, the reasons for which would be for a whole separate article.

Anyway, Slovakia is a receiver of technology, progress or research and development capacities cannot be bought. We have to rely on Germany, China or the USA and wait until the use of new technologies reduces their price to an acceptable level. Incidentally, the same applies to subsidies for the purchase of electric cars.

Until then, Slovak politicians must think about where to get more bang for the buck. Insulation of buildings, subsidies for heat pump installations, or subsidies for large emitters are at hand. Each alternative has its pros and cons and has its own complications. However, one alternative is right under our noses, and politicians are successfully ignoring it.

Emissions do not only have to be reduced, emissions can also be removed from the atmosphere. Although scientists are desperately struggling to come up with an effective way to pull carbon out of the atmosphere, we have one method at hand, proven over millions of years. It’s a forest.

Carbon is bound not only in wood, but almost to the same extent in forest soil as well. A square of forest with an edge of 15 km would reduce as many emissions as we save annually by subsidizing solar panels. Unlike the construction of large-scale solar plants, this approach has many other positives, which I guess do not need to be mentioned. In addition, the forest is a tireless carbon “consumer”, its lifespan does not end after twenty years.

The state in owns roughly half of the Slovak forests. It would have been enough that the state let part of the forests lie fallow. And it could be even more ambitious. The state could pay the forest owners for storing carbon instead of logging – emitting carbon. Such compensations already occur today, with around EUR 100 per hectare being paid for non-harvesting.

If the state paid the market price for a ton of CO2 saved, it would be attractive for the owners, since a hectare of mature forest can store 8-9 tons of CO2 per year. (One emission allowance with today’s value of EUR 85 covers one ton of CO2.)

The solar subsidy program launched more than ten years ago in Slovakia had probably only one real positive effect. It gave us an example of how not to approach reducing emissions. The public should learn to ask politicians two questions. How many euros per ton of CO2 will it cost? Is it cheaper than storing carbon by forests?

Translated by Ina Sečíková, INESS

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