Will Austerity Derail Europe's Clean-Energy Movement?

On Jan. 30, a letter arrived at 10 Downing Street from 101 Members of Parliament, addressed to Prime Minister David Cameron. Its message: Stop taxpayer subsidies for wind power.

The call is being echoed across Europe, where governments are reconsidering what they — and taxpayers — can afford in terms of green-energy initiatives in an age of austerity. In the boom times before the global economic crisis, European governments were eager to pump cash into renewable sources of energy to make them competitive with fossil fuels and meet carbon-dioxide-reduction targets. But with pensions, health care and education budgets already feeling the chill, lavish spending on clean energy has become harder to justify.

Greece, France and the U.K. have slashed subsidies for solar power since the recession began in 2008, and even economic powerhouse Germany has announced it will eliminate government support for solar panels by 2015. Spain — once the largest solar-energy market in the world — halted subsidies for new renewable-energy projects altogether two weeks ago.

Has Europe's green-energy agenda fallen prey to the global economic crisis? Not exactly. In fact, many of the solar-power-subsidy cuts are a symptom of how well the industry is doing. "It's a victim of its own success," says David Cunningham, a renewable-energy analyst at Westhouse Securities, a brokerage firm specializing in environmental technology. "The industry has cut costs so quickly that the governments haven't kept in step."

Back when solar panels were quite expensive, governments set subsidy levels high enough to make installation worthwhile for individuals and firms. But as the price of solar modules plummeted (falling 76% since mid-2008), installation became a little too worthwhile. Those who took advantage of subsidies could count on returns of up to 7.5% on their investment. Demand ballooned. Meanwhile, average consumers were stuck paying for the bonanza through an extra charge on their electricity bills to fund the subsidies.

Given the economic climate, it's hardly surprising governments have tried to rein things in. The first big cuts came in 2010, when Germany and Italy pulled back on solar incentives. Then, at the end of 2010, France followed suit by halting its solar feed-in tariffs completely.

Analysts say there is a right way and a wrong way to cut back on clean-energy subsidies, however. Germany, for example, reduced its subsidies gradually to allow the industry to adjust. Spain, on the other hand, mishandled its cutbacks, shaking investor confidence. And the U.K. government's recent attempt at a hurried downsizing has landed it in court, where it is battling environmentalists and industry groups over whether it can legally slash support by 70% for big photovoltaic projects and 51% for home installations. "Germany has been quite skillful at reducing its tariffs and getting a lot of renewable-energy capacity built," says Angus McCrone, a senior analyst at Bloomberg New Energy Finance. "Other countries have been less skillful and ended up shocking the industry."

But it's not just subsidy cuts that threaten Europe's solar manufacturers. China's rise has also cast a shadow over the firms. China has rapidly emerged as the dominant industry player, producing at least half of the world's solar panels in 2010. While cheap panels pouring in from China have driven the installation boom in Europe, they've also put competitors like German solar-panel maker Solon out of business.

The worry is that as European manufacturing firms collapse, even more people will be out of work during a time of economic hardship. But solar-panel makers are only part of the industry. In fact, increasingly automated solar manufacturing employs far fewer people than installation firms, which have seen an upswing in work since Chinese panels have flooded Europe. "In a perverse way, China isn't destroying jobs in the West," says Cunningham. "It's creating more jobs in installation and maintenance."

Still, this hasn't kept China and the West from exchanging barbs over environmental policy. European and American firms complain that Chinese solar-panel makers benefit unfairly from state subsidies, including low-interest loans and cheap power to run their plants. Late last year, American solar-panel manufacturers went so far as to file a complaint with the U.S. International Trade Commission, which ruled in their favor in December. This could pave the way for the Commerce Department to impose heavy tariffs on Chinese solar-panel imports. China has vowed to retaliate by filing its own claim with its Commerce Ministry alleging unfair U.S. subsidies.

European clean-energy policies are under threat in another industry as well: aviation. The U.S. and China have formed a rare alliance against a new European Union law requiring airlines using European airports to pay fees for each flight's carbon-dioxide emissions. On Monday, Feb. 6, Beijing banned Chinese airlines from taking part in the E.U. program. The E.U.'s ambassador to China, Markus Ederer, responded by noting that the law would drive up Beijing-to-Brussels ticket prices by just 17.50 yuan (less than $3). "I leave it to you to make a judgment on whether this is too much for saving the earth," he said.

Clean energy has certainly provided ample fuel for global posturing. But there's one renewable — wind power — that's unlikely to spark a trade war in the near future. European wind-turbine manufacturers are shielded from competition for now, Cunningham says, despite the fact that you can buy a Chinese turbine for 40% of the price of one from leading European manufacturer Vestas. "These machines need regular operation and maintenance. You're not going to get that with a Chinese turbine." And for the time being, European governments haven't pulled the plug on wind power. Germany, for instance, increased subsidies for offshore wind farms last year. And the U.K. has announced relatively modest cuts of 5% and 10% for offshore and onshore turbine projects, though more could be on the way. Wind power faces stiff opposition from conservative politicians who object to what they see as taxpayer despoilment of the countryside. It remains to be seen whether the coalition government — which has so far remained committed to strict cuts in carbon emissions — will listen.

In fact, globally, the outlook for renewable energy is quite sunny. Last year, total new investment in clean energy increased 5%, to $260 billion, according to Bloomberg New Energy Finance. That growth occurred despite the continuing economic downturn, tighter profit margins and falling government investments in green subsidies and R&D. In Europe alone, renewable-energy investment rose 3%, to $100 billion, driven by solar installations and offshore wind projects in the North Sea. That's a good sign. Even as government subsidies dry up, it appears the renewable-energy industry is going to be just fine.