Harry Geels: The repercussions of the 'green bailout'

Harry Geels: The repercussions of the 'green bailout'

Energy Transition
Harry Geels (foto credits Cor Salverius)

By Harry Geels

In both the US and Europe, many alternative energy companies have run into problems due to the sharply increased costs of materials and rising interest rates. However, a 'green bailout' will have the necessary repercussions.

In a somewhat blunt article entitled The coming green energy bailout’ the Wall Street Journal (WSJ) wrote in early September about the major problems that many American companies involved in new or alternative energy have found themselves in. The bottom line is that these companies, which initially thrived on subsidies and low interest rates, can now no longer survive due to sharply increased interest rates and commodity prices. In addition to the subsidies already received, these companies now want new government support and intend to significantly increase consumer prices.

Major price increases are looming

Joe Biden's Inflation Reduction Act (IRA) includes hundreds of billions of dollars in green energy subsidies, but apparently that's not enough. For example, according to a New York State Energy Research and Development Authority (NYSERDA) report late last month, major offshore wind developers are asking for an average 48% price adjustment in their contracts to cover rising costs. The IRA allows companies to offset 50% of costs through a tax credit.

But new energy manufacturers say their costs are rising faster than inflation and the projects 'are not economically viable and cannot be built and operated at current prices', according to NYSERDA. 'Growing demand for renewable energy projects across the country has exacerbated inflation for the cost components of renewable projects relative to broader inflation levels.' It may well be that if the US government doesn't like such price increases, it will have to bail out companies.

Rescues are also happening in Europe

After the bailout of the banks and car companies during the credit crisis, the euro bailout during the euro crisis, and the bailout of the entire business community during the corona crisis, 'green energy bailouts' are now threatening. Siemens Energy recently received €16 billion in support from the German government. Once the first sheep crosses the dam, more will probably follow. It is estimated that the energy transition in Europe would cost € 5 trillion. But that was still at low interest rates. The costs of the energy transition will increase now that interest rates have risen.

Three repercussions

The analysis described above shows that the increased raw material prices and rising interest rates initially have three repercussions. Firstly, the costs of energy (and therefore inflation) threaten to increase for both consumers and companies. The central banks also look at core inflation when achieving their inflation target, which does not take energy prices into account. That is why Christine Lagarde dares to claim that inflation will return to the target in 2025. Although higher energy prices will ultimately trickle down to all products and services.

Second, bailouts cost governments, and therefore all of us, money. The additional government spending indirectly leads to price increases, possibly later through higher taxes.

Thirdly, the energy transition is under pressure. Worldwide, investments in new energy and the production of electric cars, for example, are being scaled down. GM, Ford and Tesla have already announced this (also due to competition from China), which means that Biden's goal of 50% of all cars sold being electric by 2030 is further away than ever.

A hidden wealth transfer

And then there is a hidden fourth consequence of the (upcoming) green bailout, namely that not only the green sector will be saved, but also its financiers, the banks and investors. So they get another bailout, while the bill, as mentioned, is passed on to the taxpayers... for the umpteenth time. Of course we can now say that the climate transition has a higher purpose, but let us at least clearly identify the winners and the losers. Perhaps we can do something with that in the future.

Finally, the political-philosophical question is whether we actually want to live in a bailout economy, with all the implicit wealth transfers. Doesn't Joseph Schumpeter's 'creative destruction' ultimately produce better results? Through too much government interference, with a flood of regulations, policies, subsidies and tax rulings and oligopolistic corporates, we have created a quasi-market that no longer resembles the free market as Adam Smith intended it. I previously dared to make the statement that a truly free market is ultimately the best solution for the climate transition.

This article contains a personal opinion from Harry Geels