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Rhetorical support among public officials for renewable electricity is broad and bipartisan, and the direct and indirect subsidies for renewable electricity from the federal and state governments are substantial. At the federal level, this support takes the form of large financial support for the production of renewable power and for investment in renewable generation capacity. At the state level, the major form of support for renewable electricity is the ongoing implementation of “renewable portfolio standards”—guaranteed market shares—for power produced from renewable sources. Despite this support, renewable electricity has only a small share of the market, and ongoing developments in the market for competitive fuels—in particular, the prospect of declining prices for natural gas—make it likely that renewable electricity will continue to face severe constraints in terms of competitiveness for many years to come. [Read part 1] [Read part 2]
Key points in this Outlook:
For many years, the bright future of renewable electricity generally, and wind and solar power in particular, has been a given in the public discussion. Many believed that some public support might be needed at initial adoption to get renewable power up to speed in the competition with gas- and coal-fired power. But then technological advances, scale economies, and learning efficiencies would make the new technologies competitive, and the benefits in environmental improvement, employment, and other parameters would justify the initial public investments.1
This general argument has become familiar over many years. As we learned in the previous two Outlooks (No. 1 and No. 2, January 2012), the competitive performance of wind and solar power is less than impressive, to put it mildly; the greater the competitive difficulties faced by wind and solar generation, seemingly ever-louder have become the official arguments promoting them.
And amid this utter disconnect between the rhetoric and the reality of renewable electricity, lower costs for renewables’ competitors—in particular, natural gas prices, both current and prospective—have worsened this competitive environment. Wind and solar technologies must compete with conventional electric generation—coal and natural gas technologies in particular—so that long-run price dynamics for those conventional fuels have a significant effect on the competitiveness of renewables. As I will explain here, recent technological advances in the production of natural gas from shale formations and coal beds have created enormous new problems for the competitiveness of renewable electricity.
Public Support for Renewable Electricity
It is useful, therefore, to review briefly the public support given renewable electricity, because the substantial magnitude of the rhetorical support and the direct and indirect subsidies bestowed upon it contrasts sharply with the stubbornly small market shares of renewable technologies. This condition is likely to be exacerbated by the increasingly harsh competitive environment in which wind and solar power will have to compete.
President George W. Bush argued in 2007, “It’s in our vital interest to diversify America’s energy supply, and the way forward is through technology. We must continue changing the way America generates electric power by even greater use of clean-coal technology; solar and wind energy; and clean, safe nuclear power.”2 This argument is broadly bipartisan, as reflected in this statement from President Barack Obama in 2010: “Each of us has a part to play in a new future that will benefit all of us. As we recover from this recession, the transition to clean energy has the potential to grow our economy and create millions of jobs—but only if we accelerate that transition. Only if we seize the moment. And only if we rally together and act as one nation—workers and entrepreneurs; scientists and citizens; the public and private sectors.”3
This political support is reflected in current legal and regulatory requirements—mandates or renewable portfolio standards (RPS)—in many states for the use of renewable energy sources for given percentages of the respective states’ electricity generation, consumption, or sales. Moreover, at both the federal and state levels, investment in and production of renewable electricity receive important subsidies in the form of direct payments to producers and the federal production tax credit for power generated by wind and other renewable technologies. For the federal government, the US Energy Information Administration (EIA) has estimated that the total cost of subsidies and support (in 2010 dollars) for all energy forms was about $9 billion in 1999, growing to almost $18 billion in 2007 and to more than $37 billion in 2010. For renewable energy, the respective figures were about $1.5 billion, $5 billion, and $14.7 billion.4 Moreover, the American Recovery and Reinvestment Act (the stimulus bill of 2009) included over $80 billion for various “clean energy,” energy efficiency, and technology programs and projects, of which $23 billion was to be directed toward renewable energy development.5
At the state level, policies in support of renewable energy investment and production vary widely; examples are production tax credits, property and sales tax exemptions, and subsidized loans. An important indirect subsidy results from standard regulatory rate making: higher-cost power—wind and solar electricity is a prime example—is combined (or “bundled”) with lower-cost power in regulated rates, which reflect average costs across different electricity generation technologies and across peak and off-peak periods. Even more important are the current legal and regulatory RPS requirements in many states for the use of renewable energy sources for given percentages of the respective state’s generation, consumption, or sales of electricity in the context of some timetable. Table 1 shows the thirty states (including the District of Columbia) with RPS requirements and the seven states where RPS goals are not yet mandatory.
As table 1 shows, a typical requirement is a 20 percent market share (measured in various ways) by, say, 2020. In nearly every state with such requirements or goals, wind and solar power qualify as renewable generation counting toward satisfaction of the RPS standards. Table 2 presents recent data on actual power generation for the various electric generation technologies and on the market share of renewables.
The recent slow growth in the market share of nonhydroelectric renewable technologies, coupled with the formidable problems faced by such technologies discussed in the first part of this Outlook series, suggests that achievement of the RPS goals summarized in table 1 will be difficult and costly. These problems are very likely to be exacerbated by ongoing developments in the market for natural gas, to which we now turn.
Outlook for Natural Gas Supplies and Prices
Recent technological advances in the production of natural gas from shale formations and from coal beds have increased estimated natural gas reserves sharply.6 Figure 1 illustrates the resulting sharp increase over the last two years in projected gas reserves. Between the 2010 and 2011 EIA estimates, projected natural gas reserves through 2025 have increased about 15 percent. The 2011 projection is about 17 percent higher for 2030 and for 2035.
As a result, the EIA has reduced its projections of future prices for natural gas delivered for electric generation. Between the two sets of projections (2010 and 2011), prices fall by about 15–23 percent over the period 2015–35.
As we would expect, the 2010 and 2011 EIA projections of combined cycle gas capacity remain roughly the same until 2035, when the 2011 projection is about 6 percent higher than that made a year earlier. But the projections for nonhydroelectric renewable capacity in 2030–35 fall by 16–21 percent over the course of only one year. These EIA projections of capacity investment in substantial part reflect the fact that gas and renewable generation technologies are substitutes, and the projected decline in delivered gas prices exacerbates the inherent competitive disadvantages borne by renewable technologies, as I discussed in my first Outlook.
This poor competitive performance of wind and solar energy is not limited to the United States. As a crude generalization, Europe’s experience with renewable electricity also can be summarized as high costs combined with low reliability.7 That is the unavoidable outcome given the basic economic realities afflicting wind and solar electricity generating technologies. Accordingly, renewable power generation has achieved only a small market share in the United States, and official projections are for slow growth at best, notwithstanding large subsidies and other policy support.
This market resistance to investment in renewable generation capacity can be explained by the problems intrinsic to renewable power—that is, the inherent limitations on its competitiveness—that public policies can circumvent or neutralize only at very substantial cost. Those problems can be summarized as:
Moreover, the five central analytic arguments that dominate the political and policy support for renewables are highly problematic: The infant industry argument is inconsistent with the cost evidence on renewables. The subsidies enjoyed by renewables far outweigh those bestowed upon conventional generation technologies. The costs of backup capacity necessary for renewable power—an externality that renewable power imposes upon the electric system writ large—are greater than any negative environmental externalities created by conventional generation that current policies may not have corrected. And the sustainability and green employment rationales are exceedingly weak.
These realities suggest that the purported social benefits of policy support for renewables are illusory. Moreover, ongoing supply and price developments in the market for natural gas are likely to weaken further the competitive position of renewable power generation. At the same time, the subsidies and mandates implemented in support of renewable electricity impose nontrivial costs upon the taxpayers and consumers in electricity markets. The upshot is the imposition of substantial net costs upon the US economy as a whole even as the policies bestow important benefits upon particular groups and industries, thus yielding enhanced incentives for innumerable interests to seek favors from government. As has proven true in most contexts, the outcomes of market competition, even as constrained and distorted by tax and regulatory policies, are the best guides for achievement of the most productive allocation of resources. As federal and state policymakers address the ongoing issues and problems afflicting renewable electricity generation, the realities of this recent history provide a useful guide for policy reform.
The author thanks Kenneth Green for his suggestions on an earlier draft.
Benjamin Zycher ([email protected])is a visiting scholar at AEI. This third in a series ofthree Outlooks is based on his new book, Renewable Electricity Generation: Economic Analysis and Outlook (AEI Press, 2011).
1. I discussed the poor prospects for scale effects and learning efficiencies in the second Outlook in this series. Technological advances are likely, but because that is true for conventional generation technologies as well, advances in wind and solar technology do not necessarily imply improved competitiveness. I also looked at the purported employment benefits of renewable electricity in the second Outlook; the net environmental benefits of wind and solar power are far from obvious, as they impose significant adverse effects. Examples are massive land use needs, additional transmission capacity, unsightliness, bird destruction, flicker effects, noise problems, and—because of the need to cycle conventional backup capacity up and down—familiar effluents.
2. George W. Bush, “President Bush’s 2007 State of the Union Address,” January 23, 2007, www.washingtonpost.com/wp-dyn/content/article/2007/01/23/AR2007012301075.html (accessed December 30, 2011).
3. White House, “Remarks by the President to the Nation on the BP Oil Spill,” June 15, 2010, www.whitehouse.gov/the-press-office/remarks-president-nation-bp-oil-spill (accessed December 30, 2011).
4. Energy Information Administration, “Federal Financial Interventions and Subsidies in Energy Markets 2007,” April 2008, www.eia.doe.gov/oiaf/servicerpt/subsidy2/index.html (accessed December 30, 2011); and Energy Information Administration, “Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2010,” July 2011, http://docs.wind-watch.org/US-subsidy-2010.pdf (accessed December 30, 2011).
5. As I noted in the first Outlook in this series, nonhydroelectric renewable power generation was 3.6 percent of all generation in 2010 but received 53.5 percent of all federal financial support for the electric power sector. Wind power, providing 2.3 percent of all generation, received 42 percent of such support.
6. For a brief discussion, see EIA, “What Is Shale Gas and Why Is It Important?,” August 4, 2011, www.eia.gov/energy_in_brief/about_shale_gas.cfm (accessed December 16, 2011).
7. See Kenneth P. Green, “The Myth of Green Energy Jobs: The European Experience,” AEI Energy and Environment Outlook (February 2011), www.aei.org/outlook/energy-and-the-environment/the-myth-of-green-energy-jobs-the-european-experience/. See also Kenneth P. Green, “On Green Energy: A Dutch (Re)Treat,” The American, April 10, 2011, www.american.com/archive/2011/april/on-green-energy-a-dutch-re-treat.
Despite this support, renewable electricity has only a small share of the market, and ongoing developments in the market for competitive fuels—in particular, the prospect of declining prices for natural gas—make it likely that renewable electricity will continue to face severe constraints in terms of competitiveness for many years to come.
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