Let it not be said that burning your ships behind you never works out. On April 29, 711 BC, Tariq Ibn Zayad stood gazing to the north, across the Mediterranean Sea with his army of 10,000 men strong. Upon the orders of Musa bin Nusayr, the Emir of North Africa, they boarded merchant ships and sailed across the Straits of Gibraltar to Julien poised to attack. Their formidable adversary was ‘King’ Roderic, the commander of 100,000 soldiers, who controlled the Iberian Peninsula.
Zayad’s troops were indeed outnumbered. Although it has never been confirmed, legend has it that upon landing, Zayad ordered his men to burn their ships behind them. Without the ships, there was nowhere to go and no other choice but to fight. “Oh my warriors, whither would you flee? Behind you is the sea, before you, the enemy. You have left now only the hope of your courage and your constancy,” he said. In the fearsome battle that ensued, Roderic ultimately was killed and Tariq’s warriors emerged victorious, driving the enemy inland. Tariq’s conquering forces eventually reached Toledo, deep in the center of Spain.
Zayad’s strategy of burning his ships upon landing was a risky one. Had his army’s fortunes been different, had they been beaten back to the Iberian shore, and the entire army would almost certainly have been slaughtered. Relying on a single strategy and forging ahead is fraught with risk – if it pans out, all is well, if not – total defeat is certain.
Corporate history is full of examples of companies that have pursued a single strategy of burning their ships on the shore. Some have been successful, but many have not. The Eastman Kodak company, for instance, went bankrupt because it failed to embrace digital technology. The big three North American automakers preached ‘small cars, small profits’ and in turn, ceded huge market share to the Japanese auto makers in the 1970’s. Over the years, many companies have disappeared for refusing to ask the question or face the reality of is our current strategy working and can we remain solvent if we continue to follow it?
Turning to energy, near the turn of this century, many European countries embraced the green energy wave. The goal for these nations was to have a large percentage of their domestic power generated from renewables. Germany, Spain, Denmark, the Netherlands and Great Britain, all were intoxicated by the dream of a world where a significant portion of their power could be produced without the burning of fossil fuels. Reducing the emissions of dirty fossil fuels became their mantra. Reduce their reliance on non-renewables, clean up the air and you save the planet was the rhetoric du jour. But what followed next with each of these countries was a massive, government subsidized, expansion of all things green, predominately wind turbines, biomass and solar panels. The overall result? Was it the utopia of green that was promised to the electorate, a bumper crop of new “green economy” jobs and a major decrease in carbon dioxide emissions? No, in fact, it yielded the exact opposite. Enter the feed-in tariff (FIT).
The green energy subsidization process, FIT, entails governments to make appropriations for wind turbine and solar manufacturers, whereby they would guarantee to purchase a fixed volume of electricity at a fixed price; one that is significantly higher than that of the current market. The government would then force the utility companies (who own the electrical grid) to purchase power from the green energy providers at the fixed rate for a fixed period of time, sometimes 20 – 25 years. Now, unfortunately, for the jurisdictions that chose this plan of action, they now enjoy some of the highest power costs in the world.
As an example, Spain forged ahead with allotting feed-in tariffs to green energy providers who dutifully obliged, supplying the new wind turbines and apportioning their farmland for solar power. The hope of the Spanish government was that this would boost the economy with the creation of a bounty of new green jobs and, lower carbon emissions. But let’s take a look at what really happened.
Not only did the programs not realize the financial and green benefits that they were hoping for, they actually had disastrous effects on the economy. The cost of the feed-in tariffs was borne by consumers and the corporate sector, reducing the standard of living for lower-income families (those who could least afford it) and pushing many companies into bankruptcy. The net effect of the program was as follows: By 2011, Spain’s domestic electricity prices (including taxes) amounted to 46 U.S. ¢/kilowatt-hour (kWh), nearly 2.5 times more than U.S. prices. The price for electricity in Spain increased by 92 percent from 2005 to 2011. Rising energy costs hit low-income Spaniards the hardest–driving them into energy poverty because they were unable to afford the high power costs to run their homes. Despite numerous renewable energy mandates, Spain’s carbon dioxide emissions increased by 5% from 1994-2011.
At almost the same time, Germany embarked on a green energy program of its own called Energiewende. Germany’s goals and hopes were parallel to Spain’s – a reduction on its reliance on fossil fuels, job creation and reduced carbon dioxide emissions. Unfortunately, as with what happened in Spain, the benefits of Energiewende have not been realized and has resulted in huge costs to the economy.
Germany offered a similar feed-in tariff program as that offered in Spain. The builders of wind turbines and solar panels were guaranteed the payment of higher power rates coupled with long-term usage contracts to incentivize them to invest and build the required infrastructure. In the extreme case, offshore wind farm companies were promised not only higher electricity rates but the government guarantee that should their investments not provide sufficient returns, they would be bailed out. Thus, in Germany the massive expansion of renewable energy construction began.
In 2011, as a result of the Fukushima nuclear disaster in Japan, Germany decided to shut down 8 out of 17 nuclear power plants with the further plan to shut down the remainder by 2022. These actions affected the livelihood of 40,000 workers. The intent was to partially fill the energy void caused by the lost supply with alternate renewables but it soon became clear that Germany could not supply enough power to compensate for the power lost from that provided through the nuclear industry. Ironically, their solution for this calamitous dilemma was to build and commission coal burning plants. Since 2011, Germany has opened 9 new coal plants, several of which burn ignite, the most polluting of all coals. In 2014, coal accounted for 43% of the electricity generated in Germany and as a result, their greenhouse gasses have also increased.
As well as the possibility of actually increasing greenhouse gas emissions, there is also another by-product of having a disproportionate amount of power generated by renewables: grid instability. When the wind dies or the sun sets, the result is a shortage of necessary power. This shortage requires an injection of power from non-renewable sources, and integration is not always seamless. As well, when the sun shines and the wind blows, an excess of power is created forcing utility companies to scramble and shut down base power supplies in order not to overload the system. This also creates a supply-demand problem – basic economics says that when supply exceeds demand, the value of that commodity goes down. Thus when conditions are the most ideal, wind and solar tend to drive down the price of electricity, making them even less economic.
As in Spain, Energiewende caused power prices in Germany to jump dramatically, putting many lower income people into energy poverty – in 2014 alone, 351,000 customers had their power disconnected because they could not afford the high power prices. Higher energy costs meant business became less competitive. Even BMW constructed one of their new plants in the State of Washington citing the lower price of power. BMW is not alone. Many other industries have also begun shuttering plants or moving production outside of Germany due to greater power costs. This obviously was not the intention of Energiewende, but it has been the result.
Finally, Ontario also embarked on a FIT subsidized green energy program starting in 2009. The results in Ontario have been similar to Germany and Spain – more expensive power with lower income families hit the hardest, intermittent power availability from wind and solar and huge costs to the taxpayer.
At present, the costs to install a wind turbine exceeds the revenues that will be generated for many, many years to come. Therefore, it does not make economic sense for companies to build and install them. In southern Alberta for example, Canada’s oldest wind turbine farm is being retired after 22 years of service.
Interestingly, TransAlta is in no rush to replace these turbines. “TransAlta is very interested in repowering this site. Unfortunately, right now, it’s not economically feasible…we’re anxiously waiting to see what incentives might come from our new government,” says Wayne Oliver, operations supervisor for TransAlta’s wind operations in Pincher Creek and Fort Macleod.
It is telling that in an area where all of the electrical cable for wind turbines is already connected to the grid, it is still uneconomic to erect new ones in one of the windiest places in Canada. The only way that it makes fiscal sense for them is if the price for power generated and paid to the turbine owner is artificially made higher to offset the cost of installation.
We would be wise to remember that government forced programs frequently fail because they are often based on ideology rather than true market forces. The downside of these enforced programs are many, and when they fail, tragically it is tax payers that end up footing the bill. Those affected most are in the lower income brackets, the ones who can least afford increases to their cost of living.
In all cases, the benefits of FIT programs were grossly overstated and the costs to consumers grossly understated. Spaniards know this. Germans know this. If we are to forge ahead with renewables, let us be smart about it. Let us approach it as we would a profitable business. If we are to phase out coal let us do so in a fiscally responsible manner. We must fill the gap that will be left by shuttering other forms of electrical generation with natural gas and only expand renewables if/when electrical grid stability can be maintained. Let us not burn our ships on the shore, betting all on the success of renewables. There is simply too much at stake when the cost of failure is so dangerously high.
Mike Davies has 24 years of oil and gas experience in exploitation engineering with a proven track record of enhancing and maximizing value with my strong technical, facilitation and leadership skills