CEO of the consulting firm, LECG Europe, Dr. Jorge Padilla is an expert in economics and finance. He is an affable economist, who talks in an informative, rapid-fire manner.
Renewable Energy Magazine met with him just days before “Harnessing Renewable Energy: in Electric Power Systems” was presented at the Rafael del Pino Foundation in Madrid at the end of September. The book was co-edited by Padilla along with fellow economists Boaz Moselle and Richard Schmalensee, and, according to Padilla, aims to “shift the [energy] debate from what we perceived as a debate between two extreme views – the ultra-ecologist, 100% renewables persepective or the Bush-style ‘oh well, this is a disaster’ approach –to the middle ground, to the economists’ position, which is all about cost-benefit". Interview date: September, 2010 Interviewer: Antonio Barrero Why is it necessary to support renewables? The driving force behind support for renewables is the need to curb emissions. Renewable energies are part of the fight against global warming, one of the ways we can reduce emissions. There are alternatives, but they face a number of problems. Let’s look at them one by one: if we focus on carbon capture and storage technologies for example, to date they are not really sufficiently developed to make them cost effective. Looking at nuclear power ... we are going to face problems of an essentially political rather than economic nature. Any other alternatives? The imposition of carbon taxes, for example, would also face challenges, primarily of a political nature. From a strictly economic standpoint, I think that most economists prefer such taxes as they are neutral from a technological perspective and because they ensure the entire burden of reducing emissions does not lie with the electricity sector. Neutral "from a technological perspective”? Yes, neutral because they are not skewing the technological choices of businesses in favour of a particular technology. In other words, there would be no regulator saying that we will use one technology over another. Instead, market mechanisms would exist that determine which technology to use. It may be that after imposing the tax, one may not use fossil fuels, but whatever the case, the market will tell you which choice rather than a certain politician or regulator opting for solar photovoltaics (PV) one minute... or gas... or more or less coal the next. The tax would apply to all technologies, and would essentially place a greater burden on the worst emitters. You said that climate change is behind the support for renewables. What are the other drivers? Climate change is one of these arguments and there is ample evidence that it is real. Another, for example, is that renewables create jobs. Well, I tell you that the empirical evidence suggests that it is not clear whether they create or destroy jobs. It is true that a number of jobs are created in companies engaged in energy production using renewable technologies or primary sources of renewable energy. But on the other hand, to the extent that the output of other companies is reduced, there is also a drop in employment. Thus, in terms of employment, frankly, there does not appear to be a substantive impact of either a positive or negative nature. More arguments ... To say that you require public support means having to argue that your investment generates positive effects on other areas of the economy, effects that are not necessarily to your own advantage. In other words, there have to be externalities for the economy as a whole. However, nobody has been able to demonstrate this using real data. Any positive effects are more to do with basic research, i.e. with R&D into new forms of solar power generation to cite one example. In this case, there does seem to be benefits for the future. An entrepreneur invests, does not make much money today, but may eventually develop a solar technology that is truly valuable from a market perspective. I am therefore all for providing funds to invest in developing these new technologies. On the other hand, however, it is not clear that funding the installation of renewable energy capacity generates positive effects for the economy as a whole. And finally, there is a third argument, which is security of supply. Wind and solar power is very secure with regard to issues such as natural gas prices skyrocketing because the Russians and the Algerians suddenly deciding to form a cartel. In principle, this explanation makes some sense, although the truth is that the ability of renewables to replace all our gas requirements is limited. All things considered, if one examines all the different arguments, as we do in our book, the position which stands up is the environmental stance. And we say, well, it may not be the way an economist would have wanted it, because we would have preferred the tax, but one also has to be realistic: imposing taxes is not easy for politicians. Moreover, it is also the case that the cost of environmental policy is almost too obvious. In your book you say that "growth in renewable generation capacity is not determined by market forces (and in the foreseeable future is unlikely to be so). In contrast, growth is largely the result of government intervention". Is this the only way it has been possible to ramp up renewable energy? Or should one believe that business would have been the main driver if governments had not intervened? Proponents of PV say that grid parity will arrive in 2015, i.e. grid parity is just around the corner… And as an economist, what is your view on wind power? Looking at gas and then nuclear power. Approximately 25% of Spain's electricity comes from renewable sources. That means that 25% of the electricity is not produced with either gas, coal or uranium. In the case of gas, all the gas we avoid consuming can be deemed a financial resource we are not sending to Algeria, for example. Does this not represent what we term “energy independence”? The commitment to nuclear power by political authorities has a cost, or will entail a cost... to their image. Okay, that’s understood. However, the private sector can also opt for nuclear, but why, since the electricity market was deregulated in Spain in 1997 or thereabouts, have no new nuclear facilities been built? As far as I understand ... we have a nuclear moratorium. Correct me if I'm wrong. Sorry, but since 1997 any company can develop a nuclear power plant in Spain. What a coincidence! Just what renewable energy developers are complaining about. In other words, politics, as far as energy is concerned, has to intervene? Could you classify the regulatory tools for supporting renewables in order of effectiveness? Why? Because caps intervene in the market process and someone with divine inspiration has to decide “the quota must be specifically this figure or that”, while the same can be said of investment grants, where someone with divine inspiration says “you have to invest so much”. In conclusion, there is enough consensus that FITs are the best of all mechanisms: for reasons of design, compatibility with the structure of the deregulated market and, also, based on experiences in Spain and Germany. Can you prioritise the tools to combat climate change? Second choice? Well, since I cannot avoid waste, I will try to produce in a way that emits less. As economists, what we would say is: Well, first, let’s impose a carbon tax. What’s the catch? Well, that it is complicated and difficult to achieve in practical terms. So we turn to nuclear, renewables, carbon capture. Looking at each individually: in this country, nuclear is impossible for political reasons. Carbon capture is not currently an efficient technology. PV is also not an efficient technology. So what is left? Wind... The question is how to offer the smallest possible feed-in tariff while still encouraging an adequate level of investment. That said, for me, the best option is energy efficiency, carbon taxes, and then you turn to energy generation, which in terms of renewables today would, in my opinion, be wind power. Does it make sense that the State provides financial support to the renewables sector which is currently still at a learning stage? PV is different, as it is not mature. Here, there is a lot of room for technological improvement, innovation. Of course, one must still decide what you are going to support. It is true that any investment in R&D made today will encourage the development of better technologies. This represents a future externality that may merit public intervention. Where? Who should receive funding? Those performing R&D, or those who acquire a site and build a solar array using existing technologies? I believe that if the argument is based on technological externalities, learning by doing, the economies of learning, then money has to be given to those conducting R&D. Okay. The question then is how many megawatts need to be installed to verify how the technology performs? Well, I think a lot less than we have installed in Spain. So, in principle, yes, but with limits, and deciding where to put the money. I'd put money into R&D. Greenpeace published a paper a few months ago concluding that 100% of electricity could be renewable by 2050. What is your opinion on this statement? So, I gather that you are in support of a diversified energy mix. And to round off, why a book like this at a time like now? For additional information:
