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Why renewable energy is not cheap and not green
August 27, 1997
by Robert L. Bradley, Jr. for the Cato Institute
Summary:
The stubborn competitive gap between renewable generation and its rivals explains why renewable-energy lobbyists on both the state and federal levels are trying to get governments to set quotas, and not just continue or expand current subsidies.
Executive Summary
A multibillion-dollar government crusade to promote renewable energy for electricity generation, now in its third decade, has resulted in major economic costs and unintended environmental consequences. While previous renewable capacity built with liberal government subsidies is widely acknowledged to have been uneconomic and is at risk with falling electricity prices, future renewable capacity will be challenged by the rapidly falling costs and prices of traditional sources. Improved new-generation renewable capacity is, on average, twice as expensive as new capacity from the most economical fossil-fuel alternative and triple the cost of surplus electricity. Solar power for bulk generation is substantially more costly than this average; biomass, hydroelectric power, and geothermal projects are not as uneconomic. The cost of wind power comes close to the average, although certain prime projects with high economies of scale are cheaper. Only ideal virgin geothermal sites and selected upgrades at existing renewable sites are economic for new capacity under current technology and market prices.
The stubborn competitive gap between renewable generation and its rivals explains why renewable-energy lobbyists on both the state and federal levels are trying to get governments to set quotas, and not just continue or expand current subsidies. Yet every major renewable energy source has drawn criticism from leading mainstream environmental groups: hydroelectric for destroying river habitat, wind for killing birds, solar for desert overdevelopment, biomass for air emissions, and geothermal for depletion and toxic discharges. Meanwhile, natural gas, which has a substantial cost advantage over renewables, even after imputing a "social cost" for alleged air-emission "externalities," has emerged as the most economical "green" fuel heading into the new millennium.
Current state and federal efforts to restructure the electric industry are being politicized to foist a new round of involuntary commitments on ratepayers and taxpayers for politically favored renewables, wind and solar being foremost. Yet new government subsidies for favored renewable technologies are likely to create inconsequential or negative environmental benefits, worsened electric generation overcapacity in most regions of the United States, higher electric rates -- and new environmental pressures, given the heavy resource requirements (concrete, steel, glass and land) needed to significantly increase wind and solar generation projects beyond their current size of one-tenth of 1 percent of U.S. output.
Mandatory labeling of electricity sold to consumers, sought by some, should be rejected as costly and invasive of business competition. "Green pricing" programs offered to consumers to voluntarily subsidize renewable-energy-based electricity generation, particularly in the transition from monopoly to competitive provision, should not be involuntarily cross-subsidized by the "nongreen" portfolio or depend on government subsidies.
While market competition and civil society can ultimately decide the fate of "green pricing" programs, political subsidies for "green energy" must be removed to allow true market decision-making. Environmentalists should respect consumers' decisions to define "green" energy however they wish, or even forgo "green energy" entirely, given the real and heterogeneous environmental costs of every energy alternative -- fossil fuel, nuclear and renewable.
Introduction
A centerpiece of the environmentalist agenda has long been the regulation of fossil fuel consumption. While antipollution controls are the accepted short-term solution to many of the environmental problems posed by fossil fuels, many believe that the long-term answer is the gradual replacement of fossil fuels with other, less environmentally threatening fuel sources. This philosophy can perhaps best be described as eco-energy planning: the belief that government intervention in the energy economy is necessary to maximize environmental protection and, in the end, America's economic vitality.
Renewable energy -- power generated from the nearly infinite elements of nature such as sunshine, wind, the movement of water, the internal heat of the Earth, and the combustion of replenishable crops -- is widely popular with the general public and governmental officials because it is thought to be an inexhaustible and environmentally benign source of power, particularly when compared to the supposedly finite and environmentally problematic alternative of reliance on fossil fuels and nuclear power. It is the centerpiece of eco-energy planning. Yet all renewable energy sources are not created equal. Some are more economically and environmentally viable than others. The list of those renewable fuels that were once promising but that are now being questioned on economic and/or environmental grounds is growing and threatens the entire "supply side" strategy of eco-energy planning.
Wind power is currently the environmentalists' "favorite" renewable-energy resource and is thought be the most likely energy to replace fossil fuel for generating electricity in the 21st century. Hydropower has lost favor with environmentalists because of the damage it has done to river habitats and fresh-water fish populations. Solar power, at least when relied upon for central-station electricity generation, is not environmentally benign on a total fuel cycle basis and is highly uneconomic, land-intensive and thus a fringe electric power source for the foreseeable future. Geothermal has turned out to be "depletable" with limited capacity, falling output and modest new investment. Biomass is also uneconomic and produces air-emissions comparable to and sometimes worse than fossil fuels.
Despite its revered status within the orthodox environmental community, wind power poses several major dilemmas. First, wind remains uneconomic despite heavy subsidies from ratepayers and taxpayers over the last two decades. Second, from an environmental viewpoint, wind farms are noisy, land-intensive, unsightly and hazardous to birds, including endangered species. With the National Audubon Society calling for a moratorium on new wind development in bird-sensitive areas, and an impending electric industry restructuring that could force all generation resources to compete on a marginal cost basis, wind power itself is a problematic choice for future electric generation without a new round of government subsidies and preferences.
Because of the precarious economics of acceptable renewable energies, eco-energy planners have turned to taxpayer and ratepayer subsidies for energy conservation as an alternative means to constrain the use of fossil fuels. Yet fundamental problems exist here as well. Multibillion-dollar taxpayer and ratepayer subsidies over two decades have resulted in severely diminished returns for future conservation investments. The potential price reduction from electric industry restructuring threatens to lengthen the payout period of energy conservation investments to worsen this problem.
A major but largely unrecognized development in the public policy debate over subsidized renewable generation and energy conservation has been the elevated role of natural gas in electric generation. Not only is natural gas significantly cleaner-burning and less expensive than a decade ago, it has increasingly become the fuel of choice for new generation capacity. The eco-energy planning agenda for electric generation -- developed with coal and fuel oil in mind -- must now be reconsidered. Such a reconsideration places into question some of the most important public policy missions of government energy agencies, from the California Energy Commission (CEC) to the U.S. Department of Energy (DOE).
Eco-energy planning is a public-policy paradigm favoring taxpayer and ratepayer subsidies and governmental mandates for renewable generation and energy conservation in the electricity sector to promote "sustainable" energy development. With the end of energy shortages in the 1970s, the focus of federal energy policy shifted from price and allocation regulation to reducing fossil fuel consumption in order to address ozone formation, acid rain and climate change.2 The key assumption of eco-energy planning is that state and federal air emission standards alone are inadequate to address those public-policy issues.
The new (post-1980) mission of many state public utility commissions, the California Energy Commission and the Department of Energy has been to intervene in the market with incentives for renewable energy generation and conservation, particularly in the electric generation sector. Those government interventions or special preferences have included the following supply-side and demand-side alternatives:
Supply-Side:
- Tax code preferences for renewable energy generation (federal and state).3
- Ratepayer cross-subsidies for renewable energy development (state).
- Mandatory utility purchases of power generated by renewable energy sources at the utility's "avoided cost" (federal/state).
- Imputed environmental costs ("full environmental costing") to penalize fossil-fuel generation planning choices (state).
- Fuel-diversity premiums to penalize reliance on natural gas in power generation (state).
- Government payments for renewable energy research, development, and commercialization (federal and state).
- Early entry into open-access programs for renewable energy generation (state).
- "Green pricing" programs that are subsidized by the utilities' other electric sources (state).
Demand Side:
- Taxpayer subsidies for energy-efficiency programs (federal and state).
- Ratepayer subsidies for energy efficiency, so-called demand-side management, or DSM (state).
- Minimum energy-efficiency building and appliance standards (federal and state).
This cumulative taxpayer and ratepayer investment is substantial. The Department of Energy has spent approximately $19 billion, in 1996 dollars, since its inception on electric conservation ($8-9 billion) and nonhydro renewables ($10.7 billion).4 State demand-side management programs add approximately $16 billion more, as explained elsewhere in this paper. Adding in tax preferences and above-market pricing for renewables, the annual benefit in 1994 alone was estimated as high as $5 billion.5
A rough estimate of electric subsidies for renewables and conservation over the last 20 years is between $30 billion and $50 billion, which does not include the substantial private costs associated with building and appliance energy-efficiency standards. This represents the largest governmental peacetime energy expenditure in U.S. history, outranking the Strategic Petroleum Reserve program to date, as well as the cumulative spending on the 1974-88 synthetic fuels program.
Eco-energy planning currently is confronting three major challenges in the move to a more competitive electric industry:
- Renewable-energy options, prominently including hydroelectricity and now wind power, have environmental drawbacks that have proven intractable to date.
- Renewable-energy subsidies and mandatory conservation are proving to be incompatible with a competitive restructuring of the electric industry because of unfavorable economics and surplus existing capacity.
- Economic and environmental advances in the fossil fuels industry, particularly natural gas in electric generation and reformulated gasoline in transportation, have reduced the environmental costs of fossil fuel consumption that are necessary to justify subsidized alternatives.
In contrast to eco-energy planning, market-based energy environmentalism relies on private property, tort redress and market incentives to address environmental degradation, and sound science to develop emission standards.6 Secondary, ad hoc programs to reduce energy consumption per se or substitute alternative energy technologies are rejected either as wholly unnecessary or as inefficient. They are unnecessary, given the alternatives of amending the primary air-pollution standards and programs with market-based regulations and/or tort redress. They are inefficient, given the demonstrated inability of government regulators to intelligently plan the energy economy.
In sum, eco-energy planning is predicated on the idea that energy markets are so riddled with imperfections (largely because the environmental costs of consumption are not entirely accounted for in the pricing system) that major interventions are necessary to efficiently manage society's energy choices. Market-based energy environmentalism rejects the idea that the energy economy is rife with "market failures" and questions the idea that government regulators -- no matter how intelligent or well intentioned -- can improve on the private choices of millions of economic agents in the free market. Market-based energy environmentalists maintain that the best way to ensure the efficient use of both economic and environmental resources is to rely on undistorted price data and government protection of private property rights.
Editor's note: The link will take you to the complete paper.
Web link: http://www.cato.org/pubs/pas/pa-280.html
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