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The Mafia Finds Windpower: Report from Italy

So, the bad guys are found in the green business, too. Police in Italy have charged eight people, allegedly with Mafia connections,  for corrupting local politicians in order to get a project for a wind farm in Sicily assigned to companies close to the Mafia. Honest people in the renewable industry, such as Carlo Durante of the Milan-based Maestrale Green Energy, have pointed out that the main reason why the Mafia can play the renewable game is the confusion and uncertainty in the licensing process, which has too many people involved in giving the authorizations and a great degree of arbitrariness. There is more than a grain of truth in this: It doesn’t apply to the renewable business alone, indeed, but it is a general feature of “doing business” in the country, as a World Bank survey demonstrates eloquently.

There is, however, a broader reason why the Mafia is more active in the renewables and other politicized businesses than in competitive segments of the market. When the state is involved, it is not just economic reasoning that determines which investments are to be made: Political decision makers do not answer to transparent economic incentives. The greater their arbitrariness, the greater is the temptation of being corrupted. Corruption has a very high opportunity cost in the private sector—if you make economically unsound decisions, you are likely to be expelled from the market by more efficient competitors; therefore you have a long-term incentive to resist temptation. But if you are a politician, there is no such thing as the long-run: You will try to maximize your own interest as soon as possible, and, because your term will end, you will not bear any cost (except from the relatively low risk of being caught).

An even broader lesson can be drawn by looking at how these things works. While corruption is a pathological problem, it is not the main driver of extra-costs for the consumers: the major driver is that inefficient and costly energy sources are deployed, energy sources that could not survive a free market. Significantly, the diffusion of renewables depends mostly on the amount of incentives (either monetary—subsidies, green certificates, and the like—or regulatory, as is the case with mandates). In 2007, for example, wind and photovoltaic energy had been remunerated on average at, respectively, 145.8 and 208.2 €/MWh, well above the market price of electricity (the peak price in the wholesale market in 2007 was slightly above 90 €/MWh).  That is a 60% and 130% premium to market, respectively.

Under such asymmetry between the actual market value of electricity, and what consumers are required to pay in order to sustain investments in politically correct sources, one can easily understands both the sharp rise of green investments in the last few years, and the strong interest of the Mmafia.

4 comments

1 Tom Tanton { 02.26.09 at 10:34 am }

This sort of corruption is happening here, albeit apparently w/o the Mafia connection. See my aricle of last September regarding the NY State AG investigation of similar doings.
http://www.heartland.org/publications/environment%20climate/article/23691/New_York_State_Investigates_Wind_Companies_for_Improper_Business_and_Political_Dealings.html

2 DB { 02.26.09 at 3:26 pm }

What is the source of the remuneration rates for wind and PV?

3 TokyoTom { 02.27.09 at 2:58 am }

When the state is involved, it is not just economic reasoning that determines which investments are to be made: Political decision makers do not answer to transparent economic incentives. The greater their arbitrariness, the greater is the temptation of being corrupted.

You are very right to point this out, Rob. As Tom Tanton points out, the same holds true, of course, for all decisions made by our federal and state governments – and as probably even more so with respect to areas where there is more money at stake.

Just look at our various scandals relating to public lands and the MMS, for example.

4 GardenState { 02.26.13 at 5:07 pm }

This is good information. I understand the energy business to be like public transportation, and all the producers received subsidies of one kind or another, and fight like hell to keep them at budget cutting time. What’s that remuneration look like for fossil fuels?

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