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June 24, 2011

Does Government Intervention Make Energy Cheaper?

June 24, 2011
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Does Government Intervention Make Energy Cheaper?

 

The proponents of renewable energy like to argue that renewables are cost-effective and create jobs, despite mountains of evidence to the contrary. One of the latest examples of this was a recent post put out under the auspices of Joe Romm’s “ClimateProgress” blog seeks to debunk the “myth” that government regulations increase electricity prices for consumers. The writer, Stephen Lacey, fails to make his case, relying either on calculations showing that the burden is merely shifted to taxpayers, or on “experience” that doesn’t really test the full brunt of the proposed regulations.

On top of all that, there is always the basic argument that we at IER make: If the folks at ThinkProgress really believe what they are saying—namely, that converting to windpower and reducing carbon dioxide emissions will save money and generate economic growth in addition to the alleged climate benefits—then why does the government need to force private industry to make these changes? Do businesspeople not want to make more money?

Wind Power Is Cost Effective?

In the first half of the post, Lacey takes on the “Minnesota Free Market Institute and the American Tradition Institute,” who had “released a joint report projecting that Minnesota’s Renewable Portfolio Standard (RPS) – 20% renewable electricity by 2025 – would cause rates to jump by up to 37% by that date.”

In order to try to rebut this projection, Lacey quoted from another story:

Xcel Energy, the state’s largest utility, has come up with a much smaller number: $0.003. That’s the difference Xcel forecasts between its projected per-kilowatt-hour energy price in 2025 under its proposed wind expansion plan compared to a hypothetical scenario in which it stopped adding new wind capacity after 2012.

Asked to comment on the Free Market Institute’s study, Xcel Energy spokesman Steve Roalstad said, “It doesn’t seem to be moving in that direction.” The cost of adding renewable energy sources, especially wind, continues to fall and has become very competitive with traditional generating sources, he said.

Lacey then quotes a different utility company from the same article:

Otter Tail Power, which serves about 130,000 customers in the Dakotas and western Minnesota, has had a similar experience. Todd Wahlund, Otter Tail’s vice president for renewable energy development, said the company would have added wind capacity regardless of Minnesota’s renewable standard. That’s because it’s been the most economical option.

“Absent these wind resource additions, an alternative resource would have been needed, and from our analysis, other options would have been higher cost,” Wahlund said.

To repeat our argument: If Lacey really believes these representatives from the power companies, then there is no need for government mandates. Let wind power prove its cost effectiveness in the open market.

As an aside, since when did progressive start believing self-serving statements from large businesses? These companies have every incentive to say in public statements that the cost of wind power is low.

Climate Progress’ interview with Tam Hunt, “a California lawyer focused on clean energy issues,” was a little closer to the truth. When asked whether mandates for renewables would raise rates for consumers, Hunt said:

Wind power has shown to be particularly cost effective for ratepayers with either a tax credit or a grant. And looking forward, while natural gas prices are low today, I think there’s a very real possibility that prices could rise substantially. Historically, natural gas fields have a high up-front profile, but decline very fast. So with renewables, you can provide a hedge for that fuel volatility. There’s a lot of hype over how these programs will raise rates, but we haven’t seen it and I don’t think we’ll see it.

Well yes, with a big enough tax credit or grant, you can make anything “particularly cost effective for ratepayers.” What people aren’t seeing in their utility bill, they are seeing in their tax bill.

In reality, it’s inaccurate to say “wind is good for consumers” or “wind is inefficient.” Such blanket statements are too broad. Even without government support, wind can serve a small but important niche to supplement other, more reliable forms of electrical generation. It’s also important to look at the levelized cost of new generating technologies, since the intermittent nature of wind can make it appear cheaper than it really is.

Rather than point to estimates of what might happen in the future, we can look at wind-heavy Denmark, which has the highest electricity rates in Europe.

Cap and Trade No Big Deal Either?

After arguing that mandates for wind power won’t hurt consumers, Lacey tackles cap and trade too:

The same goes for carbon cap and trade. The nation’s first carbon trading system, the 10-state Regional Greenhouse Gas Initiative (RGGI) in the Northeastern U.S., has been falsely labeled by groups like Americans for Prosperity as a “job killer” that will raise rates by up to 90%. Yes, you read that correctly: 90%.

The reality? To date, the rate impacts of RGGI have been so miniscule, it’s been very difficult to separate them from other costs in the system…

Lacey is probably right that the rate impacts of RGGI have been small, but he’s right for the wrong reasons. RGGI is probably not having a large impact on electricity prices because RGGI is not having an impact on the electricity market, other than raising millions of dollars in taxes.

RGGI’s website describes RGGI as “the first market-based regulatory program in the United States to reduce greenhouse gas emissions. Ten Northeastern and Mid-Atlantic states have capped and will reduce CO2 emissions from the power sector 10 percent by 2018.” [emphasis added]

The reality is that carbon dioxide emissions reductions in the RGGI states have already far exceeded RGGI’s goals. In fact, carbon dioxide emissions from power plants are down by more than 30 percent—three times more than RGGI’s goals. But the emissions are not down because of RGGI, but because of a weak economy, the shale gas boom, and cooler summers lately. In fact, E&E News reported, “the consultancy ICF International has told RGGI members that their system isn’t contributing to lowering emissions in the Northeast, nor would it ever.” Because RGGI isn’t contributing to lowering emissions, we shouldn’t be surprised that it  hasn’t led to dramatically higher electricity prices.

Lacey also makes the mistake of arguing that RGGI is creating jobs, apparently out of thin air. He writes that, “Rather than kill jobs and hurt ratepayer’s pocketbooks, the program has boosted economic activity: In Connecticut, 2,500 direct jobs were created through energy efficiency programs helped by RGGI; in New Hampshire, 2009 investments in efficiency helped train an additional 170 workers…”

This type of facile economic reasoning has been debunked for literally centuries and still some people fall for the fallacious reasoning. The money for the energy efficiency programs came from ratepayers. RGGI might not have dramatically increased electricity rates, but it did lead to increased electricity rates and those increases went into a fund which spends money on energy efficiency programs. Lacey is point to the spending from the fund as creating jobs, while failing to note all of the jobs that would have been created in other fields by ratepayers if they had been able to keep their money.

It’s also worth reminding our friends at Climate Progress that the whole point of the “market-based” cap and trade program is to raise prices and make consumers alter their behavior. As a well-known progressive famously put it in January 2008:

Under my plan of a cap and trade system, electricity price would necessarily skyrocket. . . . Because I’m capping greenhouse gases, coal power plants, natural gas—you name it—whatever the plants were, whatever the industry was, they would have to retrofit their operations. That will cost money. They will pass that money on to consumers.

Conclusion

This recent Climate Progress blog post repeats the familiar pattern: Advocates for government intervention into the energy markets claim that certain disaster will occur if we allow the free market to run its natural course. Yet when critics warn that these interventions will cost jobs and raise costs, the interventionists respond that these things will actually help businesses. If this is true, why the government mandates, subsidies, and preferential tax treatment?

If the advocates of intervention want to argue that private business is ignoring the “externalities” of climate change, and that conventional measures of income, GDP, and job growth will have to be sacrificed for the more important long-term goal of averting climate damage, that is a respectable argument. We would still disagree with the conclusions, but at least such an argument at least makes sense.

Yet the climate alarmists are not willing to admit the true impact of their proposals, because they know most Americans would not support them. Therefore they pretend that businesses are for some reason lobbying against regulations that would make them more money.

 

Daniel Simmons contributed to this post.

 


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