Do renewable energy technologies need government subsidies?

To what extent are different energy sources subsidised around the world?

Renewable energy comes from sources that are not depleted when used but are replenished naturally. They include wind, solar, hydro, tidal, wave and geothermal energy, and are generally used for power generation or heat production. Their use has grown rapidly in recent years, largely to take the place of fossil fuels as countries try to reduce their carbon dioxide emissions in the fight against climate change.

The International Energy Agency (IEA) has calculated that subsidies to aid the deployment of renewable energy technologies amounted to US$140 billion in 2016. Countries within the Organisation for Economic Co-operation and Development (OECD) subsidise green energy more than poorer, non-OECD countries.

While renewables are often criticised for being heavily subsidised, in fact fossil fuels and nuclear power receive more financial support. The IEA calculated that fossil fuels received about US$260 billion in 2016 and the United Nations Framework Convention on Climate Change (UNFCCC) has criticised these subsidies for hampering progress on reducing emissions. Some describe fossil fuels as receiving preferential treatment politically. However, many countries are committing to phasing out fossil fuel subsidies and their amount decreased by 15% between 2015 and 2016.

There is also an ‘implicit’ subsidy to fossil fuels, because the price of power generated by fossil fuels does not reflect the environmental costs they generate in the form of climate change and local air pollution.

What role can subsidies play?

The use of subsidies is motivated by the need to address market failures, such as to address the price disparity with fossil fuels when environmental costs are not accounted for. Other market failures affecting renewable energy sources, such as spill-overs from research and development and economies of scale, may also warrant a higher price in early years to induce more innovation.

Subsidies to renewables have been credited with increasing innovation, lowering costs and expanding the energy mix – roles also played by early subsidies to fossil fuels, which were greater than those made to renewables at the same stage of development.

By increasing the deployment of renewables, subsidies have played a role in reducing reliance on fossil fuels. This is very important for reducing greenhouse gas emissions and restricting global temperature rise. International Renewable Energy Agency (IRENA) analysis in 2017 showed that renewable energy (with energy efficiency) could meet 90% of the Paris Agreement’s energy-related goals, but that to do so further technological breakthroughs and new business models will be required.

Benefits can also be measured in other ways. Researchers from Berkeley National Laboratory found that using wind and solar energy in place of fossil fuels helped avoid between 3,000 and 12,700 premature deaths in the US between 2007 and 2015, saving US$35–220 billion. The researchers concluded that the monetary value from improved air quality and climate benefits were about equal to or more than the cost of government subsidies to wind and solar.

Are subsidies still needed?

Today renewable sources of electricity are becoming cost-competitive with fossil fuels and nuclear power and will soon no longer need subsidies. In the context of the European Union, for example, analysis has suggested that countries should focus on carbon pricing rather than subsidies for low-carbon electricity to achieve further reductions in power sector emissions, and as a more cost-effective measure. This is backed by other research which has found that in a time of more stringent climate policy, strong carbon pricing is the preferable policy instrument to encourage demand for renewable energy, but that to meet less ambitious climate targets, using subsidies alone would be successful in stimulating further development of clean technologies.

In the UK, subsidies have led to a significant increase in the deployment of renewables. This in turn has led to a rapid decrease of the cost of some of these technologies. Notably, offshore wind projects commissioned in 2022/23 will sell their electricity at £57.50/ megawatt hour (MWh). This is cheaper than the average cost of generating electricity from gas, and well below the price of long-term contracts for new nuclear power, which is £92.50/MWh. Recent analysis backed the UK government’s view that further subsidies should be time-bound and removed once the relevant obstacles and market failures have been overcome. This will include phasing out fossil fuel subsidies, as recommended by the International Monetary Fund (IMF).