Renewable energy and green jobs An empirical analysis for the UK

Gordon Hughes
University of Edinburgh

The issues in the UK

The UK has a target to generate 30% of electricity from renewable sources by 2020 Investment in wind power is *very* expensive Arguments:
Short term jobs created in manufacture & installation Long term Porter hypothesis infant industry argument Development of new technologies & expertise

Basic macroeconomics energy & environmental policies have, at most, a transitory impact on employment contrast with labour market policies
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Background - some basic constraints

Typical load factor for UK wind farms - ~25% for onshore, ~28% offshore
Assumes no dispatch or transmission constraints

Under UK market conditions wind displaces nuclear power but requires gas as backup Large requirement for additional transmission capacity to serve wind farms (Scotland, North Sea)
Difficult to fund with postage stamp transmission charges

Peak demand (winter) correlates with low wind yield

Limited scope for pooling in Europe overlapping peaks plus similar weather conditions & high transmission costs
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The economic costs of wind power

Like-for-like comparison between gas & wind power to meet 20% of 2020 demand
Gas about 22 GW of CCGT, capital cost 13 billion, fuel + O&M costs about 5.9 billion per year Wind about 36 GW + 13 GW of gas OCGT backup + transmission, total capital cost 120 billion, fuel & O&M costs about 5.4 billion per year Reduction in CO2 emissions < 23 million tonnes (2.8% of UKs emissions in 1990) - could be much less than this Average cost of GHG reduction ~ 270 per tonne of CO2 under most favourable assumptions Carbon floor price for 2020 set at 30 per tonne of CO2
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Direct & indirect employment

An investment of 120 billion rather than 13 billion will necessarily increase demand for labour
With GDP constant this financed by diverting investment from other sectors - 107 billion 10% business investment outside the electricity sector to 2020 Major supply bottlenecks substantial cost inflation likely

Renewable energy creates less employment income per million of investment than gas or nuclear Electricity investment is marginally more labourintensive than other business investment but substantial less labour-intensive than construction and investment in other types of infrastructure
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Employment income per 000 of capital spending on electricity generation

Construction A. Direct capital spending Nuclear Coal Gas Wind - onshore Wind - offshore Solar - photovoltaic Solar - thermal Biomass Hydro Nuclear Coal Gas Wind - onshore Wind - offshore Solar - photovoltaic Solar - thermal Biomass Hydro 32 32 42 28 42 23 9 32 102 73 73 93 62 93 52 21 73 228 110 121 110 131 110 0 31 121 31 165 181 165 196 165 0 47 181 47 11 26 19 22 26 41 19 26 19 17 40 29 34 40 63 29 40 29 0 0 0 0 0 33 39 0 0 0 0 0 0 0 49 57 0 0 57 19 32 19 19 32 32 19 44 95 32 53 32 32 53 53 32 74 210 198 202 200 197 129 130 198 196 350 325 340 325 330 217 206 325 378 Boilers, turbines, etc Mechanical & Solar equipment electrical Other Total

B. Direct & indirect capital spending

Technology & the Porter hypothesis 1

Claim: green technology will form the basis for future comparative advantage in manufacturing Facts:
Employment in producing turbines, etc < 5,000 or ~20% of employment in conventional generation equipment In the US, employment < 20,000 Most employment for building wind farms is in construction + conventional electrical & mechanical equipment No country, other than China, has seen sustained growth since 2005 in employment linked to manufacturing of renewable generation capital equipment.
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Technology & the Porter hypothesis 2

Claim: infant industry argument R&D + learning by doing will reduce capital costs in future Facts:
Real cost of new installed capacity for both wind & solar PV stopped falling in early/mid 2000s Without a fundamental technical change, future capital costs of renewables will be determined by location (less favourable), construction and electrical/mechanical items
No reasonable prospect of large cost reductions

The original Porter hypothesis for environmental equipment has been repeatedly shown to be wrong
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Energy prices & economy-wide effects

Renewable energy targets will increase wholesale electricity prices by 100-150% in the UK Since the UK is an open economy with high capital mobility, higher energy costs will primarily fall on wages and/or employment in producing traded goods Sectors identified account for 40% of employment in production of traded goods Impact will vary from reductions in wage income to complete closure of plants Effects are much bigger than any employment in producing capital equipment for renewable energy
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Sectors potentially affected by increase in energy costs

Reduction in employee compensation due to: 150% increase in electricity cost 55.0% 48.4% 44.0% 43.8% 41.3% 32.7% 22.9% 18.9% 17.9% 17.7% 15.4% 15.2% 14.7% 14.7% 14.1% 14.1% 12.9% 12.8% 12.4% 12.3% 11.9% 11.8% 11.5% 11.1% 10.5% 10.3% 10.2% 10.0% 100% increase in energy cost 203.7% 73.3% 90.9% 125.0% 59.7% 49.1% 41.9% 29.6% 17.0% 29.0% 23.9% 55.0% 13.7% 20.9% 18.1% 14.5% 50.4% 20.0% 25.4% 15.6% 32.1% 10.1% 11.5% 58.9% 18.6% 11.5% 23.1% 11.8% Employee compensation, 2008 mln 109 2,415 504 877 650 637 840 365 1,292 1,747 1,504 905 662 2,058 849 2,457 4,178 411 822 4,871 1,201 406 702 190 570 1,977 1,546 4,280 Fishing Metallurgy Building materials Inorganic & organic chemicals Pulp, paper and paperboard Industrial gases and dyes Glass and glass products Animal feed Shipbuilding and repair Articles of concrete, stone etc Mining & quarrying Fertilisers, plastics & pesticides Weapons and ammunition Paper and paperboard products Rubber products Structural metal products Agriculture Soft drinks and mineral waters Dairy products Plastic products Other chemical products Machine tools Other transport equipment Oils and fats Ceramic goods Special purpose machinery Alcoholic beverages Metal forging, pressing, etc

Macroeconomic effects
Diversion of business investment
Reduction in output ~2% of potential output in 2020 Equivalent to 40% of target reduction in public expenditure announced in 2010 Will fall almost entirely on employee compensation

Monetary policy if inflation target is maintained, core inflation must be reduced by 0.7-0.8% per year
Sacrifice ratio generally considered to be > 2 Hence, economic activity must be reduced by > 1.5%

Overall, macroeconomic cost is reduction of at least 2-3% in GDP for 10 years cost equivalent to 15-20% of current GDP

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Conclusion
The impact of renewable energy on employment is entirely a function of its cost Allowing for the diversion of business investment the net impact will be negligible or, maybe, negative Renewable technologies are not an infant industry
No evidence for significant impacts on future growth Too much competition for sustained comparative advantage

The economy-wide impacts of higher energy prices are potentially large So too are the consequences for macroeconomic policies
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