Forcing Consumers to Buy Renewable Energy
Congress pretends to solve an energy crisis
Carbon rationing is dead on Capitol Hill. The Democratic leadership in the Senate has concluded that they cannot round up enough votes to pass a cap-and-trade carbon rationing bill that aims to cut the emissions of greenhouse gases. But in the face of the catastrophic Gulf oil spill, congressional leaders feel that they must be seen as doing something about energy. And if that something provides members of Congress an opportunity to hand out federal pork to their friends, that's a bonus.
So Democrats and some Republicans are pushing legislation that will reward favored industries, chiefly wind and solar power, by forcing consumers to buy the electricity that they produce. How? By requiring that retail electricity distributors purchase 15 to 20 percent of their electricity from wind and solar power producers by 2020. This so-called national renewable energy standard, or clean energy standard, is being carved out of energy legislation such as the American Clean Energy Leadership Act [PDF] proposed by Sen. Jeff Bingaman (D-NM).
Supporters argue that renewable energy standards cut greenhouse gas emissions, create jobs, revitalize rural communities, boost energy independence, and even lower energy prices. Many politicians find them irresistible as a way to signal to voters that they are serious about energy policy. As a consequence, two-thirds of Americans already live in the 28 states that since 1995 have begun to pursue various schemes to force consumers to buy wind and solar power. But are the claims of supporters economically credible?
When it comes to cheaply cutting greenhouse gases, renewable energy standards actually mandate perverse incentives, according to a 2008 analysis [PDF] by California State University, Fullerton, economist Robert Michaels. When it comes to cutting greenhouse gases, it may be cheaper to figure out how to get customers to cut back their demand for energy rather than build new expensive renewable capacity. Simply mandating extra capacity forecloses the opportunity to find which way is more efficient. For example, when a utility incentivizes customers to permanently cut their demand for a megawatt of capacity, this has the same effect on emissions as investing in a megawatt of renewable energy capacity. But under most current state schemes, cutting load by a megawatt under a 20 percent renewable energy standard reduces a utility's obligation by only 0.2 megawatts, while building an additional megawatt of renewable capacity counts fully for compliance.
Put another way, increasing the price of electricity causes renewable energy standards to function like a really inefficient energy tax. A salient analogy comes from the conservative think tank, the Heritage Foundation. Consider the case of a farmer who can produce 10,000 bushels of wheat using irrigation. Now suppose that the government prohibits irrigation which cuts his production to 9,000 bushels. From the point of view of the farmer that is the same as a 10 percent tax. But had the government imposed an actual 10 percent tax, it would have at least had 1,000 bushels of wheat to redistribute. Instead, those bushels (megawatt hours) just disappear.
The claim that renewable energy mandates boost overall job creation is persistent and powerful, but the experience of other countries clearly shows that such mandates destroy more jobs than they create. A study last October by an independent German economics think tank found that each solar power job cost $240,000 and overall the result of renewable energy subsidies was higher energy prices, lost jobs in other sectors of the economy, and reduced consumer purchasing power. The German study mirrored the findings of an earlier Spanish university study which reported that every green job created by subsidizing renewable energy destroyed 2.2 jobs in other sectors of the economy.
Vast agricultural subsidies have failed to "revitalize" rural areas, so why should one expect that renewable energy mandates causing wind farms to sprout across the vacant countryside will do the trick? As Michaels notes, supporters of renewable energy standards "do not make clear why outmigration that has persisted for a century should be reversed, or why power consumers should bear the costs." Why should coastal urbanites pay more for electricity just to keep 'em down on the farm in North Dakota and Kansas?
"Patriotism is the last refuge of a scoundrel," quipped the 18th century wit, Samuel Johnson. Two centuries later, few things in political life are more scoundrelly than calls for energy independence. When it comes to electricity, we are already largely energy independent since the vast majority of our power [PDF] is now generated using domestic coal, natural gas, and hydropower.
Mandating renewable energy standards will not make us more energy independent with respect to electricity, just poorer. But just how much poorer is hotly disputed. Environmental activist groups such as the Union of Concerned Scientists say renewable energy standards will boost electricity costs by mere pennies per day. As evidence, backers of renewable energy standards cite studies such as the recent one from the Energy Information Administration (EIA) that finds that the standards would boost electricity prices by a measly 3 percent by 2020. Hardly noticeable.
But can that be? Michaels notes that EIA and most other studies on renewable energy standards rely on the National Energy Modeling System to make their cost projections. This is the same energy modeling system that the EIA used in 2000 to project that the price of oil in 2010 would be $29 per barrel [PDF] (adjusted for 2009 dollars). It was about $75 per barrel yesterday. Perhaps more interestingly, the EIA also projected in 2000 that renewables would make up a "smaller share of U.S. electricity generation, declining from 11.3 percent in 1998 to 9.5 percent in 2020." The upshot is that energy model projections may be useful for outlining scenarios for energy planners, but they are not predictions.
Setting aside quibbles about energy cost and capacity modeling, if renewables like wind power were already cost competitive, then Congress would not need to mandate them. So will renewables soon be cost competitive? There are reasons to doubt they will be. Taking EIA projections with the requisite grain of salt, the agency's Annual Energy Outlook for 2010 estimated the levelized costs [PDF] of various generation plants in 2016. Levelized costs include the cost of constructing a plant, the time required to construct a plant, the non-fuel costs of operating a plant, the fuel costs, the cost of financing, and the utilization of a plant. The levelized costs per megawatt hour are $100 for conventional coal power, rising to $129 for advanced coal with carbon capture and sequestration. On-shore wind costs are $149 per megawatt hour, and off-shore costs are $191. The cost of solar photovoltaic power is $396 per megawatt hour and solar thermal is $257. For what it's worth, advanced nuclear comes in at $119 per megawatt hour.
Crudely, these levelized costs suggest that substituting wind for conventional coal under a 20 percent mandate would boost electricity prices by 10 percent. Similarly substituting solar photovoltaic power would increase electricity prices by about 20 percent. A recent analysis by the Heritage Foundation takes into account the costs of building a vast new national high voltage electricity grid to transmit wind and solar power from the plains and the deserts to coastal cities, the costs of building and maintaining additional natural gas electricity generation capacity to back up intermittent renewable energy sources, and consumer cuts in their electricity use due to higher prices. Once these and other factors are added in, the Heritage Foundation study finds that in 2020 a 15 percent renewable energy standard would reduce the disposal incomes of American families by $1,700 per year and increase unemployment over what it would otherwise have been by more than one million jobs.
Ultimately, the top-down imposition of a renewable energy standard now being considered by Congress is a stupid and costly way to cut greenhouse gas emissions; will destroy more jobs than it creates; is just another wasteful subsidy showered on depopulating rural communities; will do nothing for the chimerical pursuit of energy independence; and will, in fact, increase energy prices to consumers. A national renewable energy standard, concludes California State University economist Michaels, "is an inefficient and inequitable response to the emissions of pollutants and greenhouse gases, a reassuring and ultimately dysfunctional distraction from real problems." What could be more perfect for bipartisan action in Congress?
Ronald Bailey is Reason's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books.
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