IER, April 15, 2009
In the ongoing debate over “renewable energy,” one of the primary sticking points is the compliance costs that government mandates would impose on utilities, consumers and the broader economy. Critics of a federal electricity mandate have warned that the Southeast in particular would be hard-hit by proposals to produce a certain percentage of electricity from approved technologies.
In response, the Union of Concerned Scientists (UCS) has recently released a new study prepared by the Southern Alliance for Clean Energy.[i] The study surveys some of the literature and declares that:
The Southeast has the ingenuity and renewable energy resources to become more prosperous and energy independent. Utilities across eleven Southeastern states can tap homegrown clean energy resources to meet a significant percentage of electric power demands. Our analysis of renewable energy estimates in the region show sufficient resources to fulfill an aggressive national mandate for renewable energy.
Yet despite the triumphant conclusion, the UCS’s touted study does little to move the debate forward. For one thing, its projections of renewable “potential” rely on very optimistic assumptions, and pick only the most favorable estimates from among the spectrum of plausible forecasts. Perhaps more significant, because the study focuses on matters of engineering, rather than economics, it almost entirely misses the point: The issue is not whether a proposed renewable electricity mandate is technically feasible, the question instead is how much will it hurt the economy? Unfortunately, the UCS study contributes nothing to answering this crucial issue.
Rosy Scenarios
The UCS study explores the feasibility of a national renewable electricity mandate that requires 15% generation from renewables by 2015, 20% by 2020, and 25% by 2025. (It’s fortunate they did not attempt such legislation a few decades ago; one can imagine President Jimmy Carter signing a law requiring 85% renewables by 1985, 90% by 1990, and 95% by 1995…)
In achieving its optimistic projections for renewable electricity production in the Southeast, the UCS study relies on many assumptions. In its words:
Twenty-first century policies must prioritize actions that will achieve energy independence and minimize global warming pollution. In addition to a national Renewable Energy Standard (RES), the following policies are needed (and assumed in this analysis) to help achieve these goals:
- National carbon dioxide “cap-and-trade” or equivalent policy.
- Third party suppliers of electricity paid at market-based cost of service, reflecting off-peak and peak system value.
- A solar “carve-out,” feed-in tariff, or other policy that provides a premium value for investment in solar energy (to the extent that this value is not already reflected in payments at a market-based cost of service).
- Complementary government biofuel policies.
- Responsible and predictable permitting for low-impact hydro, onshore wind, offshore wind and biomass power plants.
- Extension and expansion of state and federal tax credits for renewable energy and efficiency through 2020.
- Moderately high fossil fuel costs.
- Relatively low capital costs for renewable energy projects that are sustained from recent experience.
- Biomass resources proven to be available at the higher end of resource potential range.
- Relatively rapid rate of technology adoption.
Other renewable technologies are even more exaggerated in the study, relative to the government estimates. For example, EIA indicates about 7 gigawatts of offshore wind “potential” for Florida, which is in relatively deep water and of the lowest quality wind resource. Yet incredibly, the UCS study shows over 40 gigawatts of “potential” offshore wind resource in Florida with no indication regarding depth or wind quality, and claims that 612 megawatts are “feasible.” If offshore wind gets built in the U.S., it is unlikely to be built any further south than Cape Hatteras since the wind quality drops off quite precipitously in the south and decent quality wind is in very deep water. Costs would be prohibitively too high to access these lower quality wind resources and would not make economic sense unless there is a very severe push toward local renewable generating technologies. Further, the UCS study indicates that 14 gigawatts of onshore wind are “feasible,” while EIA analyses show that low quality wind resources in the West would be built before lower quality wind resources in the Southeast—a situation that would require the Southeast to buy credits from other states. Some federal lawmakers from the Southeast are quite worried about this potential wealth transfer from their region to other parts of the U.S.
Solar technology is another area of major discrepancy between the UCS report and official government projections. EIA does not believe that solar will be competitive for wholesale markets through 2030. In EIA’s renewable electricity analyses, solar energy penetration, which is all in end-use markets, reaches 20 gigawatts for the nation due to being awarded a “triple credit” in the proposed bill analyzed, meaning that distributed photovoltaics (PV) is awarded three times the credit price. That is, if renewable credits are trading at 2 cents per kilowatt-hour, end-use PV would be awarded a credit of 6 cents per kilowatt-hour. The UCS study believes that almost 80 gigawatts of solar are “feasible” in the Southeast alone, with a total “potential” of 545 gigawatts. While it is true that there is enough sunshine in the Southeast to serve energy needs several orders of magnitude in excess of expected demand, the economics for solar central station generation are not competitive with other renewable technologies, with its cost being more than three times higher than onshore wind and biomass and 1.5 times higher than offshore wind.[vii]
Finally, the UCS study also has extremely high values for total “potential” capacity for geothermal in the Southeast, at over 1,000 gigawatts, though they admit that the “feasible” capacity is zero. EIA’s analyses of renewable electricity mandates result in less than 10 gigawatts of geothermal capacity nationwide.
Engineering versus Economics
In the section above, we explained the numerous shortcomings in the study’s estimation of renewable potential. But even if we conceded the UCS study’s numbers, just for the sake of argument, it would still not follow that a national renewable electricity mandate is a good idea, or that the Southeastern economy would absorb the blow easily. This is because the UCS study has confused engineering with economics.
At best, all of the tables and citations in the UCS study prove only that it is physically possible for the utilities in Southeastern states to adapt to the renewable percentage mandates under a national renewable mandate. But so what? Just because something is technically feasible, does not make it economically efficient.
For an analogy, suppose that in an effort to reduce carbon emissions, the federal government mandates that 20 percent of every large corporation’s employees must ride bicycles to and from work. Business groups would of course complain that this would put an undue burden on large corporations and many employees would likely quit and seek work elsewhere. It would also impose huge new expenses on municipalities, who would have to completely revamp their roads to accommodate the huge surge in cyclists. Yes, these adaptations would be possible, but nonetheless, the draconian measure would still be incredibly costly. It would make business operations much less efficient and Americans on average would be poorer, because many workers would now be producing less output per day.
We face a similar situation when it comes to electricity generation. Currently, the United States only relies on the politically correct “renewable” technologies to produce 3% of its electricity.[viii] The reason for this isn’t some pro-fossil fuel bias on the part of the utilities; on the contrary, they rely on coal, oil, and natural gas because these are the most economical and dependable sources of power, at least with current technologies.
The marketplace is perfectly capable of fostering innovation. It didn’t take a federal tax on buggies or an annual cap on horse manure to force the U.S. transportation sector to switch over to automobiles in the early 20th century. By the same token, as wind, biomass, and other sources of electricity generation become more competitive with coal, oil and natural gas, then utilities will naturally expand their use. The UCS study had to assume “Extension and expansion of state and federal tax credits for renewable energy and efficiency through 2020” precisely because renewable energy sources can’t survive without government handouts.
An Energy Information Administration (EIA) report[ix] indicates that Federal subsidies for renewable generation for wind and solar in fiscal year 2007 were almost 100 times those for oil and gas-fired generation and over 50 times that of coal-fired generation. For example, EIA data show that solar power was subsidized at $24.34 per megawatt hour and wind power at $23.37 per megawatt hour for electricity generated in 2007. By contrast, traditional coal received 44 cents, natural gas and petroleum received 25 cents, hydroelectric power 67 cents, and nuclear power $1.59 per megawatt hour.[x] For wind power, these subsidies include a production tax credit of 2.0 cents per kilowatt-hour.[xi] However, they do not include accelerated depreciation (a five-year write-off), a favorable accounting treatment that wind developers receive.
As these facts indicate, for the UCS study to point to even the existing level of renewable electricity generation as proof that it “can work” misses the big picture: An operation isn’t efficient if it requires government support against its competition. If the government cut off its preferential treatment for wind and solar, these sources would become an even smaller portion of the current energy mix.
In a small section at its conclusion, the UCS study briefly addresses the economic impacts of a renewable electricity mandate. Yet here the study informs the reader that an additional set of government constraints will help the economy. In its words:
A national Renewable Energy Standard (RES) that reaches a target of 25% by 2025 can play an important role in strengthening our region’s economy. Developing the Southeast’s renewable energy potential will create new economic opportunities and spur demand for a variety of skilled trades and professional careers.
This is quite simply a crude fallacy. There is nothing intrinsic to the argument here about “green” jobs. If this logic is correct, then any government mandate on business—for example, to put polka dot wallpaper up on all their offices—would “create new economic opportunities” and “spur demand.” Yet that analysis can’t possibly be right. It overlooks all of the jobs that would be destroyed by the new mandate. And in the same way, the UCS study is ignoring the jobs that are destroyed by an renewable electricity mandate. It cites studies purporting to show otherwise, but such studies often contain very basic methodological errors.[xii] They can’t disprove the commonsensical insight that the government doesn’t make the economy more efficient by imposing more hoops for businesses to jump through. If it really made economic sense for the solar panel and wind turbine industries to grow and attract new workers, then those industries would do so in a free market.
John Adams once said “Facts are stubborn things; and whatever maybe our wishes, our inclinations, or the dictates of our passion, they cannon alter the state of facts and evidence.” All too often, this important edict gets lost in the public debates on energy and environmental policy. By focusing on the technically “possible” and then claiming that new business regulations would boost the economy, the UCS study ignores the reality that certain and immediate economic harm would come from federal intervention into energy markets. And while some may support such a policy without regard to the costs, they cannot – and should not – be ignored.
References
[i] See “Yes We Can: Southern Solutions for a National Renewable Energy Standard,” available at: http://www.cleanenergy.org/images/stories/serenewables022309rev.pdf.
[ii] For example, see Energy Information Administration, “Impacts of a 15-Percent Renewable Portfolio Standard,” June 2007, www.eia.doe.gov/oiaf/servicerpt/prps/pdf/sroiaf(2007)03.pdf; and Energy Information Administration, “Energy and Economic Impacts of Implementing Both a 25-Percent RPS and a 25-Percent RFS by 2025,” September 2007, http://www.eia.doe.gov/oiaf/servicerpt/eeim/policy.html
[iii] Energy Information Administration, “Regional Generation Impacts of a 15-Percent Renewable Portfolio Standard,” August 2007, http://www.eia.doe.gov/oiaf/servicerpt/prps/regional_generation.html?slide=13
[iv] The UCS study defines a feasible resource as “one that can be developed without compromising an obvious restriction or and under a reasonable (but perhaps aggressive) policy scenario.”
[v] According to the UCS study, “total potential capacity indicates the potential maximum peak output if all resources identified in the study were used to generate power.
[vi] EIA’s Southeast region includes Maryland and West Virginia, which are not in the UCS’s Southesat region.
[vii] Energy Information Administration, “Annual Energy Outlook 2009,” levelized generation costs.
[viii] Energy Information Administration, Monthly Energy Review, Table 7.2a, http://www.eia.doe.gov/emeu/mer/pdf/pages/sec7_5.pdf.
[ix] Energy Information Administration, Federal Financial Interventions and Subsidies in Energy Markets 2007, http://www.eia.doe.gov/oiaf/servicerpt/subsidy2/pdf/chap5.pdf, Table 35.
[x] For more information on renewable subsidies, see http://www.instituteforenergyresearch.org/2008/07/30/energy-subsidies-study/.
[xi] Energy Information Administration, Assumptions to the Annual Energy Outlook 2008, page 155, http://www.eia.doe.gov/oiaf/aeo/assumption/pdf/renewable.pdf
[xii] For a critique of several leading “green jobs” proposals, see: “Green Jobs: Fact or Fiction?” at: http://www.instituteforenergyresearch.org/green-jobs-fact-or-fiction/.
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