Nous ne l'avons pas vue venir

Greg Mankiw’s Principle #4 – People Respond to Incentives

An article from Bloomberg reports that the French government has required the electricity provider to pay above market rates in an effort to encourage more renewable energy. Surprisingly, to some, this has caused an increase in the number of solar energy producers. The situation is so bad, that farmers are building barns so they have a place to mount the solar panels. (Click here for article)

Profits are down at Electricite de France SA and this is hampering their ability to fund life-extending maintenance on its nuclear reactors. It is also restricting their investment in the U.K., China and Italy.

The problem is not unique to France. Elsewhere subsidies have increased the number of solar fields, to the point where, in Germany, customers are paying surcharges to fund the subsidy. This is a massive welfare transfer from users of electricity to solar power producers. Solar power producers are paid 546 euros per MWh while the spot price is 55 euros. At those prices, farmers can get rid of their cows and produce electricity instead.

It’s only week 5 of the new semester, but I’m pretty sure that 90% of my students can tell you that supply curves are upward sloping. The amount produced at 546 euros will be greater than at 55 euros. They haven’t learned that economic profits encourage firms to enter and industry, but they will by week 9. Unfortunately, politicians rarely take economics. A comment from French parliamentarian in response to the growth of the solar power industry … “We just didn’t see it coming” (Nous ne l'avons pas vue venir)