Renewables suffered their first “serious slowdown” in 2012, as their rapid growth outpaced the capacity of some economies to continue subsidizing them, according to BP Chief Economist Christof Rühl.

Global renewables consumption – defined as wind, geothermal, biomass, solar and waste – grew by 15.2% in 2012 over 2011 levels, to 237.4 million tons of oil equivalent, according to BP’s 2012 Statistical Review of Energy. Growth was led by China, the US and Italy. The US was the largest producer of power from renewable sources, at 50.7 mn tons last year, with China in second place at 31.9 mn tons.

“But renewables have also experienced their first serious slowdown,” Rühl said at the Columbia Club in New York on June 14. “With relatively slow growth in total power generation, renewables managed to continue to gain market share. They now account globally for 4.7% of power generation.”

Rühl attributed the slowdown to a rate of capacity additions that exceeded governments’ ability to continue subsidizing them.

“The problem is that they’re still by and large subsidized. They need financial support,” he said. “When you have a situation where any fuel is subsidized, and it starts to grow very fast, and its rate of expansion is higher than the cost efficiency improvements – so expansion goes faster than costs come down – then subsidization has to increase.”

Rühl said that poor fiscal and budgetary conditions in Europe – where renewables penetration rates are highest – forced cuts to financial support for renewables.

“It’s not because people don’t like renewables. It’s because they have become victims of their own success. They have become too expensive. The more they grow, the more you have to pay,” said Rühl.

He added that renewables subsidies in the US are distorting growth rates in wind power, with the expiration of the Production Tax Credit at the end of last year prompting a rush to add capacity while government financial incentives were still available.

“That was the biggest increase in wind capacity last year,” and “as a result, prospects for 2013 are for strong growth in wind production, but a much lower level of wind capacity additions”, Rühl said.

Competitive Edge

Rühl suggested that continued subsidization of renewables could prevent them from achieving the types of cost reductions and efficiency gains that could make them competitive with other fuels.

He compared the renewables industry with the US natural gas industry. “Why is it that the natural gas price is so low that you have to ask whether it will ever come back again? It’s ultimately because of technical change, because of innovation…it’s an example of this amazing capacity of the old-fashioned fossil fuels sector to reinvent itself and to drive new technologies.”

As long as renewables are not subject to the same competitive forces, they are not forced to adapt in a similar manner.

“A subsidized sector by definition is not exposed to competition,” Rühl said. “If my aim is to grow it, and I know in order to grow it I need its efficiency to improve and its costs to come down, and if I know that in order to bring costs down and increase efficiency I need competition, then I have a problem.”

Rühl acknowledged that he did not have a solution for making renewables more competitive. But he did indicate that a carbon price might level the playing field between renewables and fossil fuels.

A carbon price “brings them closer in reality to the price of other fuels, exposing them to competition”, he said.