Angry Birds: Fun Game or Innocent Wind Power Victims?

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Outside of peripheral debt troubles, there's another fairly common European theme. It's difficult to spy in major media sources, but several European countries are drastically cutting renewable energy subsidies, including Italy, Spain, Germany and the Netherlands.

With Italy and Spain, it's not hard to fathom why-peripheral eurozone nations struggling to rein in federal debt and/or deficit woes likely don't have a lot of discretionary funds available to subsidize much of anything, let alone alternative energy development. But Germany and the Netherlands are perhaps a little more surprising. After all, Germany recently shuttered the doors of eight nuclear power plants in the wake of Japan's tragedy last year and, to many, appeared poised to become a global leader in solar power. As it turns out, Germany's currently importing a decent chunk of electricity because its solar farms aren't able to meet demand (not too surprising in a country that doesn't see all that much sun, relatively speaking).

And then there's the Netherlands-land of clogs, tulips and ... windmills. If anyone seemed likely to make wind power work efficiently, it was undoubtedly the Dutch. And indeed, they were commonly praised as an example to whom the rest of the world should look. But the example they're giving now is a government that's significantly cutting wind power subsidies.

The reason for the cuts? Simply stated, the programs are unsustainable (no pun intended) at the current cost to the government (i.e., taxpayers). The Netherlands is proposing shifting the cost to consumers, while creating a way for "interested parties" to help fund it as well, though that's still only estimated to collect a third of the total cost. Meaning it's pretty likely consumers will choose to light their homes via cheaper (i.e., conventional) energy sources, at least for the time being.

There's an important economic lesson to be learned in this development: Government subsidies are rarely the best means for achieving an end, no matter how socially valuable it's generally deemed. Consider the implied costs of subsidies-not only to the taxpayers who foot the bill to help support the fledgling cause, but also to lost competition. After all, the government's essentially preordaining the winner of a competition typically played out in a more open market. So chances are the companies who might be able to provide the sought good or service at a price the market would support (i.e., a price consumers would pay and which exceeds the cost of production sufficiently that the company can stay afloat) may be forced to go under.

Overall, subsidies also likely discourage innovation. There's little incentive for firms to pursue, invest in and develop new and improved technologies if the government's already largely determined the winner. Meaning there might be an even better way to achieve the goal in question no one's ever considered, but there's little incentive to pursue that technology if those efforts are unlikely to be rewarded by consumers in the market.

The reality is free, unfettered competition is much more likely to lead to successful alternative energy sources than government subsidies. Why? Because it is precisely fierce competition that encourages companies to stay one step ahead of their opponents. If there's a better, cheaper, faster but cost-effective way to provide a good or service and undercut their competition, you better believe a company will deploy that technology. Not only that, but they'll likely dedicate resources to researching new ways to achieve the same thing.

Consider the recent technology revolution: The various computer, software, cell phone, you-name-it technology companies haven't sat on their hands and waited for competitors to evolve and release the next-generation gizmo and edge them out of the market. Instead, we're witnessing a pretty intense race in which all participants continually seek to one-up each other in a self-perpetuating (and virtuous) cycle from which consumers ultimately benefit in the form of cheaper, smaller, faster, lighter and near-infinitely more powerful products.

Now consider the possibilities if something similar were allowed to take place in the energy industry. Already, energy companies have made mind-blowing progress in horizontal drilling and fracking-a technique previously considered economically unfeasible. But with renewable energy sources heavily subsidized in many countries, incentives for the private sector to pursue still further innovations here are out of whack. The recent illuminating cases of the Netherlands and Germany (among others) illustrate well the perils of relying on government subsidies to primarily drive energy innovation.

We're all for technological development in whatever field in question-from technology to energy to health care and so on. And humans will no doubt evolve increasingly green energy sources in the future we can't currently even fathom. Further, government subsidies have played a role in development of instrumental technologies through history. But absent compelling incentives for the private sector to start competing, the chances future game-changing developments happen on the back of government subsidies are pretty slim. The free market and capitalism-the greatest source for societal good mankind's short history has thus far seen-are much more likely to accomplish that goal.

(This article constitutes the views, opinions, analyses and commentary of Fisher Investments as of March 2012 and should not be regarded as personal investment advice. No assurances are made Fisher Investments will continue to hold these views, which may change at any time without notice. In addition, no assurances are made regarding the accuracy of any forecast made herein. Past performance is no guarantee of future results. A risk of loss is involved with investments in stock markets.)


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