Was it Matthew asking for ideas to get Europe’s economy moving?
It was a great insight of Keynes that spending doesn’t have to be useful to be effective in a slump (though he also said that useful was preferable). Helicopter drops of cash, banknotes buried in coal mines, and cheques mailed out randomly would work just fine, but clash with the Protestant ethic. Few Germans believe Keynes’ argument, and no German central bankers, so you really have to come up with Useful and Virtuous ideas.
At the risk of sounding like a one-subject crank, here’s mine. A part of my roof as it could be by Christmas:
What I suggest is a very large solar panel leasing scheme, funded or underwritten by the creditworthy members of the EU, meaning Germany. Taking a number out of a hat, 5 GW at â‚¬2.5 per installed watt would cost â‚¬12.5bn up front. That’s 2 million houses at 2.5 kw each, or â‚¬6,250; or 50,000 industrial roofs at 100kw, or any linear combination.
My American readers in the business were incredulous about these German costs when I last wrote on solar PV. But the German solar trade association BSW-Solar publishes an index (end of pdf) of all-in unit costs for installed rooftop systems under 100kw. Their latest number is â‚¬1.969/w without tax, making â‚¬2.34/w with VAT. Spanish wages are lower, and prices are steadily dropping, so â‚¬2.5/w must be attainable in Spain for a large scheme that’s closely based on German models.
The Spanish government has been forced by austerity to slash and cap its feed-in tariff (FIT), so the solar boom in Spain has some to a shuddering halt. But it doesn’t look as if a FIT subsidy is necessary; reverse metering, with an FIT equal to the retail price, should be enough. I pay 14.4câ‚¬ (18.3c$) a marginal kw/h before taxes; 17/7câ‚¬ (22.5c$) after tax. The latter is the relevant price for domestic substitution; the former may be relevant for feed-in, depending on the details of the tariff. At these prices, residential panels in sunny Spain pay off simply with reverse metering. Sources: Breyer and Gerlach, 2010, appendix; consultant Richard Keyser, Exhibit 2. (Keyser offers a handy rule of thumb for US conditions: multiply the installed cost in $ per watt by 7% to get the LCOE in cents per kw/h.) Solar PV imposes some hidden costs to other electricity consumers in the form of backup and night-time capacity and upgrades in the grid infrastructure. The capacity already exists as a sunk cost and the smart grid has to be paid for sometime. I think we can ignore this in our scheme.
Solar leasing has become popular in the USA. Householders hand over a good part of the benefits to leasing companies (Sungevity, Solar City) in exchange for simplicity and no cash required up front. The moral hazard to the leasers is limited: the householders don’t own the panels, but they have an incentive to maintain them properly, keep them clean and report faults. Stealing them doesn’t look practicable; where’s the resale market? Favelas in Brazil? From a policy viewpoint, leasing is a good way to build up economies of scale and learning in installation, though it’s open to abuse through opaque and one-sided contracts.
In Spain, residential solar PV (as opposed to utility) never took off because of impenetrable red tape – planning permits from the town hall, hooking up to foot-dragging utilities. The European trade association EPIA claims it takes 89 weeks on average to get through this; most householders are simply deterred. My solar installer (of hot water systems) has a list of customers who are waiting for a new right-to-connect decree, published in draft, to become effective. It doesn’t apparently impose reverse metering. I assume the utilities and grid-scale PV operators are doing their best to delay and water down the reform.
A large EU/German-funded scheme would be conditional on the adoption in Spain of drastically simplified regulations and standardised feed-in contracts. It could not, under European competition law, be tied explicitly to the use of German equipment, but in fact the German component of the value-added would be quite high. Residential PV installation is labour-intensive and dispersed. The scheme would create large numbers of jobs where they are most needed, for young people who have lost jobs in construction in the sunny South of Spain.
The main selling-point of the scheme is psychological. It maps on to two German preoccupations. (The Spanish preoccupation is to have any stimulus at all, on any conditions going).
One is the environment, where Germans are right. The rest of us should be grateful that Germany is deadly serious about renewable energy. Solar panels in Spain cut Europe’s carbon emissions even more than they do at home, with 68% more sunlight (Breyer & Gerlach).
Second, their puritanical anxiety about throwing more money away on lazy, dishonest and swarthy Mediterranean types. The closet racism is reprehensible, but remember that they have already managed to lose a lot of money with foreigners of all descriptions, including WASPS in Wall Street. German skill at generating a huge trade surplus from superior manufactures has been balanced by a remarkable incompetence at investing the corresponding capital outflows. Hence giant loans to reckless Spanish and Irish real-estate developers (the Irish are pale-skinned but drunken Catholics, so perhaps count as honorary Mediterraneans) and the Greek government, lying through its teeth for years with coaching from Goldman Sachs.
A solar leasing scheme has the huge merit of presenting Germans with visible, revenue-generating assets. PV panels are reliable and long-lived, and insolation is known perfectly. The technical risk is negligible. There is still a default risk. Ultimately the only way Germans can insulate themselves from that completely is by not running a current-account surplus in the first place. A leasing scheme with standardised and saleable physical assets (even more so than cars) is safer than anything else they are likely to find.
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My scheme is not very original. Greece has already tried its luck with a â‚¬10 bn project called Helios covering sunny Greek hillsides with utility-sized solar farms and exporting the electricity to Mitteleuropa. The EU Commission may be receptive – they are a sucker for megaprojects – but Germany is sceptical. The snag is the need for new transmission lines, on land through
bandit country rapacious and unsympathetic neighbours in the Balkans, or expensively undersea to Italy. My scheme doesn’t need new transmission capacity, and the security is a lot better.
It’s not actually very difficult to think up quite sensible forms of Keynesian stimulus in Europe. The EU has plenty of other vehicles. The problem is German politics. It’s still an open question whether Germany will choose the survival of the European project over Protestant housekeeping (30% of Germans are Catholics, but the moral culture is Protestant). The ray of hope here comes from FranÃ§ois Hollande’s election in France, combined with the defeat of Merkel’s candidate in a regional election in North Rhine-Westphalia, Germany’s most populous state. The defeat wasn’t a protest at Merkel’s popular euro policies, but it has the effect of strengthening opponents more sympathetic to Hollande’s case.