Renewable Energy: Not Cheap, Not “Green” (1997) – Part 3

August 27, 1997
by Robert L. Bradley Jr.

It is erroneous to conclude that even if wind is not competitive now, it soon will be. Wind is competing against improving technologies and the increasing abundance of natural resources. The cost of gas-fired combined-cycle plants–the most economical electricity-generation capacity for central-station power at present–has fallen in the last decade because of improving technology and a 50 percent drop in delivered gas prices adjusted for inflation. [36] The energy-efficiency factors of gas turbines have increased from just above 40 percent in the early 1980s to nearly 60 percent today. [37] Forecasts by the DOE and other sources expect continued efficiency improvements in the years 2000 through 2015 for gas-fired generation. [38] One forecast is that new gas-fired generation of virtually any capacity will cost from $200 to $450 per kW, generating power at 2 cents per kWh. [39]

To illustrate the point, compare the most recent nominal leveled prices of advanced wind technologies operating in prime wind areas with new-generation gas turbines. Long-term fixed-price wind contracts are available at about 3 cents per kWh (nominal) in prime areas, translating into an all-inclusive price of 5 to 6 cents per kWh (a price that factors in the tax preferences and other implicit costs, as discussed). The price of combined-cycle gas turbines in 1996-97 also has reached new lows, between $400 and $500 per kW, bringing electricity below 3 cents per kWh and even below 2.5 cents per kWh in select regions such as the Pacific Northwest, where natural gas prices are the lowest. That suggests that the historic delivered-price discrepancy still holds and may continue to hold. Indeed, technological change can be congruent between different energy technologies, and falling gas prices and electricity prices from gas-fired generation are lowering wind turbine costs as well. But even if the gap were cut in half, a 50 percent premium for new wind capacity is substantial.

Head-to-head comparison of wind power and other generation alternatives for new generation capacity is mostly a hypothetical debate. An even greater competitive problem for wind, and an environmental problem as well, [40] has been and continues to be surplus sunk-cost capacity with very low incremental costs that exists in many markets around the country. California, in particular (where the U.S. and world wind-power industry is centered), [41] has had substantial surplus gas-fired capacity that in the early to mid-1990s was generating electricity for as little as 2 cents per kWh. [42] New wind capacity had to compete with 2-cent existing power, not 3-cent new power, which made new wind capacity between 100 percent and 300 percent more expensive than the relevant competition. That insurmountable competitive disadvantage for wind, ironically, had been created partly by California’s multi-billion dollar investment in demand-side management programs, which idled gas-fired capacity and helped to remove the need for new generation capacity in the state. [43]

In northern California, where the state’s wind industry is concentrated, new capacity is not forecast by the CEC until 2004. In southern California, where the solar industry is centered, new capacity is not forecast until 2005. [44] Moreover, this gas-fired capacity, experiencing use rates of 30 percent and less because of low demand, [45] has been retrofitted pursuant to California’s stringent air quality rules to become virtually environmentally benign. [46]

The surplus capacity problem for prospective wind power exists outside California as well. Most other regions have surplus gas-fired (if not coal-fired) generating capacity, particularly off-peak, and that surplus will increasingly become national as electricity-industry restructuring makes the grid more interconnected.

The analysis just given pertains to central-station wind power. Regarding residential wind systems, the American Wind Energy Association states, “As a general rule of thumb, a turbine owner should have at least a 10 mph average wind speed and be paying at least 10 cents per kWh for electricity.” [47] Properties need to be one acre or more to support an 80- to 120-foot tower, and noise levels “about half as much as . . . a lawn mower” can be expected. [48]

Assuming optimal wind speeds and the right-sized property, the 10-cent criterion at the residential level leaves 11 states–Alaska, California, Connecticut, Hawaii, Maine, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont–as potential sites. [49] With the impending restructuring of the electricity industry (to be discussed), 10-cent electricity will become a thing of the past in the lower 48 states. Opening the national electricity grid likely will equalize rates across state boundaries and reduce the nation’s 8 cent per kWh average residential rate, leaving still fewer economic applications.

Ratepayer and Taxpayer Subsidies
Ratepayer and taxpayer subsidies to wind power have been substantial for two decades. Ratepayers typically pay three times more for wind power than they would pay for electricity in today’s spot market, [50] and the premium could be higher. The obligation stems from the Public Utility Regulatory Policies Act of 1978 (PURPA), which requires utilities to purchase power from “qualifying facilities” at the utility’s “avoided cost.” [51] PURPA, concluded one study, “almost single-handedly created the renewable energy industry.” [52] California became the nation’s renewable energy capital when its public utilities commission instructed utilities in the state to enter into PURPA contracts at avoided costs that soon escalated far above market prices. Standard Offer no. 4 contracts, awarded to qualifying facilities in California between 1982 and 1988, in particular, were predicated on oil prices’ approaching $100 per barrel. [53] Thus, the State Utility Commission’s avoided-cost guidelines locked in prices that today are about 12 cents per kWh. [54] With many of the contracts reverting to market prices (about 2 to 3 cents per kWh) in the 1996-98 period, many renewable projects face retirement without new government help. [55]

PURPA’s encouragement of renewables was augmented by preferential state and federal tax treatment of renewables. Between 1978 and 1986–the period in which tax preferences were greatest–such preferences funneled as much as $2.0 billion to renewable energy projects. [56] During that time, the combined California and federal investment tax credit was as high as 50 percent, a two-year payout. [57] That incited a flurry of first-generation wind capacity that encountered operational problems and hurt the entire industry’s credibility. [58] “Wind farms,” concluded one study, “were sometimes operated as tax farms.” [59] Complained another pro-wind study about the “sledgehammer” approach, “Some of the early companies knew more about tax minimiza-tion than they did about engineering.” [60]

After several years of relatively neutral tax treatment, a tax credit of 1.5 cents per kWh was established in the Energy Policy Act of 1992 [61] for electricity generated with wind and closed-loop (organic) biomass. The credit applied to such qualifying facilities placed in service between 1993 and 1999. Phasing down began at a reference price of 8 cents per kWh; the tax credit was to be phased out at a reference price of 11 cents per kWh. Both the 1.5 cent and 8 cent rates would increase with inflation beginning with 1994 generation. [62] The production tax credit is currently set to expire on June 30, 1999.

For government and nonprofit entities that could not use the tax credit, the secretary of energy was authorized to make “incentive payments” of 1.5 cents per kWh (adjusted for inflation from base year 1993) for all renewable electricity-generation technologies, excluding hydroelectricity and municipal solid waste. [63] The tax credit was for 10 years and applied to qualifying facilities placed in service between October 1993 and September 2003. [64]

The DOE spent $900 million (constant 1996 dollars) on wind energy subsidies through fiscal year 1995. [65] Yearly DOE wind expenditures ranged from $10 million in FY90 to a high of $129 million in FY79. The CEC’s Wind Program (founded 1977) and Energy Technologies Advancement Program (founded 1984) have provided tens of millions more dollars in wind subsidies. [66] Foreign governments have spent hundreds of millions of dollars (equivalent) more on research and commercialization. [67]

A conservative estimate of the total U.S. government (i.e., taxpayer) subsidy to wind power totals over $1,200 per installed kilowatt, even greater than the direct capital cost of wind under advanced technology of around $860 per kilowatt [68] and certainly more than the installed capacity cost of gas-fired combined-cycle plants of approximately $580 per kilowatt. [69] On a dependable capacity or capacity factor basis, the subsidy cost and capital cost premium to market is severalfold greater.

Wind power has proven itself to be a perpetual “infant industry,” with its competitive viability always somewhere on the horizon. Proponents have always argued for continued subsidies on the rationale that commercialization is in sight. In 1985 congressional hearings, for example, an executive of the American Wind Energy Association testified that “the goal for this industry, the achievable goal, according to the CEC, is the lowest-cost source of electricity, along with hydro, available to a utility by 1990.” [70]

The need for more subsidy continues. The 1995 report of the DOE-appointed Task Force on Strategic Energy Research and Development (Yergin task force), [71] concluded that $350 million in future research and development funding was still needed for “wind characterization, aerodynamics, structures and fatigue, and advanced concepts and components.” [72]

What the Yergin task force fails to consider is that the federal government’s crash course in wind-related research and development has been a bust to date, and further commitment may be doomed as well. Gipe, one of the nation’s leading advocates of wind energy, has pronounced the U.S. effort through the early 1990s “a chimera . . . nothing more than ‘welfare for the educated.'” [73] He explains,

The United States lavished nearly half a billion dollars on the aerospace industry from 1974 to 1992 [for wind-power R&D]. . . . [Yet] with the exception of U.S. Windpower’s model 56-100, none of the U.S.-designed machines in California can be called a success. . . . By the mid-1990s there were no major U.S. manufacturers selling commercially proven wind turbines to independent developers in the United States and there were practically no U.S. wind turbines operating in Europe. [74]

One byproduct of DOE centralization and largesse has been the professional corruption of the American Wind Energy Association, which, Gipe states, fell into the trap of measuring its success by the size of taxpayer subsidies. [75]

The aggregate ratepayer and taxpayer commitment makes the embedded cost of wind power, conservatively estimated at 10 cents per kWh, [76] one of the highest for any kind of electricity generation in the present era. Wind power ranks with high-cost nuclear generation (above 10 cents per kWh compared with average generation costs of 4 cents per kWh), [77] synthetic oil (around $57 per barrel versus spot crude of around $20 per barrel), [78] Strategic Petroleum Reserve oil (around $60 per barrel versus crude of $20 per barrel), [79] and synthetic natural gas ($3 to $7 per MMBtu versus spot gas of around $2 per MMBtu). [80]

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