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Rupert Darwall: Europe’s Green Frankenstein Monster

Rupert Darwall, The Wall Street Journal

Like Frankenstein, the EU has created a renewable-energy monster it does not know how to tame.

“We can avoid what could well be a human calamity,” German Chancellor Angela Merkelsaid in 2007 after EU leaders decided to cut greenhouse gas emissions by 20% and to generate 20% of the EU’s energy from renewable sources by 2020. While these policies might have no discernible effect on the climate, they are a calamity for the EU. Like Frankenstein, the EU has created a renewable-energy monster it does not know how to tame.

In a clear-eyed analysis last week, the European Commission published its proposals for the follow-up period from 2020. The Commission notes that since 2005, the U.S. cut its CO2 emissions by more than 12% (a little less than the EU, which cut emissions by just under 14%), thanks largely to shale gas. EU firms and households, the commission says, are increasingly concerned by rising energy prices and widening cost differentials with the U.S. Between 2008 and 2012, the average electricity price paid by European industrial firms rose by 16.7% while American firms are paying 2.3% less, so prices paid by American firms are 45% lower than EU firms.

As the U.S. powers into an era of cheap, abundant energy, across the Atlantic the European Commission reckons electricity prices will rise 31% before inflation by 2030 from 2011, and will consume an increasing share of European GDP. Widening energy-price disparities may reduce production and investment and shift global trade patterns, the commission concedes. However, it adds, if other countries outside Europe agreed to cap their greenhouse-gas emissions, they would help Europe’s energy-intensive industries—hardly an inducement for them to do so.

Having driven much of the way to its 2020 vision, the EU has a big problem. Institutionally, it has no reverse gear. So for the post-2020 period, the commission proposes pushing on in the same direction, but with considerably less determination. It wants to nix some of the most egregious policies. First-generation biofuels have a limited role in decarbonizing the transport sector, so should not receive public support after 2020. The commission also puts a black mark over biomass policies (chopping down trees to burn in power stations), questioning their ability to reduce greenhouse emissions and highlighting their effects on other timber-consuming sectors.

But the EU’s biggest energy problem lies at the dead center of its 2020 vision. By the end of 2012, the EU had installed around 44% of the world’s renewable capacity. The commission acknowledges that, because member states over-incentivized investment in renewables, they compounded the challenges posed by weather-dependent electricity generation. Renewable energy needs conventional back-up, but the subsidies needed to make wind power profitable upend generators’ cost structures, imperiling investment in conventional capacity.

The variable costs of wind and solar electricity are virtually zero. Subsidizing their fixed costs increases the risks and displaces the returns from investing in conventional power stations. When the wind blows, wind power delivers the lowest-cost electricity to the grid, bumping off conventional generators. Ironically, when wind becomes a sizeable component of a nation’s electricity mix, profits from a gas-fired power station are more at risk from wind conditions than investments in wind-farms.

According to John Constable of the Renewable Energy Foundation, wind investors receive subsidies that give them satisfactory returns even in a low-wind year. A high-wind year is a bonus. The unsubsidized conventional generator is in a more awkward position. Its fixed costs are only recovered from the electricity it sells. With a large wind fleet in a high-wind year, the load factor for conventional generators could drop very low indeed, making it almost impossible to recover their fixed costs. The squeeze is being felt by gas-fired power stations. Last month, gas-fired power stations contributed 29% to the U.K.’s net supply of electricity compared to 50% four years earlier. As a result, there is a dearth of investment in such capacity.

The commission does not have an answer to Europe’s looming energy crunch other than to propose that any post-2020 target for renewables should not be binding on member states. It also argues for “more market oriented approaches,” including phasing out subsidies for mature energy technologies.

At Davos last week, U.K. Prime Minister David Cameron talked up the huge opportunity represented by shale gas. Having lots of shale gas won’t be much use without gas-fired power stations. At the same time, the prime minister boasted that Britain is one of the best places for green investment, with the world’s largest offshore wind market, seemingly oblivious to its effect on killing investment in new gas-fired power stations.

For the rest of the world, Europe offers a stark lesson. When it comes to unilateral cuts in greenhouse emissions and aggressive incentives for renewables, this is a global race you don’t want to win. As Europe shows, the winner loses—big.

Mr. Darwall is the author of “The Age of Global Warming—A History,” (Quartet Books, 2013).

The Wall Street Journal, 28 January 2014