By MICHAEL GIBERSON AND MEGAN HANSEN, June 25, 2017
When Energy Secretary Rick Perry requested a study of electric grid reliability, wind and solar energy lobbyists were predictably alarmed. Perry wanted to know how federal policies were shaping wholesale electricity markets and whether public policies were responsible for forcing the premature retirement of baseload power plants.
The government has long had a role in the electric power industry, so asking for a survey of its effects should not be controversial.
The reason for the alarm? The request mentioned government mandates and subsidies, which have driven wind and solar energy’s growth, as possible drivers of reliability concerns. The industry lobbyists are right to be sensitive. Despite constantly touting the rapidly falling cost of wind and solar, industry growth over the next decade depends on mandates and subsidies.
The lobbyists are not wrong about falling costs. The most recent Wind Technologies Market Report, a Department of Energy (DOE) study, highlights the up to 40 percent drop in wind turbine costs since 2008. Over the same period, solar PV costs have fallen by as much as 70 percent.
Are policies supporting wind and solar energy responsible for the premature retirement of baseload power? In some sense, the answer is obvious. Without wind and solar energy, sales to existing resources would have been higher and most of these resources are only on the grid because of government subsidies and mandates.
While low natural gas prices due to fracking have figured into the closure of coal fired power plants, a rise in regulatory compliance costs is playing a prominent role according to a 2013 study in Environmental Science & Technology. From the consumer’s view, coal power’s loss to natural gas is mostly market-driven and produces lower electricity prices, but coal’s loss to wind and solar has been driven by government mandates and subsidies that drive costs higher.
Renewable lobbyists are quick to claim other forms of energy get subsidized as well, and they are not wrong about that either. The government has long been in the business of doling out favors to industry groups, and taxpayers would be better off if the government stopped playing favorites, period.
This “everybody does it” claim about subsidies needs to be put into perspective. DOE data from 2013 show that federal subsidies for coal and natural gas amount to about 0.05 cents per kWh of electricity, while wind gets 3.5 and solar receives 22 cents per kWh. This money is not an investment in the future, but rather a subsidy to developers and financiers for the installation of existing technology.
Perry couched his inquiry in terms of concerns about reliability and the effects of policy on “baseload” power plants. This is a slightly outmoded way of phrasing the concern. In today’s competitive power grids, the cheapest, sufficiently reliable power mix is selected regardless of whether the power plants are called baseload or peaker or something else.
Consumers should be wary of this focus on baseload power. Owners of money-losing baseload power plants have been lobbying for subsidies too. Like support for renewable energy, proposals to boost old baseload units are more about company profits than consumer needs.
Even with the recent expansion of wind and solar on the grid and the retirement of older coal plants, reliability challenges have not been as bad as expected. The nation’s power system operators have proven quite capable of managing the variability of wind and solar energy output to keep the lights on. Still, there are costs involved in managing this variability.
In 2016, an analysis by Strata Policy found subsidies for intermittent energy sources create unseen costs for electricity consumers. First, Americans subsidize the building and operation of wind and solar projects through their taxes. Second, they pay for the electricity these projects produce. Finally, consumers pay the extra costs associated with ensuring reliability as more intermittent sources are deployed.
Do Americans benefit from these added costs? There is a fairly standard tool for evaluating public policy termed “benefit-cost analysis.” Every president since Ronald Reagan has required such analysis for major regulations. Unfortunately, federal subsidies for the wind and solar energy industries have never been evaluated to identify their net benefits.
This benefit-cost review is the next federal energy policy study Secretary Perry should request. No doubt howls of protest will become louder. When protests from renewable energy lobbyists include a call for reviewing all government subsidies by the same standards, we will heartily agree. Federal energy policy is long past due for a full-scale review.
Michael Giberson is a professor in the Rawls College of Business at Texas Tech University. Megan Hansen is director of policy at Strata, a free-market oriented public policy research center based in Logan, Utah.
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