Renewable Energy: Not Cheap, Not “Green” (1997) – Part 6

August 27, 1997
by Robert L. Bradley Jr.

High Costs as a Virtue: The Jobs Rationale

A jobs-creation rationale for wind power is marshaled by supporters, almost as a last line of defense. The American Wind Energy Association trumpets the fact that about $3.5 billion is invested in the U.S. [wind- power] industry, where watt-for-watt, dollar-for-dollar, that investment creates more jobs than any other utility-scale energy source. In 1994, wind turbine and component manufacturers contributed directly to the economies of 44 states, creating thousands of jobs for American communities. [124]

The high-cost propensity of wind power is a negative, not a positive, aspect of the industry. Prices reflect relative scarcity, and the price of wind-power energy is substantially higher than the price of electricity from other sources. Resources devoted to wind power are thus wasted in an economy where wants are greater than the resources available to meet them, and better alternatives are forgone. Without subsidies, less renewable energy infrastructure would have been built and consumers would have had lower cost electricity. The saved resources (land, labor, and capital) would have gone to a more competitive source of electricity or, more likely, given electricity-generation overcapacity, to a different endeavor entirely. Electricity consumers, in turn, would have incremental savings to spend elsewhere in the economy. The result of wind-power investments in California is the existence of an uneconomic renewable energy industry and an underused natural gas infrastructure. Consequently, it has contributed to artificially high rates and a substantial ratepayer surcharge for stranded cost recovery (jargon for generation facilities and third-party contracts incapable of delivering power at competitive prices in a restructured market; utility companies argue that the public should compensate them for those now uneconomic investments) in the restructuring period.

Subsidizing renewable energy for its own sake is akin to “creating” jobs by digging holes and filling them back up. The fundamental law of economic efficiency–“employ[ing] the available means in such a way that no want more urgently felt should remain unsatisfied because the means suitable for its attainment were employed for the attainment of a want less urgently felt” [125]–is violated.

Proponents of renewable subsidies argue that if the subsidies do not continue, U.S. firms will lose out to foreign firms whose governments will continue to subsidize them. [126] Tax incentives and government grants are sparking new wind-power capacity in a variety of countries. [127] The subsidies have resulted in “many strong European and Japanese competitors in the market place . . . actively marketing products internationally.” [128] Concluded the Yergin task force

Continued cost reductions fostered by [DOE’s] strategic research, development, and deployment activities can ensure the United States a place in an emerging multibillion-dollar clean energy market. The establishment of footholds by U.S.-based firms in international sales activity is clearly vital. [129]

Warnings that foreign companies will replace U.S. renewable energy companies just when commercialization is in sight have been heard since the 1980s [130]–another argument that is wearing thin. Not surprisingly, however, U.S. companies are finding the best markets abroad where electricity is more scarce and the cost of new power is higher. Whereas almost 80 percent of the world’s wind-power capacity was based in the United States in 1990, less than 50 percent is in the United States today. [131] If U.S. subsidies contract, the wind-power industry will likely be a foreign-subsidized experiment rather than a U.S.-subsidized experiment as in the past.

Today’s renewable export industry is a very small portion of total U.S. energy-related export activities. A $500 million annual renewable export industry accounts for under 1/10 of 1 percent of the total U.S. export market. [132] Unwise and uneconomic subsidies abroad do not justify unwise and uneconomic investments at home. Should foreign subsidies result in major technological breakthroughs to make wind power economically and environmentally viable in niche markets, the United States can “free ride” by importing the technology or equipment, or both. U.S. ratepayers and taxpayers would be spared, and, in fact, U.S. consumers would have been advantageously subsidized by foreign taxpayers or ratepayers.

A Dying–or Resurrected–U.S. Industry?

A 1976 study by the DOE estimated that wind power could supply close to one-fifth of all U.S. electricity by 1995, a fact trumpeted by the American Wind Energy Association in congressional hearings in 1984. [133] Going into 1996, instead of 20 percent, wind had a 1/10 of 1 percent share of the U.S. electricity market–an overestimate of 20,000 percent.

In 1995 and 1996, the U.S. wind-power industry was very sick if not on its deathbed. National production was down in 1995. California’s wind-power capacity had fallen from its 1991 peak, [134] leading a spokesperson of the CEC to conclude that “the wind energy industry in California has reached a plateau in its growth cycle.” [135] An even greater dropoff was feared when wind power’s PURPA contracts–scheduled to pay as much as 14 cents per kWh for some 650 MW of wind capacity in California alone–were scheduled to expire. [136] With the going market rate for spot generation estimated to be 2 cents per kWh, existing facilities with old technology, low capacity factors, and high maintenance faced retirement without new subsidies. [137] Plant modernization, such as proposed for Altamont Pass by Kenetech, also faced uncertainty given competition from sunk-cost capacity, the possible loss of tax credits from tax reform, and problems with the company’s new technology (KVS-33 blades). [138]

Kenetech, the market leader in the United States, declared bankruptcy in the spring of 1996 because of equipment problems at existing sites and a dearth of new business. [139] WindMaster went to a skeleton crew. Other firms such as FloWind and Cannon cut staff significantly. [140] Existing projects, operating under long-term operation and maintenance agreements with the same companies, faced new uncertainties–one reason why the Sacramento Municipal Utility District canceled Phase II of its Kenetech wind farm project in the spring of 1996. [141] Numerous complaints were heard at state and federal forums that the industry would not survive without redoubled government support in an intensely competitive, restructured industry.

In an earlier draft of this study, I wrote,

Only a sizable taxpayer or ratepayer bailout will prevent the large majority of the state’s heavily indebted wind-power capacity from going the way of synthetic oil and gas production. The “power surge” from wind to help fuel “the coming energy revolution,” (as anticipated by the Worldwatch Institute) will require a near miraculous technological turnaround and soon. Evidence exists that this turnaround will have to occur without the taxpayer or ratepayer largesse as in the past. . . . It is ironic yet illustrative how the eco-energy planning supply-side portfolio has contracted over time. Nuclear power was endorsed in the 1960s by the environmental establishment and abandoned in the 1970s. Hydro was endorsed until the 1980s for new capacity. Will wind power, the choice of the 1980s, be abandoned in the 1990s? [142]

Yet in 1997, with state and federal restructuring initiatives promising billions of dollars of new subsidies for qualifying renewables, prominently including wind, and a leading energy company entering the moribund wind-power field, [143] the industry seems to have escaped from the brink. The inordinate political clout of the eco-energy planners once again showed that, while eventual market verdicts cannot be repealed, they can be delayed.

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