CATO Institute: Renewable Energy Part 3

This analysis can be employed now in the public policy debate to answer such questions as whether there has been too little or too much renewable energy investment to date, whether renewable and conservation subsidies should continue, and what the role of renewables and conservation in a restructured electricity industry might be.

Reconsidering the rationale of eco-energy planning opens the door to market-based energy policy. State-level energy agencies lose a key rationale, and some of the most significant civilian programs of the DOE can be eliminated. ^[307] Air-emission regulation under the Clean Air Act would continue with revisions based on the best available information; ad hoc eco-energy planning programs would not.

The DOE-appointed Yergin task force, formed to evaluate the nation's energy research and development effort, concluded in 1995 that "there is growing evidence of a brewing 'R&D' crisis in the United States--the result of the cutbacks and refocusing in private-sector R&D and reductions in federal R&D." ^[308] This "depletion of our R&D resource" was presented in stark terms:

The loss of our "inventiveness"--that is, our store of human intellectual capital--would change America's future. It would reduce economic growth, damage the U.S. standard of living and America's international competitiveness--and erode America's leadership and . . . our "national power in the modern world." ^[309]

The verdict, that a continued or enlarged federal effort was needed to subsidize energy technologies on both the demand and the supply side, is undermined by the major findings of the present analysis. The problem has been not market failure but government failure (and analytic failure). The economic and environmental shortcomings of renewable energies point to a stark historical fact: a multibillion-dollar public-sector "malinvestment" has taken place. The fuel of choice for electricity generation has turned out to be the fuel that the DOE did not feature in its R&D portfolio--natural gas. Of the $60 billion (1996 dollars) expended by the DOE from FY78 through FY96, only 1 percent ($787 million) was spent on natural gas, while 99 percent was spent on conservation ($13.3 billion), civilian nuclear energy ($20.1 billion), coal ($13.3 billion), solar energy ($5.1 billion), geothermal energy ($1.8 billion), wind power ($900 million), other renewable energy sources ($2.8 billion), oil ($1.4 billion), and hydropower ($193 million). ^[310]

The lesson from the past is a warning for the future. One caution about a governmental R&D silver bullet has come from Gipe:

Whenever renewables seem stymied, environmentalists, regulators, and politicians respond that more R&D is needed. This cry arises from an outmoded belief that technological and social innovations spring from the womb of large centralized organizations. This model of innovation no longer produces results either in government or commerce. The call for more R&D diverts attention from what is needed most, structural change in the market. ^[311]

The policy implication of the present analysis is, stop throwing good money after bad. All renewable energy subsidies from all levels of government should cease. Once again, the lesson has been learned the hard way that government invariably picks losers, the market picks winners, and "infant industries" requiring government favor have trouble growing up. The history of subsidized renewable output also provides another case study of the unintended consequences of even well-intentioned government intervention in the marketplace. The unnecessary demise of members of endangered species populations and controversial unnecessary development in environmentally sensitive areas are unintended consequences of the eco-energy planners' energy agenda that they must openly and honestly confront.

The end of renewable and conservation subsidies translates into a number of specific public policy reforms. One is to end state-level integrated resource planning, a central planning exercise by utilities and regulators to determine "optimal" demand- and supply-side strategies. The end of IRP would entail repealing sections 111 and 115 of the Energy Policy Act of 1992. ^[312] Iowa would need to repeal its 1983 Alternate Energy Production Law. California would need to repeal sections 701.1 and 701.3 of the California Public Utility Code to end the requirement for energy diversity and renewable set-asides. ^[313]

Another policy revision on the state level is no longer to condition utility mergers on environmental commitments that lower the wealth of either ratepayers or shareholders. In what Ralph Cavanagh of the Natural Resources Defense Council called a model for future merger proceedings, 13 special-interest groups required the acquiring company in a particular merger to purchase a minimum amount of wind and geothermal resources regardless of cost. ^[314] Ratepayers also were required to fund energy-efficiency programs, among other things, through a nonbypassable transmission charge ("wires charge").

Electricity restructuring is gaining momentum at both the state and federal level. Many of the reforms being proposed and adopted still suffer from an unthinking reliance on the paradigm of eco-energy planning and thus threaten to negate some, if not much, of the rate savings possible from increased industry competition.

CPUC's about-face on the matter of eco-energy planning has been a disappointment to those welcoming the prospect of lower electricity rates and a free-market industry structure. Despite the commission's initial hostility toward the range of expensive subsidies for renewable energy and energy conservation programs, heavy pressure from eco-energy planners and welfare-seeking corporations led the commission ultimately to endorse maintaining, if not enlarging, renewable subsidies. ^[315] On the other hand, the CEC began to reconsider the need for renewable quotas to achieve fuel diversity given available market instruments to do the same. ^[316]

Twenty-nine months after the restructuring debate began, the California legislature settled the issue with a resounding victory for eco-energy planning. Fully $2 billion in ratepayer money is to be dedicated to propping up the eternally uneconomic renewable and conservation energy market. For the 1998-2001 period, the investor-owned utilities were instructed to commit $872 million to energy efficiency, $540 million to qualifying renewable generation (existing and new), and $350 million to research and development. Public power entities in the state would allocate approximately $400 million more to these areas. ^[317] In addition, "green pricing" programs were sanctioned under which consumers could contract to pay a premium for renewable energy, and qualifying renewable portfolios of at least 50 percent were allowed open access on the opening day of the program, January 1, 1998.

Allocating the $540 million for renewable projects was a central planning exercise by the CEC despite instructions in AB 1890 to employ "market-based mechanisms." The choices were among seven or more qualifying fuels; among existing, new, and emerging technologies; and among the four years 1998-2001. The final allocation was 45 percent for existing technologies ($243 million), 30 percent for new technologies ($162 million), 10 percent for emerging technologies ($54 million), and 15 percent for customer-side accounts ($81 million). Of the existing technology account, 56 percent went to biomass and solar thermal ($135 million); 29 percent went to wind power ($70.2 million); and 15 percent went to geothermal, small hydro (under 30 MW), digester gas, municipal solid waste, and landfill gas ($37.8 million). The allocation of monies for new and emerging technologies was by bid and request, respectively, and the consumer-side allocation was divided between customer credits for renewable purchases ($75.6 million) and customer information ($5.4 million). ^[318]

The $243 million allocation to exiting technologies, 5 percent more than was required by the legislation, represented a bailout of existing renewable facilities threatened by the end of PURPA contracts and marginal-cost competition in a restructured industry. Solar power was the big winner, given its highly uncompetitive state as a central power station generator, while wind projects hit the jackpot since "the best way to reduce high operating and maintenance costs on older turbines is to largely or completely replace them with new equipment via retrofitting or repowering." ^[319] Confirming the environmental problems of new wind siting, the CEC determined that "repowers are preferable to green field development from an environmental standpoint." ^[320] Yet left standing was wind power's notorious killing field--Altamont Pass. The hard question must be asked: Where were the "environmentalists?"

Reflexively throwing another billion or two dollars at unproven technology and exhausted opportunity after two decades of failure will not achieve "fuel diversity," "job creation," "export commercialization," "clean air," and other panaceas any more than before. It will only exacerbate a public policy failure by having a renewables industry in competitive disarray compete against an overbuilt, utility-dominated, energy-efficiency industry in a state plagued by excess capacity, high rates, and low marginal costs. ^[321]

Two states besides California have already moved ahead toward restructuring in ways that protect renewable energy and energy conservation programs from the competitive forces of the marketplace. Only one state passing legislation (thus far) has resisted the temptation.

· Rhode Island, on August 7, 1996, became the first state in the country to enact electricity restructuring, requiring each distribution company to include a 0.25 cent per kWh charge to fund demand-side management and renewable programs.

· Pennsylvania specified ratepayer subsidization of conservation programs but did not specify a renewables program.

· New Hampshire simply stated that customers should be allowed the opportunity to choose to pay a premium for renewable energy.

In Arizona, a restructuring order from the state public utility commission established a set-aside for solar power of a half percent by 1999 and 1 percent by 2002. Commission orders in Maine, Massachusetts, and Vermont are also tending toward renewable portfolio requirements.

In other states, mandated environmental expenditure is proving to be too much for some parties to agree to industry restructuring. In Texas, for example, the industrial-user Coalition for Competitive Electricity complained that a proposed $1.5 billion ratepayer commitment for renewables and energy efficiency was unaffordable. ^[322]

Industry restructuring at the federal level also provides challenges. The proposed Electric Consumers' Power to Choose Act of 1997 (H.R. 655), introduced by Rep. Dan Schaefer (R-Colo.), would require that each state's power generators submit credits to FERC for qualifying renewables (organic waste biomass, dedicated energy crops, landfill gas, geothermal energy, solar energy, and wind power) in the following percentages of total generation: 2 percent in 2004; 3 percent in 2005-2009, and 4 percent for 2010 forward. ^[323]

States with less than those percentages would be required to purchase credits from generators in states with extra qualifying renewables.

The renewable provision would not only force technology on markets whether or not it was economically or environmentally desirable, it would create unequal wealth effects favoring states with existing renewable infrastructure or more attractive renewable sites at the expense of other states with less renewable energy activity or fewer prospects. California, in particular, would enjoy a windfall at the expense of the dozens of states with little qualifying renewable activity. The federal setaside, unlike the California law itself, continues the quota for an indefinite period.

The provision contradicts the intention of the restructuring bill to lower electricity rates for consumers. Coming on top of the generous federal tax credit and promises of "green pricing," the quota mandate reveals the economic plight of a two-decade-old subsidized industry that the U.S. market would naturally reject.

A competing electricity restructuring bill (H.R. 1230) by Rep. Tom DeLay (R-Tex.), reintroduced on April 8, 1997, does not specify a renewables or energy conservation program but leaves such matters to the states. A bill (S. 237) introduced by Sen. Dale Bumpers (D-Ark.) adopts the same renewable quotas as does Representative Schaefer's bill with higher percentages to include hydroelectricity; but it has a sunset date of 2019.

Changes in consumer demand and technology can make what is uneconomic today economic in the future. If central-station power from wind, solar, or other renewables becomes economic on its own merits, there will be no complaint from free-market quarters. In fact, free-market advocates will likely be defending those resources from zero-tolerance environmentalists who will condemn even air-emission-free energy for its other environmental costs. For now, the harsh environmental opposition to hydroelectric power, the only meaningful alternative to fossil fuels in the renewable portfolio, should be reconsidered. A public policy initiative to repeal licensing requirements and privatize waterways to allow market decisionmaking about existing and new hydropower facilities is long overdue to replace the current political conflict over these now "public" resources.

The chance that market verdicts may change with such resources as wind and solar energy in central-station electricity generation cannot be a rationale for government to pick winners and losers before the market does. The evolutionary market process is theoretically and empirically the best way to allocate scarce resources amid uncertainty--a conclusion buttressed not only by theory but by the history of market and government forces in energy markets. ^[324]

It is possible that the primary source of energy in 50 or 100 years will be renewables, as a study by Shell International predicts. ^[325] Then again, present trends may continue to make wind and solar backstop fuels, as synthetic oil and synthetic gas are today, while fossil fuels, and even nuclear power, continue to be abundant and increasingly nonpolluting as a result of technological change through the 21st century. Government planners and the eco-energy planning intelligentsia cannot know if a transformation to preferred renewables will occur or what its specific parameters might be if it were to occur. The results of a complex, evolving market discovery process cannot be known ahead of time.

The failed coercive model of eco-energy planning should be replaced with a market energy model predicated on private property, competition, market pricing, profit/loss signals, technological improvement, and growing real wealth and philanthropy. This paradigm shift should be welcomed by environmentalists who

· prefer voluntary negotiation to coercion (civil society to political society),

· recognize the unintended negative consequences of government intervention and the unintended positive consequences of market transactions, and

· understand the positive correlation between private economic wealth and improving technology on one hand and ecological sensitivity and progress on the other.

To this end, the failed ad hoc program of eco-energy planning should be terminated. Such a public policy initiative would end the present era of energy intervention, facilitate the abolition of the DOE and state-level energy bureaucracies, and contribute to increased energy abundance and true sustainability.

Table A.1
Department of Energy Civilian Subsidy Program (dollars in thousands)

Dollar Analysis	FY 1978	FY 1979	FY 1980	FY 1981	FY 1982	FY 1983	FY 1984	FY 1985	FY 1986	FY 1987
1996=$1.00	Stat	Stat	Stat	Stat	Control	Control	Control	Control	Control	Control
Direct Energy Subsidies Per Source:	(1-25-79)	(1-23-80)	(1-12-81)	(2-4-82)	(2-4-83)	(1-20-84)	(6-11-85)	(2-24-86)	(2-10-87)	(2-08-88)
Nuclear	2,772,117	2,360,621	2,058,617	1,810,322	1,765,400	1,629,285	1,143,117	887,831	885,041	840,208
Conservation	1,294,168	1,363,362	1,484,091	1,224,303	236,407	676,006	649,785	667,023	610,116	320,930
Coal	1,608,783	1,526,360	1,437,421	1,259,538	816,147	369,408	361,291	365,535	492,733	483,941
Oil	189,187	217,961	117,509	99,751	63,996	37,413	45,605	46,216	41,677	35,800
Gas	65,939	73,071	58,537	53,531	19,043	21,550	23,256	14,789	12,173	11,009
Wind	88,316	128,708	115,304	133,771	55,931	49,449	39,817	41,347	35,483	22,936
Solar	773,522	802,053	797,187	673,602	291,136	217,097	181,176	157,765	121,293	106,116
Hydro	25,058	84,657	39,870	5,520	4,878	3,144	1,133	652	689	622
Geothermal	296,551	316,352	284,444	233,577	117,234	91,022	48,882	43,481	38,028	28,731
Other Renewables	361,433	394,824	383,424	338,264	186,269	118,565	118,447	107,027	89,444	79,406
Total:	7,475,075	7,267,969	6,776,406	5,832,178	3,556,440	3,212,940	2,612,509	2,331,665	2,326,677	1,929,697
	FY 1988	FY 1989	FY 1990	FY 1991	FY 1992	FY 1993	FY 1994	FY 1995	FY 1996
	Control	Control	Control	Control	Control4	Cong2	AppCont	Actuals	Actuals
Direct Energy Subsidies Per Source:	(1-05-89)	(1-26-90)	(1-31-91)	(4-22-92)	(5-05-93)	(3-15-94)	(2-01-95)	(3-28-95)	(2-5-97)	TOTALS
Nuclear	790,944	771,706	409,126	380,984	413,108	376,561	383,976	231,644	143,071	20,053,679
Conservation	408,910	397,070	439,494	530,946	571,791	608,624	708,365	551,827	552,893	13,296,111
Coal	571,147	544,210	988,571	778,716	767,707	257,013	410,119	124,573	119,625	13,282,838
Oil	39,078	48,480	46,859	68,190	63,175	66,900	78,634	57,654	54,935	1,419,021
Gas	13,971	14,404	17,321	18,280	13,892	31,509	100,364	115,307	109,790	787,735
Wind	11,226	11,084	10,428	12,799	23,800	25,887	30,862	31,915	31,420	900,482
Solar	86,278	80,582	74,215	92,995	110,028	113,662	152,036	197,669	106,391	5,134,803
Hydro	0	0	0	1,144	1,150	1,133	1,100	18,531	3,483	192,763
Geothermal	93,871	24,542	20,715	34,578	30,058	25,247	19,596	19,561	29,399	1,795,871
Other Renewables	69,036	70,615	61,701	90,351	105,249	111,714	134,632	47,358	(35,768)	2,831,992
Total:	2,084,460	1,962,694	2,068,431	2,008,982	2,099,958	1,618,250	2,019,685	1,396,039	1,115,239	59,695,295
Source: Department of Energy, Office of Chief Financial Officer; Consumer Price Index, Bureau of Labor Statistics

Source: Energy Information Association, Electric Power Annual, 1995, vol. 2, Table 1.
a. IPP = independent poser producer.

Source: Energy Information Association, Electric Power Annual, 1995. vol. 2, Table 1.
a. IPP = independent power producer.

Robert L. Bradley Jr. is president of the Institute for Energy Research in Houston, Texas. The author of the two-volume Oil, Gas, and Government: The U.S. Experience, and an adjunct scholar of the Cato Institute.

[307]. The case for abolishing DOE includes two public policy issues not addressed in this essay: renouncing the agency's "energy security" role and privatizing DOE's power marketing administrations.
[308]. DOE Task Force Study, p. 3.
[309]. Ibid. Romm and Curtis similarly warn that a diminished federal research and development role in energy and related technologies would be "a blunder of . . . potentially historic proportions" (p. 74).
[310]. DOE Budget Study. See also Appendix, Table A.1.
[311]. Gipe, p. 90.
[312]. Public Law 102-486, 106 Stat. 2776 at 2795-96, 2803-05.
[313]. Section 701.3 of the California Public Utilities Code states, "Until the [CPUC] completes an electric generation procurement methodology that values the environmental and diversity costs associated with various technologies, the [CPUC] shall direct that a specific portion of future electrical generating capacity needed for California be reserved or set aside for renewable resources." Quoted in California Energy Commission, 1994 Electricity Report, p. 48.
[314]. "Portland General, Enron Turn Around Opponents to Mega-Merger," Electric Power Alert, January 15, 1997, p. 18.
[315]. Both the majority and minority decisions in the December 1995 reversal stated, "We are committed to establishing restructuring policies which maintain California's resource diversity for existing resources as well as encourage development of new renewable resources." "OIR/OII on the Commission's Proposed Policies Governing Restructuring California's Electric Services Industry and Reforming Regulation," December 20, 1995, majority decision, p. 146; minority decision, p. 143.
[316]. "The Commission supports a policy of maintaining the current benefits from renewable resources to the state's electricity system. . . . The [California] Legislature should allow customers more options toward managing their own risk. The modifications should also expand emphasis beyond renewables alone to include other opportunity technologies . . . as well as financial instruments." California Energy Commission, 1994 Electricity Report, pp. 48; California Energy Commission, Final Adoption Order, November 1, 1995, amending p. 119 of the original that erroneously had "the Commission supports a policy of maintaining the current contribution of renewable resources." Emphasis added.
[317]. For a summary of AB 1890, signed by Governor Wilson on September 23, 1996, see Aldyn Hoekstra and Gary Simon, "Sweetening the Deal: The California Legislature Takes on Electric Restructuring," Cambridge Energy Research Associates, November 1996; Dan Richard and Melissa Lavinson, "Something for Everyone: The Politics of California's New Law on Electric Restructuring," Public Utilities Fortnightly, November 15, 1996, pp. 37-41.
[318]. California Energy Commission, Policy Report on AB 1890 Renewables Funding (Sacramento: CEC, 1997), p. ES-5.
[319]. Ibid., p. A-2.
[320]. Ibid.
[321]. For an example of the tension between renewable and energy efficiency proponents in California, see Geothermal Resources Association, "Demand-Side Management Uncertainty," Testimony before the California Energy Commission, in the Matter of 1992 Electricity Report (ER 92), February 3, 1992.
[322]. "Texas Choice Bill May Not Have Consumers' Support," Megawatt Daily, January 30, 1997, pp. 1-2.
[323]. The bill was reprinted in Electric Power Alert, July 17, 1996.
[324]. See, generally, Bradley, Oil, Gas, and Government.
[325]. Shell International, "The Evolution of the World's Energy System: 1860-2060," December 1995, p. 11. For a view that natural gas will be the "bridge" or "transition" fuel to a renewables future, see Flavin and Lenssen, Power Surge, chap. 5.
_______
* Courtesy of the Cato Institute.
See original at < http://www.cato.org/pubs/pas/pa-280.html >.
Cato Policy Analysis No. 280, August 27, 1997

Please send mail to webmaster@mnforsustain.org with questions or comments about this web site. Minnesotans For Sustainability (MFS) is not affiliated with any government body, private, or corporate entity. Copyright © 2002, 2003, 2004 Minnesotans For Sustainability