Follow the money! – The fairy tale about the unaffordability of renewable energies

Tirelessly, some actors from business and politics invoke technological and economic constraints claiming that a rapid shift towards a climate-friendly and at the same time secure energy supply is impossible. Renewable energies cannot economically compete with fossil fuels or nuclear energy, they say. Or: renewable energies can simply not be financed. Will we really have to do constrain prosperity and our high standard of living in the future because we subsidize the production of alternative energies at too high cost?

Let us ask the international financial sector as a kind of key witness. Here we see with some surprise considering the statements above that renewable energies today eclipse fossil energies in terms of investment volume. Nearly 78% of the net increase in energy generation capacity worldwide in 2019 went to wind, solar, biomass, geothermal and hydropower plants. As far as investments are concerned, the Frankfurt School of Finance & Management and the Bloomberg Finance Agency have done a calculation: in 2019 almost 300 billion dollars were invested in renewable energies worldwide.

The lion’s share of this sum was invested primarily for the financing of larger PV installments and onshore wind turbines. Investors were primarily the energy companies that are switching to alternative energies to remain competitive for the future. For the same reason, various countries – above all China – are also backing such large-scale projects. These investments are often financed by investors on the global capital markets, for example in the form of bonds. State investment institutions also appear as investors; in Germany, for example, this is the Kreditanstalt für Wiederaufbau with its „Renewable Energies“ program. Around 50 billion dollars were spent worldwide on small-scale PV systems, mostly by private homeowners who had a few panels installed on the roof. But even the most yield-hungry investors are now turning to renewable energies. Private equity investors in particular have several years ago discovered wind and solar parks as attractive yield drivers and have over the last 10-15 years invested up to 10 billion dollars per year in „green energy“. Idealistic motives might play a role for some private investors, but international investment companies are far from investing their money according to such principles. They have a duty to their clients and must deliver returns.

This investment initiative has not only been launched by the big Anglo-Saxon investment houses. Large pension funds are also discovered „green energy“ as an asset class and at the same time reduced their investments in „black energy“, i.e. coal and oil. In 2019, for example, a group of Scandinavian pension funds invested a total of 700 million dollars in a new infrastructure fund for renewable energy, which is mainly targeted at Asia and Latin America. And the largest pension fund in Europe, the Dutch AGP, with more than 500 billion euros under management, has already invested almost five billion euros in renewable energy, according to its own figures. Although in mathematical terms this is only 1 percent of the money to be invested by AGP, this is an exceptionally large contingent for an investment in a single investment area.

Currently, the Chinese government and Chinese companies are the largest investors in renewable energies, and at the same time the Chinese economy is the world market leader in the production of wind turbines, solar cells and smart grid technologies. China also has the largest number of PV systems; nowhere else in the world is so much solar power produced. Here, politics and business go hand in hand – albeit authoritatively controlled by the communist party.

So far, these investments have paid off well: a study published in June 2020 by Imperial College London and the International Energy Agency analyzed stock market data for the last five and ten years in Germany, France, England and the USA. The result: The returns on investments in renewable energies have risen significantly in the last five years. In Germany and France, investment in renewables yielded 178.2 percent and left investments in fossil fuels far behind. The latter even lost money with (-20.7 percent). In the United Kingdom, the ratio was 75.4 percent to 8.8 percent, in the USA 200.3 percent to 97.2 percent.

Professional investors all over the world have thus recognized the potential of renewable energies as an increasingly attractive investment. The situation is quite different for fossil energies, however: While the avowed coal fan Donald Trump promised to support the country’s coal industry to the best of his abilities, fifty coal-fired power plants had to be announced for decommissioning in the two years after he took office alone. „The fate of coal has been sealed, the market has spoken,“ says Michael Webber, an energy expert at the University of Texas. “The trend is irreversible now, the decline of coal is unstoppable despite Donald Trump’s rhetoric.

Investments should yield a profit. Subsidies, on the other hand, are not expected to provide any direct return. For political reasons, they are supposed to support institutions, companies and industries that are not or not yet competitive. For example, many hospitals and kindergartens would have to close without constant financial support. For a long time, state support for renewable energies was considered a notorious subsidy, i.e. as a cash subsidy without return. That is long gone. Today, renewable energies are proving to be real return drivers. In addition, many investment incentives for solar power do not come from public funds – they are therefore not subsidies, even if they are perceived as such. For example, the European Court of Justice (ECJ) ruled in 2019 that the German Energy Feed-In Act (EEG) does not constitute government aid. This is because the money is paid by end consumers in the form of fixed feed-in tariffs. These „compulsory investments“ are now being gradually phased out.

Renewable energies have become a matter of course. It is a completely different part of the energy industry that is still being subsidized in the true sense of the word: fossil energies! The usual argument for this was that „energy security“ must be maintained. The subsidy report of the EU Parliament of 2017 and 2019 respectively states that this industry branch receives the same and probably far more public money than renewable energies. In the EU, depending on the estimates, between 39 and 200 billion euros per year flow into direct subsidies for the coal and gas industry, tax-privileged fuels, tax-free fuels for shipping and aviation and free emission licenses for the steel and chemical industries, among other things. The EU Commission estimates that the subsidies for fossil energies in Europe amount to 55 billion euros. In contrast, estimates by the journalist network „Investigate Europe“ come to 137 billion euros for the EU plus Switzerland, Norway, and Iceland. By comparison, the EU Commission estimates that investments in renewable energies throughout the EU amount to approximately 75 billion euros per year, whereby some of these funds, such as the EEG levy in Germany, do not constitute actual subsidies at all, as we saw above. The picture is clearer worldwide: according to calculations by the International Energy Agency, in 2018 government subsidies amounting to approximately 400 billion dollars went to companies involved in fossil energy production. Support for renewable energy production was less than half of this amount: 166 billion dollars. One can imagine what will happen if the subsidies for black energy are abolished by 2025 – this is exactly what the G20 countries committed themselves to in 2009.

An answer to the question how the costs of renewable electricity compares to fossil and nuclear power is provided by the so-called electricity production costs, i.e. the sum of the costs of capital employed (e.g. for the purchase of land and installation of the power plant) and operating costs (maintenance, repair, insurance, etc.). Here are the average costs of electricity from fossil sources in Germany (in Eurocent):

• Lignite: approx. 4.5 to 8 ct/kWh
• Hard coal: approx. 6.5 to 10 ct/kWh
• Natural gas (gas and steam combined cycle power plant): approx. 7.5 to 10 ct/kWh
• Natural gas turbine power plant: approx. 11 to 22 ct/kWh
• Nuclear power: about 5 to 10 ct/kWh.

Here are the average costs for electricity from renewable energies:

• Solar energy: In the last 10 years, the cost of PV electricity has dropped by more than 80 percent. The following figures are from the year 2018:
• Larger rooftop PV systems: 5 to 11 ct/kWh
• Large-scale PV power plants on open land: 3.5 to 6 ct/kWh
• The electricity production costs of smaller PV systems, for example on the roofs of private houses, are between 7.2 and 11.5 ct/kWh
• Wind energy: Onshore wind power plants are priced competitively compared to conventional power plants, with costs of approx. 4 to 8.5 ct/kWh. Offshore plants supply electricity at a higher price of about 7.45 to 14 ct/kWh despite better capacity utilization (more constant wind at sea).
• Hydropower: Hydropower generates electricity at a price of about 6.5 ct/kWh.
• Geothermal energy: The global average costs are between 4 and 10 ct/kWh, they depend strongly on local conditions.
• Biomass: The price of electricity generated by biogas plants is around 10 to 15 ct/kWh.

However, simply comparing the electricity production costs of different energy sources is a bit like comparing apples and pears. For a fair comparison, other factors must be considered. Especially the most important alternative energy sources, sun and wind, are not capable of providing a base load. To further increase their share in the energy mix, storage capacities must be developed and expanded. Until these are available in sufficient quantities, we must still combine electricity from wind and sun with base-load-capable electricity.

It is not yet known exactly what the costs of providing this storage capacity will ultimately be. For the small-scale sector, it is known that battery prices are falling dramatically. But larger plants need other storage solutions, for example pumped storage or the production of hydrogen or even methanol. But here, too, technological development is progressing swiftly. The construction of new power lines and further infrastructure for the use of renewable energies must also be priced in. Here, too, the developments are not yet complete, and it is thus not yet possible to make reliable statements about actual electricity prices.

However, not all cost factors have been priced in for conventional electricity suppliers, either. If the direct subsidies for fossil fuels were to include the costs of externalities that are not priced in (environmental pollution, pollutant emissions, CO2 emissions, etc.), the International Energy Agency (IAE) estimates that the bottom line would be 3,100 billion dollars instead of the “more than 400 billion” mentioned above. The real cost of our electricity is therefore not known either for fossil fuels or for alternative energies. One thing is certain, however: The only way to achieve climate neutrality is through renewable energies.