The Case Against a Federal Renewable Power Requirement

by Robert J. Michaels, California State University, Fullerton

It is no surprise that the incoming Obama administration intends to reorient energy policy and better integrate it with environmental policy.

It has already announced that one important element will be a national renewable portfolio standard (RPS) requiring all utilities to obtain some percentage of their power from renewable sources. As of this writing, 28 states and the District of Columbia had RPS, and another five had enacted nonbinding goals.

All agree that wind, solar, biomass and geothermal power are renewable, but beyond those sources renewability is a legal matter. Rain renews all hydroelectric facilities, but no state RPS calls a unit renewable if its capacity exceeds 60 MW. Among other oddities, burning waste coal puts Pennsylvania utilities in compliance, while Connecticut only allows crop-based (not forest product) biomass. Localized interests will surely attempt to qualify their favorite renewables in any federal law.

Since the energy crises of the 1970s, renewables have continually loomed larger in the national agenda, as evidenced by the size of federal research support. Despite the continuing attention, their contributions remain strikingly small.

Table 1 shows that, in 1994, renewables as a group accounted for 2.36 percent of all power production, a figure that fell to 1.89 percent in 2001 before rising to 2.48 percent in 2007. Over the period, geothermal and waste-fueled generation actually declined, and solar’s 22 percent increase conceals a decrease in its percentage contribution, from 0.62 percent to 0.59 percent of renewable output.

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Absent the growth of wind power, renewable output would have declined during the past 16 years. Higher fossil-fuel prices, increased environmental concerns and the growth of integrated resource planning have all failed to bring forth the renewables that were expected to transform America.

Why Question a National RPS?

It is an inefficient environmental policy. Some supporters wax romantic, but most people find renewable generators no more appealing than conventional ones–modern wind turbines are 400 feet tall and noisy, biomass plants look and pollute like conventional ones and commercial-sized solar thermal production requires square miles of land. Most renewable backers instead stress their lack of emissions, both EPA -criteria pollutants (including oxides of nitrogen and sulfur) and greenhouse gases (GHG).

The economic question, however, is about efficiency–how to achieve a given emissions reduction at the smallest sacrifice in other goods and services. A renewables quota like an RPS is inconsistent with economically efficient environmental policy on several grounds.

  • First, an efficient policy should include all sources of a pollutant (or GHG). Singling out power production means bypassing industries that might yield the desired reduction at lower cost.
  • Second, an efficient policy attacks the pollutant directly rather than requiring a particular technology. Taxing pollution or instituting tradeable allowances motivates both buyers and sellers to find low-cost mitigation techniques, which may be either on the demand or supply side of the market.
  • Third, be geographically sensitive, concentrating control efforts on regions where pollution causes the most harm (e.g. Southern California ozone or northeastern acid rain) and hold others to lower standards.

By all of these criteria, a national RPS is inefficient. U.S. environmental policy has seen great improvements in setting allowable concentrations of pollutants by balancing their harm against the cost of mitigation, and moving from command-and-control to regulations that harness market incentives. A national RPS is a massive retrogression in environmental policy.

Renewables do not create jobs. The claim that green jobs will follow a national RPS is an elementary economic fallacy. Assume that constructing and operating a megawatt of renewable capacity requires four times more workers than one of conventional capacity. If putting 400 workers on the renewable creates 300 more jobs than the conventional plant, the latter leaves 300 workers free to produce other goods and services while still getting the capacity built. Building the renewable means paying 300 extra workers, whose incomes can only come from higher electric bills or taxes. Consumers and businesses cannot spend these added funds on other goods and services where fewer workers will be needed.

Building the renewables throws away part of the workforce and raises everyone’s light bill. There is no large pool of long-term unemployed people (with just the right skills) waiting to be hired by renewables producers. According to the U.S. Bureau of Labor Statistics, the median length of unemployment in 2007 was 8½ weeks, during which most laid-off workers received unemployment compensation.

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Renewables do not need a jump start and are unimportant for security. Whatever its sources, high worldwide spending on renewable plants and research means that it is hardly an infant industry that requires policies like RPS to become competitive. Even if subsidies were required, economics recommends direct payments rather than RPS. In this worldwide industry there is no guarantee that a national policy will somehow advantage the U.S. as a competitor in international markets, or that any advantage the country might gain will be durable. Renewables are only one of many tools utilities can use to handle fuel-price risks, and there is no reason to believe they are more efficacious than more commonly used hedges. Finally, renewables bear no relation to energy independence because only 2 percent of the nation’s power comes from oil, the most important international energy risk. The coal, gas and uranium that power most generators are either North American or easily stockpiled.

Renewables Equal Wind?

There is little doubt that for the next decades any increase in renewable generation will largely be met by wind power, the renewable with the most potential generation sites and the technology closest to economic viability. Fossil fuels are deliverable to generators located near loads or where they can best contribute to reliability, but with rare exceptions renewables are site-specific and often entail dedicated transmission. Wind power requires wind. Geothermal requires underground heat sources that do not exist everywhere, and solar facilities lose effectiveness in northern and cloudy areas. Most biomass and waste materials become uneconomic if they must be transported more than 50 miles. Siting considerations have helped make wind the sole growing renewable, but it, too, is losing its social acceptability as landowners in many areas realize its effect on their property values, views and noise exposures. (Bird kills, however, appear to be an exaggerated problem.)

Wind power has substantially increased in unit sizes and tech-nologies, but it remains largely uneconomic, even at 2007 fossil-fuel prices. It still lives or dies with its tax treatment. Accelerated depreciation is allowed, and a federal production tax credit (currently 1.9 cents per kWh) has been enacted, lapsed and re-enacted four times in the past 10 years. When it has lapsed, investment has fallen by 75 percent or more. Its costs do not necessarily reflect its value to the grid. Capacity factors have improved, but those of most wind sites are 30 percent or less. Worst, wind in most of the U.S. blows least when it is needed most. At their states’ 2006 annual peaks, wind generators in Texas and California were producing less than 3 percent of their rated capacities.

If wind is a small part of generation, its intermittency brings few operating problems because a sudden calm is indistinguishable from an ordinary generation or transmission outage. When it reaches approximately 10 to 15 percent of power production (within the range of proposed federal standards), the added costs of units that must run to ensure reliability can become substantial. Properly, they are part of the cost of wind generation, but we seldom see them counted. Even wind’s alleged successes bring important questions for the U.S. As advocates claim, wind produces nearly 20 percent of Denmark’s total generation. Fortunately, that nation is a small part of a much larger, centrally dispatched Scandinavian system largely based on hydroelectric and nuclear facilities. Denmark’s wind units produce less than 3 percent of the region’s power. Load and generation characteristics force the nation to export nearly half of its wind power, often at zero prices, and to pay premia to fill in any shortfalls. According to NUS Consulting Group, in 2007 the average cost of energy production in the U.S. was approximately 9.5 cents per kWh, and in largely nuclear France, it was just more than 8 cents. In Denmark, it was 23 cents.

Conclusions

The case for renewable power is economically weak, and the case for a national requirement is weaker still. The question that matters: How can the nation most efficiently obtain the services that its households and businesses demand from electricity? Renewables should be compared with conventional plants and with measures to ensure more efficient use of power. This is what happens in markets, assuming pollutants carry prices that measure their harms and abatement costs. RPS advocates claim (with little or no evidence) that they already know the answer to the choice question, when they do not. Available evidence shows that renewables can and should play considerably smaller roles than their advocates wish. The future belongs to efficiency, which is not necessarily to be confused with renewables.

Author

Robert J. Michaels is a professor of economics at California State University, Fullerton, an adjunct scholar at the Cato Institute and a senior Fellow at the Institute for Energy Research. He has also served as an independent consultant on some matters discussed in this article. The views expressed are not necessarily those of his affiliations or clients. Reach him at rmichaels@fullerton.edu.

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