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Energy Policies and Electricity Prices: Cautionary Tales From the EU

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Energy Policies and Electricity Prices: Cautionary Tales From the EU

March 24, 2016

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European energy policies have long been viewed favorably by U.S. pundits, environmentalists, and politicians. Germany, in particular, is often held up as a model to be copied. For instance, in 2015, New York Times columnist Thomas Friedman declared that what the Germans have done by “converting almost 30 percent of their electric grid to renewable energy from near zero in about 15 years has been a great contribution to the stability of our planet and its climate … a world-saving achievement.”

In 2009, on Earth Day, President Barack Obama said: “Denmark produces almost 20 percent of their electricity through wind power…. When it comes to renewable energy, I don’t think we should be followers. I think it’s time for us to lead.”

The push for leadership on climate issues has led some U.S. policymakers to emulate European-style energy policies.

European climate change policies are primarily designed to decrease carbon-dioxide emissions and increase the use of renewable energy. In 2011, the European Commission established an Energy Roadmap, which set a goal of reducing E.U. greenhouse gas emissions by at least 80 percent—compared with 1990 levels—by 2050. At the same time, several European countries are restricting the production of natural gas and, in the case of Germany, aiming to phase out nuclear energy. These policies have resulted in dramatic increases in electricity costs for residential and industrial consumers. 

Although the E.U. has seen a reduction in its carbon-dioxide emissions since 2005, those reductions pale in comparison with increases in the developing world. The observable results from Europe thus offer a cautionary tale to policymakers in the United States who seek to tackle climate change via government mandate. Nevertheless, two states, New York and California, are mimicking European-style energy policies: both states have adopted aggressive renewable-energy and greenhouse gas emissions-reduction goals that are likely to further increase those states’ already-high energy costs. 

Between 2005, when the E.U. adopted its Emissions Trading Scheme, and 2014, residential electricity rates in the E.U. increased by 63 percent, on average. In Germany, those rates increased by 78 percent; in Spain, by 111 percent; and in the U.K., by 133 percent. Over the same period, residential rates in the U.S. rose by 32 percent.

During 2005–14, residential electricity rates in Germany, which has the most aggressive support for renewables, increased by 13 cents, to 40 cents per kilowatt-hour—an increase larger than the average cost of residential electricity in the U.S. (12.5 cents). As the figure shows, Europe’s experience over the last decade strongly suggests that increasing renewable mandates have been the proximate cause of higher electricity prices for consumers.


Wind and Solar Capacity and Electricity Prices, Select Countries, 2012


E.U. countries that have intervened the most in their energy markets—Germany, Spain, and the U.K.—have seen their electricity costs increase the fastest. During 2008–12, those countries spent about $52 billion on interventions in their energy markets.

Emissions reductions achieved by the E.U. since 2005 have been greatly exceeded by increases in emissions in the developing world. During 2005–14, the E.U. reduced its carbon-dioxide emissions by 600 million tons per year. Over that same period, the combined emissions of four developing countries—China, India, Indonesia, and Brazil—increased by 4.7 billion tons per year, or nearly eight times the reduction achieved in the European Union. 

Bans or restrictions on hydraulic fracturing and, therefore, on natural gas production have made European countries more dependent on imported energy and have contributed to higher electricity prices.

Europe’s energy-policy lessons are easily deduced: while renewable energy may be politically fashionable, it imposes real costs on consumers and industry. Policymakers from California to New York would do well to heed the warnings provided in the 2014 report by the Swiss firm Finadvice: “[T]he lessons learned in Europe prove that the large-scale integration of renewable power does not provide net savings to consumers, but rather a net increase in costs to consumers and other stakeholders…. [L]arge-scale integration of renewables into the power system ultimately leads to disequilibrium in the power markets, as well as value destruction to both renewable companies and utilities, and their respective investors.”

To avoid the kinds of mistakes seen in Europe, U.S. policymakers should be required to do rigorous cost-benefit analyses before imposing renewable-energy mandates and carbon-dioxide emissions reductions on consumers and industrial facilities. Those cost-benefit analyses must include estimates of the total cost of the mandates, as well as estimates of the effect that the resulting emissions-reductions efforts will have on global carbon-dioxide emissions—and, therefore, on projected future global temperatures.

Finally, U.S. policymakers must keep their efforts to reduce carbon dioxide in global perspective. Reductions made in the E.U. and the U.S. cannot stop the growth of emissions in the developing world: renewable mandates may simply end up costing consumers a lot of money while doing effectively nothing for the global climate.


Robert Bryce is a senior fellow at the Manhattan Institute for Policy Research. You can follow him on Twitter here.

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