Saturday, June 26, 2010

Electricity Without Subsidies?

Increasingly, the question must be asked whether or not electricity generation can occur without direct or indirect government subsidies and loans. If the answer is no, then to what extent should the government be involved in the process and should it be allowed to 'play favourites' when it comes to supporting groups pursuing electricity generation.

There needs to be a clear difference made between industries that require govenment 'subsidies' and industries that require 'loans'. A subsidy is the equivalent of the government giving money to a company either through guaranteed electricity pricing or tax exemptions. A loan on the other hand involves the government giving a company money with the expectation that the money will be returned with interest.

On principle, I have no problem with the government providing loans to companies that it feels will be faithful in fulfilling their end of the deal by repaying the loan with interest. If the government doesn't believe that the company will repay the loan, then higher interest rates can be charged (in proportion to the financial risk) or the government can refuse to loan the money. The key part of this policy involves the government making the loan decision based on a financial assessment as to the risk involved with providing the loan, not political considerations as to if providing the loan will help the government politically.

The other consideration to be given is the scale of the loan required. Companies desiring to build nuclear power plants require government loans because of the scale of the loan required. Building a nuclear power plant costs billions of dollars, an amount that many private banks would be unable to provide.

Subsidies on the other hand, is the equivalent of throwing money out the window never expecting to see it back and can create a situation where a company that would typically fail, can survive because of government largesse. From the point of view of the government, there can be reasons to do this if financial considerations are not the only prevailing interest. For example, promoting a local mining company that produces rare earth metals may be a strategic interest for a government to retain a reliable domestic supply of rare earth metals.

There is a third and not completely distinct issue to be considered beyond loans and subsidies and that is the regulatory environment that a government establishes. Jurisdictions can introduce legal barriers to certain industries that make it difficult or impossible to operate successfully within that jurisdiction. Alternatively, the government can relax regulations to allow a specific industry to operate successfully where it otherwise might not.

In the Ontario electricity market, an example would be the status afforded to nuclear power plants as base generating sources, practically guaranteeing that their electricity is sold. Similarly, wind and solar plants are guaranteed that their electricity will be sold. Is such non-financial intervention better or worse than government subsidies? And to what extent should the government be able to regulate the electricity market in that way?


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