Zycher testimony to joint House subcommittee hearing on subsidies for renewable energy

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    Renewable Electricity Generation
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Article Highlights

  • Renewable power provides about 3.6 percent of electric power in the U.S., and official projections are for slow growth at most

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  • Subsidies and mandates for renewables impose nontrivial costs upon the taxpayers and upon consumers in electricity markets

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  • The claim that green jobs will increase with subsidies fails to distinguish between job growth and shifts among sectors

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AEI visiting scholar Benjamin Zycher testified before a joint hearing of the House Science, Space and Technology Subcommittee on Investigations and Oversight and Subcommittee on Energy and Environment on the impact of tax policies on the commercial application of renewable energy technology.

A summary of he testimony, in which Zycher argues subsidies for renewable energy should be abandoned, is provided below. His written testimony is attached as a .pdf.

Summary

This testimony is based upon my recent book "Renewable Electricity Generation: Economic Analysis and Outlook," published late last year by the AEI Press. I address here the outlook for renewable sources of energy in electricity generation as a substitute for such conventional fuels as coal and natural gas. The emphasis is on wind power, which
in terms of projected generation capacity is by far the most important of the nonhydroelectric forms of renewable power. Some analysis of solar energy is presented also, and the broad analytic themes are applicable to biofuels as well. The discussion examines also the central rationales usually offered in support of policies subsidizing the expanded use of renewables, and the implications of prospective supply and price developments in the market for natural gas.

Zycher renewable energy tax subsidy testimony to House Joint subcommittee hearing, April 19, 2012

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Public policy support for renewable electricity has been substantial. This support has taken the form of direct and indirect subsidies, and requirements in a majority of the states that specific percentages of the market for electric power be reserved for electricity produced from renewable sources. Nonetheless, renewable power provides only a small proportion---about 3.6 percent---of electric power in the U.S., and official projections are for slow growth at most. This small market share has persisted despite very substantial tax and other policy support, an outcome that 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 expense. These problems uniformly yield high costs and low reliability for renewable power, and can be summarized as follows.

-- The unconcentrated energy content of renewable energy sources.
-- Location (or siting) limitations.
-- Relatively low availability (“capacity factors”) over time combined with the intermittent nature of wind flows and sunlight.

The low energy content of sunlight and wind flows relative to that of fossil or nuclear fuels forces renewable technology to compensate by relying upon massive substitute investment in land and/or materials. Second, unlike conventional generation technologies, renewable generation is sharply constrained by siting problems because favorable sunlight and wind conditions are limited geographically, yielding large additional costs for transmission. Finally, capacity factors---essentially, the proportion of the year during which renewable facilities actually can generate power---are substantially lower for wind and solar facilities than is the case for most conventional generation, and the intermittent nature of sunlight and wind flows exacerbates this problem. These conditions result in a need for conventional backup generation capacity so as to preserve the stability of the electric grid and to prevent power shortages; this need increases associated costs sharply.

Moreover, in particular for wind power, actual power generation tends to be concentrated in off-peak periods---winds tend to blow at night and in the winter---so that the electricity produced from wind facilities tends to be less valuable than that produced from conventional sources.

The Energy Information Administration estimates wind (onshore) and solar costs in 2016 at about $149 and $257-396 per megawatt-hour, respectively; if we add a reasonable estimate for backup costs based upon EIA data, the total is about $517 for wind and $625-$764 for solar generation. The EIA estimates for gas- or coal-fired generation are about $80-$110 per megawatt-hour. Accordingly, the projected cost of renewable power in 2016 including the cost of backup capacity is at least five times higher than that for conventional electricity. This does not include the additional costs for transmission imposed by renewable generation.

The five central rationales commonly offered in support of subsidies and mandates for renewables can be summarized as follows.

-- The “infant industry” rationale: Renewables cannot compete with conventional electric generation technologies on an equal basis because scale and learning efficiencies can be achieved only with an expanded market share.
-- The “level playing field” rationale: Subsidies enjoyed by conventional technologies introduce an artificial competitive disadvantage for renewable technologies.
-- A second “level playing field” rationale: The adverse environmental effects (e.g., air pollution)---“externalities”---of conventional electricity generation create an additional artificial cost advantage for those technologies.
-- The resource depletion (or “sustainability”) rationale: Policy support for renewables is justified as a tool with which to slow the depletion of such conventional resources as natural gas and to hasten the development of technologies providing alternatives for future generations.
-- The “green employment” rationale: Policy support for renewables will yield expanded employment (and economic competitiveness).

These rationales are deeply problematic. The infant industry argument is inconsistent with the presence of an international capital market and with the cost evidence for renewables. The subsidies per kilowatt-hour enjoyed by renewables outweigh by far those bestowed upon conventional generation technologies---even if we ignore the issue of whether the latter can be defined properly as “subsidies”---so that the first level playing field argument is unsupported by the evidence. With respect to the adverse environmental effects of conventional generation, the cost of conventional backup capacity made necessary by the unreliability of wind and solar generation is substantially greater than any artificial cost advantage enjoyed by conventional technologies as a result of negative external effects assumed not to have been corrected (“internalized”) by current policies.

The depletion or sustainability criticism of conventional technologies is incorrect simply as a matter of basic economics, and is inconsistent with the historical evidence in any event. Finally, the premise that expansion of renewable power will yield an increase in “green employment” confuses benefits for a particular group with costs imposed upon the economy as a whole, and fails to distinguish between employment growth in the aggregate and employment shifts among economic sectors.

Moreover, the actual employment effect of expanded renewables subsidies is likely to be negative because of the inverse aggregate relationship between electricity costs and employment, because of the adverse employment effects of the taxes needed to finance the subsidies, and because of the adverse employment effects of an economy smaller than otherwise would be the case. In short: The purported economic and social benefits of policy support for renewables are illusory.

The market difficulties faced by renewables are likely to be exacerbated by ongoing supply and price developments in the market for natural gas, which will weaken further the competitive position of renewable power generation. At the same time, subsidies and mandates for renewables impose nontrivial costs upon the taxpayers and upon consumers in electricity markets. The upshot is the imposition of substantial net burdens upon the U.S. 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 is the case in most contexts, the resource uses emerging from market competition, even as constrained and distorted by tax and regulatory policies, are the best guides for the achievement of resource allocation that is most productive. As federal policymakers address the ongoing issues and problems afflicting renewable electricity generation, the realities of this recent history provide a useful guide for policy reform. One such reform should be the abandonment of tax subsidies and other policy support for renewable energy.

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Benjamin
Zycher

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