The Good News—the Air is Getting Cleaner

The report can be summed up with this graphic from EPA:

GDP, vehicle miles traveled, population, and energy consumption have all increased since 1990. But despite the fact that more people are using more energy to produce more goods and services, air pollution emissions have decreased.

EPA reports that air quality has improved for the six main air pollutants:

Since 1990, nationwide air quality has improved significantly for the six common air pollutants. These six pollutants are ground-level ozone, particle pollution (PM2.5 and PM10), lead, nitrogen dioxide (NO2), carbon monoxide (CO), and sulfur dioxide (SO2). Nationally, air pollution was lower in 2008 than in 1990 for:

• 8-hour ozone, by 14 percent
• annual PM2.5 (since 2000), by 19 percent
• PM10 , by 31 percent
• Lead, by 78 percent
• NO2 , by 35 percent
• 8-hour CO, by 68 percent
• annual SO2 , by 59 percent

The below graphic, from EPA’s website, (but not in the actual air trends report) shows air quality trends since 1970. These trends are even more dramatic that the 1990 to 2008 numbers.

The Bad News: the Press Does Not Seem Interested in Telling the American People Our Air Quality has Dramatically Increased

This is good news that air quality continues to improve and even more so because the American people do not know it. According to a 2004 poll from the Foundation for Clean Air Progress, only 29 percent of people thought that “America’s air quality is better than . . . it was in 1970.”

One reason that the American people do not know this is because the press does not report on it.  So far not one major newspaper has written a story about the good news in this air trends report—there’s nothing from the Washington Post, New York Times, Los Angeles Times, or any of the other major news outlets. The only story we could find is from E&E News (a subscription-based environment and energy news service) and even then it was the 12^th story in their afternoon publication.

It’s tough for the American people to lean to the truth about air quality when the media does not report the good news.

Our Air is Getting Cleaner

Today we can breathe easier knowing that our air is much cleaner than in the past. Even though the media is not reporting this good news to the American people, our air quality has substantially improved and will continue to improve. The data shows the truth.

The problem is that energy efficiency is not free. Appliances with greater energy efficiency cost more money—sometimes a lot more and frequently take more time to do the same amount of work.

Americans, not policymakers, should be free to choose which appliances make the most sense for their families instead of being forced to purchase more expensive and more energy efficient appliances.

Energy efficiency mandates are based on the premise that Americans consumers do not make wise choices about energy efficiency without the government forcing them to make “good” choices. It is a dubious claim. Consumers pay attention to their electric bill, and that is especially the case with commercial users of appliances.

Mandating greater energy efficient makes the appliances and equipment more expensive. In 2006, the Consumer Reports Best Buy for top-load washing machines only cost $380.[1] That was before the federal energy efficiency mandate for washing machines. In 2007, when washing machines had to comply with the new energy efficiency mandate, Consumer Reports said that “we can’t call any washer a Best Buy because models that did a very good job getting laundry clean cost $1,000 or more.”[2]

Since then, washing machines have improved—but the energy efficiency mandates still make them more expensive than they would otherwise be. The least expensive washing machine Consumer Reports recommends still costs $480[3] and the next lowest-priced recommend washing machine costs $650.[4] If a consumer saves $15 a year[5] in energy costs by using one of these more efficient washers, it takes nearly 5 years to recoup the extra costs of the $480 model and over 16 years to recoup the extra cost of the $650 model (even adjusting for inflation from 2006 to 2010).

Federal officials who desire to mandate energy efficiency standards apparently assume that households and businesses are not making smart choices about energy efficient appliances. This is not borne out by actual data. According to data from the Association of Home Appliance Manufactures, household appliances are becoming much more efficient. Between 1980 and 2008, air conditioners became 41.5 percent more energy efficient, dishwashers became almost twice as energy efficient, and refrigerators became nearly three times as energy efficient.[6] The graph below shows the percent improvement in energy efficiency of standard household appliances:

Americans are intimately aware of the costs of their utility bills and are always looking for ways to balance the convenience of their appliances with energy savings. When federal regulators step in and mandate energy efficiency improvements, the mandate increases the price of appliances and limits Americans’ choices. Actual data shows that appliances are becoming more energy efficient over time. There is no need for lawmakers to step in and artificially limit our choices.

[2] Consumer Reports Annual Buying Guide, Jan. 1, 2008, available at http://www.accessmylibrary.com/coms2/summary_0286-34226514_ITM.

[3] Consumer Reports, Washers & Dryers, Feb. 2010 p. 47. The model is a GE WJRE5500G.

[4] Id. at 46. The model is a Frigidaire Gallery GLTF2940F.

[5] In 2009, Consumer Reports noted online in subscriber only section of their website that “Each improvement in energy-efficiency scores, from good to very good, for instance, cuts an average of $10 to $20 from your annual energy expenditures.” The 2010 washing machines are rated at “Very Good” for energy efficiency, while the 2006 washer was rated as “Good” on energy efficiency.

[6] Data from the Association of Home Appliance Manufactures, cited by Mark J. Perry at http://mjperry.blogspot.com/2009/10/chart-above-shows-significant-increases.html.

Recent Solar Plant Construction

North Carolina. Western North Carolina is home to a new 555-kilowatt solar array that has been placed atop a landfill.[i] This small solar farm—built in response to bids for projects that would meet North Carolina’s Renewable Electricity Standard—is the fourth to begin operating in the state, with four more under contract. [ii] FLS Energy owns and operates the solar farm and will sell its power to Progress Energy Inc. The solar plant consists of 2,340 photovoltaic panels and is expected to generate about 730,000 kilowatt-hours of electricity annually, only a 15-percent capacity factor.  It is reported to have created five new jobs. Unfortunately, to provide counterweight against high winds and support on the ground, FLS Energy had to construct concrete pads on top of the landfill as a base for the solar panels, creating carbon dioxide emissions and partially negating some of the environmental benefit from the solar generated electricity.

Across 500 acres north of West Palm Beach, the FPL Group utility is grafting what will be the world’s second-largest solar plant onto the back of the largest fossil-fuel power plant in the United States. (NYT)

Florida. The N.C. plants are smaller than the solar plant that came on line last fall in southern Florida. That plant consisting of over 90,500 photovoltaic panels is a 25,000 kilowatt plant, built by Florida Power and Light.[iii] The plant costs more than $6,000 per kilowatt to construct, about 6 times what a natural gas combined cycle plant would cost, according to the Energy Information Administration (EIA), an independent agency within the U.S. Department of Energy.[iv]

Florida Power and Light is building another solar plant in Indiantown, Florida, which is an experiment of marrying a solar plant with a gas-fired plant to reduce cost.[v] Florida Power and Light expects to cut cost by about 20 percent compared with a stand-alone solar facility since it does not have to build a new steam turbine or new high-power transmission lines. Once totally completed, the solar plant will be able to generate 75,000 kilowatts of power using 190,000 mirrors, tripling the size of the Florida plant described above. But it is dwarfed by the adjacent gas plant, which can produce about 3,800 megawatts of power. As you can see by the picture below, the more efficient natural gas plant also requires far less land mass than the solar plant. At a cost of $476 million, it will cost $6, 347 per kilowatt to construct.

These solar plants and other renewable generating plants are being constructed in response to subsidies and grants from the federal and state governments and because of state mandates called Renewable Electricity Standards or Renewable Portfolio Standards.  Over half of the states and the District of Columbia have enacted Renewable Electricity Standards that require a specified percentage of future generation to be from renewable power.

What are the Costs of Competing Technologies?

Construction Costs

The EIA provides the construction costs for a slate of generating technologies and their expected annual generating costs for 2016, the first year that they can be compared owing to the different construction times for each plant type. The construction costs, without finance charges,[vi] are depicted in the following graph. The capital costs (in 2008 dollars) range from $648 per kilowatt for a gas-fired turbine to $6,171 per kilowatt for a photovoltaic solar plant, the highest cost of all of the future generating technologies that EIA considers in its forecasts.  Coal and gas-fired plants generally dominate a forecast where current laws and regulations are assumed to continue in the future. A conventional coal plant with equipment for removing sulfur dioxide and nitrogen oxide emissions runs $2,223 per kilowatt and a coal-fired integrated gasification combined cycle plant runs $2,569 per kilowatt. Gas-fired combined cycle plants are of even lower cost at $968 per kilowatt. These technologies can be used as base-load plants that operate at high capacity factors when electricity demand is at its highest.

Annualized Generating Costs of New Plants

Many advocates of renewable technologies indicate that while the capital cost of so called “green technologies” may be higher than conventional fossil-fueled technologies, the benefit is zero fuel cost for their preferred technologies–solar and wind. While that is true, wind and solar technologies cannot provide base-load power because the sun is not always visible and the wind does not always blow, meaning the electricity may not be available when you need it. Taking into account these factors as well as operation and maintenance costs and fuel costs, EIA  puts their slate of future generating technologies on a comparable basis by calculating levelized cost, that is, the annual cost of generating power including capital, fuel, operation and maintenance, and finance charges.[vii] And, in the case of coal, they include the equivalent of a $15 per ton carbon dioxide emission fee to represent the current financial and regulatory environment for coal-fired plants. Many coal-fired plants are finding difficulty in getting financing and/or are facing regulatory or legal delays in obtaining permits.

The levelized costs among the various technologies (expressed in 2008 dollars) range from $79.3 per megawatt-hour for a gas-fired combined cycle plant to $396.1 per megawatt-hour for a photovoltaic solar plant. Coal plants run from $100.4 to $110.5 per megawatt-hour for conventional coal and integrated combined cycle, respectively. Although wind has a lower cost than solar, it is still higher on an annualized basis than gas and coal-fired plants because of its lower capacity factor. Wind turbines built on-shore are estimated to cost $149.3 per megawatt-hour, and wind built off-shore has estimated annual costs of $191.1 per megawatt-hour. Again, the costs are for a plant beginning operation in 2016, the first year that can be compared for a new plant because of the difference in construction times among the various technologies.

Why Are Electric Utilities Building Wind and Solar Plants?

Subsidies and Mandates for Renewable Technologies

Electric utilities are building wind and solar plants because of incentives offered and mandates laid down by state and federal officials. These include subsidies in the form of investment tax credits, production tax credits, accelerated depreciation of the asset for tax purposes, and Renewable Electricity Standards (RES), which require electric utilities either to build a required amount of renewable power or to purchase credits from other electric utilities who more than meet the targeted requirements. Currently, twenty-eight states and the District of Columbia have renewable electricity standards.[viii] The RES specifications differ by state. North Carolina is the only state in the southeast with an RES. Many southern states are against a federal RES because they will have to purchase renewable credits from other areas of the country since they have very little “green” resources. Purchasing electricity credits will increase their electricity rates, possibly driving out industry from their states. While more than half the states have an RES, many are not monitoring its compliance, and, with the exception of Texas, are not meeting their renewable targets.[ix]

Solar power has had a 10-percent investment tax credit since 1978, which was made permanent by the Energy Policy Act of 1992. The Energy Policy Act of 2005 established a 30-percent personal tax credit, not to exceed $2,000, for the purchase of solar electric and solar water heating property. The Emergency Economic Stabilization Act of 2008 extended the 30-percent tax credit to 2016 and lifted the   cap. It also allowed electric utilities to qualify, paving the way for electric utilities to begin constructing solar thermal and solar photovoltaic facilities.

Wind received a federal production tax credit (PTC) as part of the Energy Policy Act of 1992, defined as a 1.5-cents-per-kilowatt-hour payment (adjusted annually for inflation), available for 10 years to investors for facilities placed in service between 1994 and June 30, 1999. The PTC for wind has expired and been reinstated several times since its origination. The Emergency Economic Stabilization Act of 2008   extended the PTC to 2.1-cents-per-kilowatt-hour through 2012. The $787 billion economic stimulus that President Obama signed into law in February 2009 makes a 30 percent investment tax credit available in lieu of the production credit.

Federal Subsidies for Renewable Power Compared to Other Generating Technologies

While these are some of the more direct subsidies that wind and solar receive, there are many others at both the federal and state level, such as the accelerated depreciation mentioned above. The EIA did a study comparing the federal subsidies received for electric generation by fuel type for fiscal year 2007.[x] They found that wind and solar received almost 100 times more in subsidies than oil and natural gas plants on an electricity production basis.  Total federal subsidies for electric production from wind power were $23.37 per megawatt hour (in 2007 dollars) and for solar power were $24.34 per megawatt hour, compared to 44 cents for traditional coal, 25 cents for natural gas and petroleum liquids, 67 cents for hydroelectric power, and $1.59 for nuclear. These subsidies include the federal production and investment tax credits, but do not include accelerated depreciation (a five-year tax write-off) and state subsidies. Energy subsidies are paid for by consumers and tax payers; they are not free.

Despite more than 30 years of subsidies, set asides, and favorable treatment, for the first eleven months of 2009, solar power produced only 0.02 percent of our electricity and wind power produced only 1.7 percent of our electricity. [xi]

Conclusion

Government is intended to work for the people. However, governments have expanded their influence to many areas of our lives where the rationale for action is suspect, even nonexistent. Arguments such as “energy independence from OPEC oil” make no sense when evaluating options for the electricity sector because this fuel generates only 1 percent of U.S. electricity, and this small quantity could be easily replaced if it were economical to do so.

Wind and solar are supposedly the answer for reducing carbon dioxide emissions from electrical generation.  But as Texas has found,[xii] wind and solar tend to reduce natural gas-fired generation (the least carbon-intensive fossil fuel) rather than coal-fired generation (the most carbon-intensive fossil fuel), because existing coal-fired generation is less expensive than gas-fired generation. Finding the correct policy to meet one’s goals tends to be difficult in such a complex economic environment. A bad policy can be more damaging than no policy, because it costs the American public money either through taxes or through higher rates for products.

Some people believe that “green energy” will create jobs that will stimulate the economy. But case studies from Spain,[xiii] Germany,[xiv] and Denmark[xv] have shown just the opposite. Early on, Spain embarked on a program of “20-percent renewable by 2010,” to set an example for other countries. However, a Spanish study has found that for every green job the Spanish government created, 2.2 jobs were destroyed elsewhere in the economy, and 9 out of 10 government-created green jobs were temporary. The phrase “20 percent by 2010” turned out to be a close approximation of Spain’s unemployment rate.[xvi]

A German study found that green jobs created by government actions disappear as soon as government support is terminated. A Danish study found that the government’s wind experiment was an expensive way to create jobs or to reduce carbon dioxide emissions.

So why are our politicians continuing to subsidize and mandate inefficient and expensive sources of energy? Doing so only increases taxes (to pay for the subsidies) and increases the price of energy. It’s a lose-lose proposition.

[ii] http://www.progress-energy.com/aboutus/news/article.asp?id=23642

[iii] http://www.fpl.com/environment/solar/desoto.shtml

[iv] Energy Information Administration, Electric Generating Technologies Cost Assumptions, http://www.eia.doe.gov/oiaf/aeo/index.html

[v] The N.Y. Times, The Newest Hybrid Model, March 4, 2010, http://www.nytimes.com/2010/03/05/business/05solar.html

[vi] Energy Information Administration, Annual Energy Outlook 2010 Early Release, Electric Generating Technology Cost Assumptions, http://www.eia.doe.gov/oiaf/aeo/index.html

[vii] Energy Information Administration, Annual Energy Outlook 2010 Early Release, 2016 Levelized Cost of New Generation Resources from the Annual Energy Outlook 2010, http://www.eia.doe.gov/oiaf/aeo/electricity_generation.html

[viii] http://go.ucsusa.org/cgi-bin/RES/state_standards_search.pl?template=main

[ix] “A National Renewable Portfolio Standard: Politically Correct, Economically Suspect,” Robert J. Michaels, April 2008 Electricity Journal.

[x] Energy Information Administration, Federal Financial Interventions and Subsidies in Energy Markets 2007, http://www.eia.doe.gov/oiaf/servicerpt/subsidy2/pdf/chap5.pdf, Table 35

[xi] Energy Information Administration, Monthly Energy Review, February 2010, http://www.eia.doe.gov/emeu/mer/pdf/pages/sec7_5.pdf

[xii] The Wall Street Journal, Natural Gas Tilts at Windmills in Power Feud, March 2, 2010, http://online.wsj.com/article/SB10001424052748704188104575083982637451248.html?mod=WSJ_Com modities_LeadStory

[xiii] Study of the effects on employment of public aid to renewable energy sources, Universidad Rey Juan Carlos, March 2009, http://www.juandemariana.org/pdf/090327-employment-public-aid-renewable.pdf .

[xiv] Economic impacts from the promotion of renewable energies: The German experience, http://www.instituteforenergyresearch.org/germany/Germany_Study_-_FINAL.pdf

[xv] Wind Energy-The Case of Denmark, September 2009, http://www.cepos.dk/fileadmin/user_upload/Arkiv/PDF/Wind_energy_-_the_case_of_Denmark.pdf

[xvi] http://dailycaller.com/2010/03/04/what-exactly-is-a-green-job/

In this context, of course, “seizing the energy opportunity” means that the government seizes tax dollars to help private companies invest in inefficient energy projects that could not survive in a free market. As your mother always told you, just because all the cool countries are jumping off an energy-boondoggle cliff, doesn’t mean Americans should too. It’s good to be “left behind” with all the affordable energy provided by fossil fuels.

CAP’s Vision

The Center for American Progress (CAP) study summarizes the apparently dire situation:

By 2020, clean energy will be one of the world’s biggest industries, totaling as much as $2.3 trillion.1 Over the past year, other countries made huge investments to seize the economic opportunity provided by the historic shift from fossil-based energy to renewable, low-waste electricity and fuel. These investments weren’t made out of thin air, but were a result of intentional public policies, which in turn provided a strong stimulus for new public and private investment in new clean-energy markets, infrastructure, and human resources. (p. 1, emphasis added)

We agree on one thing: The investments in inefficient energies didn’t come out of thin air. On the contrary, the type of “clean energy” programs that CAP is pushing would rely on money taken from taxpayers. Even private funding would largely be driven by government mandates that artificially penalize traditional energy sources.

[China, Germany, and Spain] invested in clean energy for short-term benefits and laid a solid foundation for future sustainable economic growth by either setting a price on carbon or implementing strong national energy performance standards or both, thus spurring innovation in new technologies that lower carbon emissions. A 2009 study by the CERNA Research Program on Technology Transfer and Climate Change found clear evidence that developed countries that ratified the Kyoto Protocol—each of which set a legally binding target to reduce its carbon emissions—saw a rise in green-tech innovation patents of more than 33 percent…Developed nations that didn’t initially ratify Kyoto—the United States and Australia—saw no noticeable change in their share of total green tech patents over the same time period. (pp. 1-2, emphasis added)

It is not surprising that when governments pick winners and losers in the energy sector, the winners do better. The CAP study simply takes for granted that the economy should be moving away from fossil fuels and into politically favored technologies, such as wind and solar. But if those are the wrong sectors to expand—at least for now—then the boost in patents in “green-tech” isn’t a blessing, but a curse. By the same token, if the government banned automobiles tomorrow, that would no doubt stimulate a flurry of patents in ten-speed bicycles and Conestoga wagons. This wouldn’t signal US leadership, it would just be silly and wasteful.

The same is true for “green-tech” investments. If the government places artificial penalties on high-carbon energy sources, then the country will be poorer in conventional terms, such as GDP or per capita income. Now, if the scholars at CAP want to argue that this impoverishment is worth it to avoid global warming, then they should go ahead and make that argument.

But the scholars at CAP know that the American people wouldn’t go for such a sales pitch, especially in the midst of a deep recession and unemployment hovering at 10 percent. That’s why CAP’s spin doctors say we can have our green cake and eat it too. They claim that not only will switching to less efficient energy sources (like solar and wind) save the planet, but it will also spur new job creation.

Ironically, Lindsay Graham himself let the marketing cat out of the bag, as quoted in the New York Times:

“The momentum around this large cap-and-trade bill to save the planet has been replaced by a business model: How do we create jobs and stay ahead of the Chinese and clean up the air?” Graham said earlier this week…”Once you start changing your perspective from ‘Iowa is going to be beachfront property’ to ‘How do you create jobs and clean up the air?’ you have a completely different focus,” he added.

US First Among Lemmings?

It is amazing that the green-energy boosters continue to cite Spain as a success story, despite the fact that their unemployment rate in December was more than 19 percent. The famous Calzada et al. study has chronicled the unsustainable bubble in Spanish renewables, a bubble inflated by government subsidies and mandates that popped once the support was only slightly scaled back.

Germany’s 8.2 percent unemployment is a tad better than the United States’. But this doesn’t surprise us, as the German government has been warning against runaway “stimulus” spending. German Chancellor Merkel’s government has been more fiscally responsible than the Obama Administration; of course their economy is on a better footing at the moment.

As for China, we also note that they are adding one coal-fired power plant a week, a nuclear plant a month, and are in the process of constructing the largest hydroelectric dams known to man. Will CAP put out a study warning that the US will get left behind in the scramble for coal, nuclear and hydropower? (CAP congratulates China for 16% of its power being from hydropower and wind, failing to mention that 95% of that combo is hydropower, principally from the new Three Gorges Dam.)

The CAP study favorably cites the Chinese tariffs on foreign-made turbine components, which are in place to boost job growth in the Chinese wind sector. But, of course, this just places an obstacle in the way of American manufacturers trying to export renewable technology to China. Taken to its logical extreme, the CAP mindset would eliminate the benefits of international trade altogether, so that every country’s workforce had to produce everything internally. That would “create jobs,” no doubt, but in the same way that a household would keep really busy if it had to grow its own food and sew its own clothes.

Conclusion

The CAP study urges the U.S. government to copy the worst economic ideas from around the world. When the government picks winners and losers, it doesn’t create wealth or jobs in the long run. On the contrary, government micromanagement will simply divert resources from efficient energy sources into inefficient ones. This will raise energy prices for consumers and retard job growth.

At some point down the road, it might make economic sense for the country to switch away from fossil fuels towards renewable technologies. But it doesn’t make sense right now. The proof is that private investors aren’t willing to put their own money on the line; they want the government to force taxpayers to foot the bill.

As Ben Lieberman of the Heritage Foundation observed, Americans shouldn’t be worried when other countries are “ahead of us” as they run off a cliff

The NREL Study Approach

Photo: NREL.gov

The NREL study considered four scenarios, three at the 20 percent level of wind generation, and one at the 30 percent level, the scenarios being differentiated by the number of onshore versus offshore wind turbines that would be built. The 20 percent scenario requires about 225,000 megawatts of additional wind capacity and the 30 percent scenario about 335,000 megawatts. That’s 9 to 13 times greater than the wind capacity that existed at the end of 2008. And it would require that 16,000 to 24,000 megawatts to be constructed each and every year. By comparison, the largest amount of wind capacity actually constructed in a year was slightly less than 10,000 megawatts, in 2009. [ii] Because wind generation is intermittent, the capacity of the new wind units needs to be above the target generation level. The offshore component would represent 0 to 28 percent of the required generating capacity, depending on the scenario. Offshore units are more expensive to build than the onshore units, but fewer transmission upgrades may be needed.

According to the study, this level of wind power is technically feasible, but to handle it the transmission system would need upgrades, including 17,050 to 22,697 miles of new high-tech lines, depending on the scenario, and over one hundred billion dollars in capital investments ($101 to $145 billion). The study determined that the cost of integrating intermittent wind power into the Eastern grid, in the 20 percent scenarios, would be $5 per megawatt-hour,[iii] or about 0.5 cents per kilowatt-hour of electricity (in 2009 dollars).[iv] The integration costs are the incremental costs incurred during operation that can be attributed to the variability and uncertainty introduced by wind generation. This cost is in addition to the costs of constructing the wind turbines and generating the wind power. The study also assumes that a large-scale consolidation of grid control organizations would need to occur in order to permit the sharing of wind power across the vast eastern grid, which could be a very large challenge.[v]

The study also noted that it would be imperative to upgrade the transmission grid before building the wind capacity because it takes longer to upgrade the grid than it does to build new wind capacity. Also, the authors point out that without the grid enhancements, there would be curtailment or shutting down of wind units. China has already found this out—their grid cannot handle 30 percent of the wind units they have constructed.[vi]

NREL admits that wind cannot be a capacity resource. And because our electricity system is dependent on capacity value—meaning that electricity can be obtained on demand and controlled as needed—wind power must have back-up power to provide that dedicated capacity. That issue alone limits wind’s usefulness.[vii] Texas, the state with the largest wind capacity (at 9,400 megawatts), provides exemptions to wind-turbine owners when their turbines do not deliver power as promised because the wind isn’t blowing. By contrast, when the owners of coal, nuclear, or gas-fired plants cannot deliver power owing to an operational or maintenance problem, they must pay for whatever back-up power is needed. The cost of backing-up wind power companies is thus paid for by all generators.[viii]

Among the report’s conclusions is this: The reductions in spending on fossil fuels that will come from replacing coal-fired electricity with wind-generated power would offset the costs of additional transmission.  But the report neglects to mention that it is more economic to construct and operate coal-fired plants than wind plants.  Let’s compare the findings of the NREL study to other studies and experience.

How Does NREL Compare With Other Studies and Reports?

One prominent progressive activist[ix] claimed that we are well on our way to meeting the target because the Department of Energy’s Energy Information Administration (EIA)[x] projects in their revised Annual Energy Outlook 2009[xi] that wind will be 5 percent of U.S. electricity in 2012 and that all renewable power would reach 14 percent. That forecast assumes the renewable incentives in the federal stimulus package, as well as the renewable electricity standards now operative in more than half of all U.S. states, which mandate that a certain percentage of future generation be produced from renewable energy. But the activist failed to provide EIA’s forecast for later years, which shows that wind does not remain the most economic option once better wind resources (lower-cost sites) are used up, and the subsidies provided by the stimulus are no longer available. In 2024, EIA forecasts wind to be only 2 percent higher than it is expected to be in 2012, and to represent only 4 percent of electricity generation, which is 1 percentage point less than its share in 2012. Biomass generation, a base-load technology, is expected to increase from 1 percent of generation in 2012 to 4 percent in 2024, with all renewable power increasing from 14 to 16 percent of total generation between 2012 and 2024.[xii]

EIA’s analyses, even when they include a cap-and-trade policy or a national renewable electricity standard (RES), show other clean technologies to be more economic than wind power once the lower-cost wind sites are exhausted and the subsidies expire, particularly given that significant new transmission will be needed to accommodate more remote wind resources. For example, following a request from Chairman Edward Markey of the House Energy and Commerce Committee, EIA analyzed a 25 percent RES in 2025 that was based on the proposal in the American Clean Energy and Security Act of 2009.[xiii] EIA considered two scenarios that depended on the amount of energy-efficiency credits available, one at the maximum level and one with no efficiency credits. In one scenario, wind in 2025 did not increase from reference case levels. In the other scenario, the increase in wind generation was 20 percent, increasing from a 4 percent to a 5 percent level of total generation. However, biomass generation increased either 82 percent or 134 percent from reference case levels. Having represented 4 percent of total generation in the reference case in 2025, biomass generation increased its share to either 7 percent or 10 percent of generation, depending on the case considered by EIA. (The larger share is in the no efficiency credit scenario.)

Based on another analysis at the request of Chairmen Waxman and Markey, EIA examined the proposed cap-and-trade provisions in the American Clean Energy and Security Act of 2009, along with its other provisions.[xiv] While many cases are analyzed, the basic case has renewable generation increasing from 16 percent in the reference case to 20 percent in the basic case in 2025, and nuclear generation increasing from 18 percent in the reference case to 25 percent in the basic case, a larger share increase. Both wind and biomass have a 4 percent share of the generation market in 2025 in the reference case, with biomass generation doubling its share to 8 percent in the basic case and wind increasing by only 1 percentage point to 5 percent. Since biomass and nuclear are base-load technologies, they generate more electricity from an equal amount of capacity than does wind power, which is an intermittent technology, generating electricity only when the wind blows.

Another advantage that biomass and nuclear technologies have over wind is their cost. Generation costs in 2016, according to the EIA, are $119 per megawatt-hour for nuclear (in 2008 dollars), $149.3 for onshore wind, $191.1 for offshore wind, and $111 for biomass.[xv] Thus, on an economic basis, it is no wonder that biomass and nuclear are expected to penetrate the market more than wind when the latter’s costs increase owing to more remote and difficult-to-construct sites. While the NREL study indicates that the savings from coal could pay for the increase in wind-transmission costs, it fails to report that conventional coal and integrated coal gasification technology are some of the cheapest technologies for generating electricity. According to EIA, their generation costs in 2016 (assuming the equivalent of a $15 per ton carbon dioxide emissions fee) are $100.4 per megawatt-hour and $110.5 per megawatt-hour respectively, obviously lower than the costs of the “clean” technologies.

Other studies have found similar results, including studies by the National Association of Manufacturers and the American Council for Capital Formation,[xvi] the Charles River Associates,[xvii] the Environmental Protection Agency,[xviii] and the Congressional Budget Office.[xix]

Another study analyzing transmission requirements was done recently for New England.[xx] The study identified a potential for up to 12,000 megawatts—a 75-fold increase from current wind capacity—with 7,500 megawatts onshore and 4,500 megawatts offshore. In order to meet the 12,000 megawatts of wind potential, the study anticipates 4,320 new miles of transmission with costs between $19 and $25 billion. A more modest scenario of 4,000 megawatts of on- and offshore wind was estimated to need 3,615 miles of new transmission, ranging in cost from $11 to $14 billion.[xxi] These results seem to imply that the transmission estimates from the NREL study may be low, as regards both the amount of transmission capacity needed and the associated cost of integrating massive amounts of wind capacity into the eastern interconnection.

Experience with Wind Energy Overseas

Denmark has succeeded in attaining about 20 percent of its generation from wind power, but that level of wind has not helped the local consumers that subsidized its construction. Because wind tends to blow more in the night when demand is lower and because Denmark has no way of storing the excess wind power, Denmark exports it to Norway, Sweden, and Germany.  Norway, which gets 98 percent of its electricity from hydropower,[xxii] is able to handle the excess wind because of its hydroelectric power, which acts like a huge battery for the wind power. [xxiii]

Germany, with about 5 percent of its generation from wind must often curtail its wind energy to protect its grid. More wind would require more conventional generation to back up the wind capacity—between 80 and 90 percent of the installed wind capacity.[xxiv]

Noise pollution from wind power has been reported in England, France, and New Zealand. In New Zealand, more than 750 complaints have been lodged against a large wind project near Makara since it began operating last April, with residents complaining about noise and vibration affecting their sleep. Anti-wind groups have sprung up here and abroad. The European Platform Against Windfarms lists 388 groups in 20 European countries.[xxv]

Conclusion

This NREL study is the second in a series that considers obtaining 20 percent of electricity generation from wind. The first study, released in the summer of 2008, looked at the feasibility of 20-percent wind power by 2030.[xxvi] While EIA’s projections have not changed during this time frame, the federal government continues to pour money into studies to promote wind technology and continues to subsidize it.[xxvii] EIA’s and others’ studies have shown that subsidized wind is not an economic choice, once the better wind resources are exhausted, and could at best provide 5 percent of generation by 2025 even with an RES or a cap-and-trade proposal.

NREL may be right that the necessary upgrade to the transmission grid is technically feasible, but the real issue is whether it would provide any benefit, given the other issues surrounding wind generation. These include wind power’s inability to provide capacity value and thus its need for other capacity to serve as back up; an intermittency that provides electricity out of sync with high-demand periods; noise pollution, which requires that wind power be located in remote areas away from consumers; the high subsidization of wind power compared to competing technologies; and its inability to be stored, which results in potential operational problems with the transmission grid. In short, while it may be possible to get 20 percent of our electricity from wind, we have to ask, “Is it worth the costs?”

[ii] http://www.awea.org/publications/reports/4Q09.pdf

[iii] The National Renewable Energy laboratory, Eastern Wind Integration and Transmission Study, January 2010, http://www.nrel.gov/wind/systemsintegration/pdfs/2010/ewits_final_report.pdf

[iv] Climate Wire reported the cost of achieving the 20-percent scenarios to be less than 2 cents per kilowatt-hour, but the author of this blog could not find that number in the NREL report. The NREL report converted the $5 per megawatt-hour, and got .005 cents per kilowatt-hour, which the author of this blog finds a conversion error.

[v] Climate Wire, TRANSMISSION: 20 percent wind power by 2024 possible but ‘challenging’ – study, January 21, 2010, http://www.eenews.net/climatewire/2010/01/21/archive/3?terms=transmission

[vi] The Wall Street Journal, “China’s Wind Farms Come with a Catch: Coal Plants”, September 28, 2009, http://online.wsj.com/article/SB125409730711245037.html

[vii] http://www.masterresource.org/2010/01/selling-industrial-wind-government-the-media-and-common-sense/#more-7063

[viii] The Wall Street Journal, Natural Gas Tilts at Windmills in Power Feud, March 2, 2010, http://online.wsj.com/article/SB10001424052748704188104575083982637451248.html?mod=WSJ_Com modities_LeadStory

[ix] http://climateprogress.org/2010/01/20/nrel-study-shows-20-percent-wind-is-possible-by-2024/

[x] The Energy Information Administration is an independent agency within the U.S. Department of Energy.

[xi] Energy Information Administration, An Updated Annual Energy Outlook 2009 Reference Case Reflecting Provisions of the American recovery and reinvestment Act and Recent Changes in the Economic Outlook, April 2009, http://www.eia.doe.gov/oiaf/servicerpt/stimulus/index.html

[xii] Ibid., Tables 8 and 16.

[xiii] Energy Information Administration, Impacts of a 25-Percent Renewable Electricity Standard as Proposed in the American Clean Energy and Security Act, April 2009, http://www.eia.doe.gov/oiaf/servicerpt/acesa/execsummary.html

[xiv] Energy information Administration, Energy market and Economic Impacts of H.R. 2454, the American Clean Energy and Security Act of 2009, August of 2009.

[xv] Energy Information Administration, 2016 Levelized Cost of New Generation Resources from the Annual Energy Outlook 2010, January 12, 2010, http://www.eia.doe.gov/oiaf/aeo/electricity_generation.html

[xvi] http://www.accf.org/publications/126/accf-nam-study

[xvii] The Charles River Associates, Inc., the Economic Impact of the American Clean Energy and Security Act of 2009, http://www.crai.com/uploadedFiles/Publications/impact-on-the-economy-of-the-american-clean-energy-and-security- act-of-2009.pdf

[xviii] http://www.epa.gov/climatechange/economics/economicanalyses.html#hr2454

[xix] http://www.cbo.gov/ftpdocs/102xx/doc10262/hr2454.pdf

[xx] New England 2030 Power System Study, February 2010, http://www.iso-ne.com/committees/comm_wkgrps/prtcpnts_comm/pac/reports/2010/economicstudyreportfinal_022610.pdf

[xxi] Industrial Wind Action Group, The Economics of transmission in New England, http://www.windaction.org/faqs/25906

[xxii]International Energy Agency, Electricity/Heat in Norway in 2006, http://www.iea.org/textbase/stats/electricitydata.asp?COUNTRY_CODE=NO.

[xxiii] http://www.aweo.org/ProblemWithWind.html

[xxiv] http://www.masterresource.org/2010/01/selling-industrial-wind-government-the-media-and-common-sense/#more-7063

[xxv] The Wall Street Journal, The Brewing Tempest Over Wind Power, March 2, 2010, http://online.wsj.com/article/SB10001424052748704240004575085631551312608.html?mod=googlen ews_wsj

[xxvi] U.S. Department of Energy, Energy Efficiency and Renewable Energy, “20% Wind Energy by 2030”, July 2008, http://www1.eere.energy.gov/windandhydro/pdfs/41869.pdf

[xxvii] Wind power gets a production tax credit of 2.1 cents per kilowatt hour for the first 10 years of operation for units constructed through 2012.

The Obama Administration’s recently released “Economic Report of the President” devoted an entire chapter to “Transforming the Energy Sector and Addressing Climate Change” [.pdf]. Whenever the government promises to transform an entire sector of the economy, we know to watch out. Upon a simple reading it is obvious that the president’s fancy economic rhetoric doesn’t justify the $60 billion in “stimulus” funds and the proposed new mandates on the private sector. Even the report’s own analysis shows that the likely damages from climate change are comparable to the economic damages of more government regulation.

The Official Economic Argument for Intervention

Frequently when governments want to increase their power, money, and influence they justify their schemes with a scientific appeal. Standard economic theory provides just such a justification in the form of “market failure,” where the Invisible Hand breaks down because of “externalities.” Most people are familiar with the alleged negative externality of greenhouse gas emissions—which then justify either carbon taxes or cap-and-trade—but the president’s report introduces us to a new market failure, this time from a positive externality:

A market-based approach to reducing greenhouse gases [i.e. cap-and-trade] will provide incentives for research and development (R&D) into new clean energy technologies as firms search for ever cheaper ways to address the negative externality associated with their emissions. However…there is a separate externality in the area of R&D. Because it is difficult for the person or firm doing research to capture all of the returns, the private market supplies too little R&D—particularly for more basic forms of R&D…In this case, government R&D policies can complement the use of a market-based approach to reducing greenhouse gas emissions and yield large benefits to society. A policy that broadly incentivizes energy R&D is more likely to maximize social returns than a narrow one targeted at a specific technology because it allows the market, rather than the government, to pick winners. Likewise, funding efforts in support of basic R&D are less likely to crowd out private investment because differences between private and social returns to innovation are largest for basic R&D. (Economic Report, p. 243, bold added)

Rhetoric versus Reality

Given the textbook justification for government spending, we would now expect the Obama Administration to tout its expenditures on, say, math and science Ph.D. students, or a superconducting supercollider. As the report itself stresses, the economic rationale for such investments is that the social returns spill out across many sectors, so that individual companies would not be expected to spend the optimal level when we consider the costs and benefits to society as a whole. Since the report says the stimulus package provided “$60 billion in direct spending and $30 billion in tax credits” to “jump-start” the transition to a “clean energy economy,” there is a whole lot of ‘splainin’ that the administration must do.

Yet look at the programs the president’s report touts as fulfilling the requirements of “basic R&D,” without the government “picking winners”:

In its 2011 proposed budget, the Administration has stated a commitment to fund R&D as part of its comprehensive approach to transform the way we use and produce energy while addressing climate change. The Recovery Act investments begun in 2009 are a first step in this clean energy transformation. They fall into eight categories that are briefly described here.

Energy Efficiency. The Recovery Act promotes energy efficiency through investments that reduce energy consumption in many sectors of the economy. For instance, the Act appropriates $5 billion to the Weatherization Assistance Program to pay up to $6,500 per dwelling unit for energy efficiency retrofits in low-income homes…

Renewable Generation. The Recovery Act investments in renewable energy generation also are leading to the installation of wind turbines, solar panels, and other renewable energy sources…

Traditional Transit and High-Speed Rail. Grants from the Recovery Act also will help upgrade the reliability and service of public transit and conventional intercity railroad systems. For example, $8 billion is going to improve existing, or build new, high-speed rail in 100- to 600-mile intercity corridors…

Clean Energy Equipment Manufacturing. The Recovery Act investments are increasing the Nation’s capacity to manufacture wind turbines, solar panels, electric vehicles, batteries, and other clean energy components domestically. As the United States transitions away from fossil fuels, demand for advanced energy products will grow, and these investments in clean energy will help American manufacturers participate in supplying the needed goods. (pp. 243-245)

In the quotation above, we have omitted some of the items—such as research on batteries—that could plausibly be classified as “basic R&D.” But as the list above shows, much of the spending programs are the furthest things from basic R&D, and are quite obviously examples of the government shoveling money to favored constituencies. Engineers already know how to weatherize homes and build traditional transit systems; there is no “market failure” here from spillover benefits from R&D spending.

The Costs of Inaction?

After sketching some of the major components of the $90 billion in total government assistance for “clean energy” in the stimulus package, the president’s report goes on to describe the administration’s plans to push for a government cap on greenhouse gas emissions, as well as new mandates on energy efficiency and renewable electricity generation.

In order to stifle voter skepticism over the costs of these proposed interventions into the energy sector, proponents will usually say, “Sure the costs are high, but the costs of inaction are much higher. We can’t afford to not act when it comes to global warming.”

In this context, the reader might be surprised to examine the report’s charts which show that the actual scientific literature—even the “consensus” as codified by the Intergovernmental Panel on Climate Change’s latest report—shows that the case for alarmism is dubious:

[T]he projected losses for the most likely range of temperature changes are relatively modest. For example, at the Intergovernmental Panel on Climate Change’s most likely temperature increase of 3˚C for a doubling of CO₂ concentration (concentrations in 2100 are likely to be higher), the projected decline is 1.5 percent of GDP. (Box 9-2, page 242, emphasis added)

That is worth repeating: The Administration’s own report, in a chapter devoted to the need to “transform the energy sector,” admits that doing absolutely nothing would “most likely” lead to a “relatively modest” impact. This is consistent with the CBO’s modeling which showed that a “pessimistic” estimate of the damages from inaction are lower than the high-end estimate of the economic cost of the Waxman-Markey cap-and-trade bill by the year 2050.

Of course, it’s always possible that unchecked greenhouse gas emissions will lead to disaster. After letting the cat out of the bag regarding the “most likely” impacts from letting the market and nature run their course, the president’s report tells us:

The projected relationship between temperature changes and consumption losses is nonlinear—that is, the projected losses grow more rapidly as temperature increases. For example, while the projected loss for the first 3˚C is 1.5 percent, the loss at 6˚C is five times higher. And the estimated loss associated with an increase of 9˚C is about 20 percent [of consumption’s share of GDP]…Overall, it is evident that policy based on the most likely outcomes may not adequately protect society because such estimates fail to reflect the harms at higher temperatures. (ibid, bold added)

Those are scary numbers, it’s true. But how likely is it that human activities will cause the world to increase 9˚C, when the total warming since the start of the Industrial Revolution has been about 0.7˚C? As this graph from the IPCC’s latest report shows—across three different emission scenarios and five different modeling teams—the probability of such a rapid warming is virtually zero. Once the government gets permission to transform entire sectors of the economy because of the dangers posed by extremely unlikely outcomes, the sky’s the limit.

Conclusion

The proposals to transform the energy sector are so audacious that they can’t even be justified according to the government’s own rhetoric. A simple reading of the president’s own economic report reveals that the billions in handouts violate their own alleged rationale, and the government’s own numbers show that the likely threat of climate change is less damaging than the Waxman-Markey cap-and-trade plan.

So, what is this doing to the U.S. economy, potential future jobs, and energy prices? The National Association of Regulatory Utility Commissioners (NARUC) has just released a study that looks at what these additional oil and natural gas resources would accomplish in those areas.[i] NARUC commissioned Science Applications International Corp. (a consulting and modeling company) and the Gas Technology Institute (a natural gas consulting group) to perform the study.[ii] Although the study was sponsored by electric utilities and oil and natural gas companies,[iii] its reviewers included administration officials in the Department of Energy, the Energy Information Administration, the Federal Energy Regulatory Commission, and the Bureau of Land Management.[iv]

What Did the Study Find?

If the Federal government never allows access to the lands previously under moratoria, the study projects, there will be fewer jobs, lower economic output, higher energy prices, more oil and natural gas imports, and larger outlays to the Organization of Petroleum Exporters (OPEC). Gross Domestic Product (GDP) will be $2.36 trillion less between 2009 and 2030, the study’s time horizon. That amounts to an average decrease of 0.52 percent annually in GDP.[v] Employment in energy intensive industries is projected to be almost 13 million jobs lower,[vi] at a time when we desperately need jobs in the United States to spur economic growth and consumer spending.

Average annual energy prices for our critical fuels are expected to be higher: natural gas by 17 percent, electricity by 5 percent, and motor gasoline by 3 percent.[vii] Owing to lower average crude oil production (by almost 15 percent annually) and average natural gas production (by about 9 percent annually), imports of these fuels would have to be higher. Oil imports from OPEC are projected to be 4.1 billion barrels higher, an average annual increase of nearly 19 percent, resulting in increased cumulative payments to OPEC of $607 billion. Natural gas imports are projected to be 15.7 trillion cubic feet higher, an average annual increase of almost 75 percent.[viii] All these cost increases result in increased cumulative energy costs to consumers of $2.35 trillion ($3,700 per person), an average annual increase of 5 percent.[ix]

How Did the Study Reach Its Conclusions?

If the lands previously under moratoria were allowed to be leased, the offshore oil resource base would increase by 37 billion barrels and the onshore oil resource base would increase by 6 billion barrels, the latter entirely in the Arctic National Wildlife Refuge in Alaska. For natural gas, the resource base would be 132 trillion cubic feet higher for onshore resources and 154 trillion cubic feet higher for offshore resources.[x] These resources were added to the resource base assumed in the 2009 Annual Energy Outlook version[xi] of the National Energy Modeling System[xii] maintained by the Energy Information Administration, an independent agency of the U.S. Department of Energy. As a result of this calculation, the natural gas resource based was increased from 1748 trillion cubic feet to 2034 trillion cubic feet, and the oil resource base was increased from 186 billion barrels of oil to 229 billion barrels of oil.[xiii] The consultants then projected impacts using the difference between the two scenarios modeled—one with the increased resource base numbers and one without them.

How Much Oil and Gas Do These Resource Numbers Represent?

The U.S. consumed 6.8 billion barrels of oil in 2009[xiv] and 23.2 trillion cubic feet of natural gas in 2008[xv] (the last year of complete data). The 43 billion barrels of oil would add over 6 years of consumption, assuming all the oil consumed is produced domestically, and almost 17 additional years of consumption if we continue importing oil at current levels. The 286 trillion cubic feet of natural gas would provide more than 12 additional years of consumption, assuming no imports of natural gas, and almost 15 years if we continue importing at current levels.

What Is the Obama Administration Doing?

The Obama administration is looking to green energy to stimulate our economy and increase jobs. So far, even though the Obama administration—with Congressional approval—has poured millions of stimulus dollars into green energy, we are no closer to solving our unemployment problems. That’s because the largest employment component of green jobs is in the manufacture of the component parts of the green technologies,[xvi] and these jobs are largely going offshore, where labor costs are lower. The American Wind Energy Association reported that the U.S. wind industry had gained about 2,000 installation and maintenance jobs in 2009 by constructing and maintaining a record addition of almost 10,000 megawatts of new capacity.[xvii] But wind power manufacturing lost just as many jobs to offshore developers.[xviii] Further, a recent study by the Investigative Reporting Workshop of American University has found that almost 80 percent of the stimulus funds awarded to renewable energy technologies have gone to foreign firms.[xix]

Also, the Department of Interior, led by Ken Salazar, has slowed the progress made by the Bush administration in accelerating oil leases on lands previously under moratoria. Less than a month after taking office, the Obama administration decided that they needed 6 additional months to hear from the American people on this issue,[xx] even though the Bush administration had already solicited comments.

In December of 2009, newly elected Virginia Gov. Bob McDonnell wrote a letter to Interior Secretary Ken Salazar urging him not to obstruct offshore drilling projects. McDonnell was planning on future income for his state in the form of taxes that it would receive from oil and gas companies drilling off its shore. The Bush administration’s offshore plan called for leasing 3 million acres about 50 miles from the Virginia shoreline in November 2011. But the Minerals Management Survey of the U.S. Interior Department recently announced its plan to wait until at least 2012 to issue any oil and gas drilling leases off the Virginia coast, claiming that more time was needed to evaluate what environmental impact offshore drilling would have.[xxi]

Conclusion

The American public indicated their support for offshore drilling back in 2008 when oil and gasoline prices were very high,[xxii] and recently reconfirmed it.[xxiii] They recognize that energy is important not only to our daily lives, but also to our economic growth. The Obama administration, however, wants to rely on green energy, which studies have shown are not contributing much to employment in the United States. Following through with leasing areas under moratoria could result in nearly 13 million jobs between now and 2030, while keeping our energy costs here in the U.S. lower, and providing OPEC with fewer U.S. dollars. The decision appears to be a “no brainer.”

[i] http://www.naruc.org/Special/GasMoratorium_EXESUMMARY.pdf

[ii] Greenwire, OIL AND GAS: Federal production curbs taking big bite out of economy – study, February 15, 2010, http://www.eenews.net/Greenwire/2010/02/15/archive/8?terms=AND+GAS%3A+Federal+production+curbs+taking+big+bite+out+of+economy+%E2%80%93+study%2C+

[iii]In addition to NARUC, the study was also sponsored by several other large companies, including the American Chemistry Council, the American Gas Association, the American Petroleum Institute, BP America Production, Shell Exploration and Production Co., the Edison Electric Institute, and the National Petrochemical and Refiners Association.

[iv] The Wall Street Journal, Regulators' Report Warns Of Econ Harm From US Oil Ban, February15, 2010, http://online.wsj.com/article/BT-CO-20100215-706458.html?mod=WSJ_latestheadlines

[v] http://www.naruc.org/Special/GasMoratorium_EXESUMMARY.pdf

[vi] Consumer Energy Alliance, NEW STUDY REVEALS ECONOMIC CONSEQUENCES OF PRESERVING STATUS QUO ON ENERGY, February 15, 2010, http://consumerenergyalliance.org/2010/02/cea-new-study-reveals-economic-consequences-of-continued-inaction-on-american-energy-exploration/

[vii]http://www.naruc.org/Special/GasMoratorium_EXESUMMARY.pdf

[viii] Ibid

[ix] Ibid

[x] Ibid

[xi] Energy Information Administration, Assumptions to the Annual Energy Outlook 2009, http://www.eia.doe.gov/oiaf/aeo/assumption/oil_gas.html

[xii] Energy Information Administration, National Energy Modeling System: An Overview 2009, http://www.eia.doe.gov/oiaf/aeo/overview/index.html

[xiii] Ibid

[xiv] Energy Information Administration, Monthly Energy Review, http://www.eia.doe.gov/emeu/mer/pdf/pages/sec3_3.pdf

[xv] Energy Information Administration, Monthly Energy Review, http://www.eia.doe.gov/emeu/mer/pdf/pages/sec4_3.pdf

[xvi] Renewable Energy Policy Project, Wind Turbine Development: Location of Manufacturing Activity, Page 4, http://repp.org/wind_turbine_dev.htm

[xvii] American Wind Energy Association, http://www.awea.org/newsroom/releases/01-26-10_AWEA_Q4_and_Year-End_Report_Release.html

[xviii] Los Angeles Times, Wind energy job growth isn’t blowing anyone away, February 2, 2010, http://www.latimes.com/business/la-fi-green-jobs2-2010feb02,0,6156904.story

[xix] http://investigativereportingworkshop.org/investigations/wind-energy-funds-going-overseas/story/renewable-energy-money-still-going-abroad/

[xx] The Washington Times, Obama Blocks Offshore Drilling, February 11, 2009, http://www.washingtontimes.com/news/2009/feb/11/drilling-ban-revisited/

[xxi] Greenwire, OFFSHORE DRILLING: Leases off Va. coast delayed until at least 2012, January 27, 2010 http://www.eenews.net/Greenwire/2010/01/27/archive/8?terms=OFFSHORE+DRILLING%3A+Leases+off+Va.+coast+delayed+until+at+least+2012

[xxii] http://www.instituteforenergyresearch.org/2008/09/24/national-offshore-energy-poll/

[xxiii] http://www.instituteforenergyresearch.org/2010/02/12/drill-gate-obama-administration-ignores-american-people-enacts-de-facto-offshore-energy-exploration-and-production/

Some people argue that we must reduce our use of oil because some oil is produced by dictators and countries with interests contrary to the United States. They argue we need to switch to different technology such as hybrids and renewables to reduce power these dictators could exert on the United States.[i]

But, as with everything else in life, there’s no such thing as a free lunch. It turns out that alternative energy technologies frequently depend on rare earth elements[ii]. We could be changing one dependency for another. Today China produces over 97 percent of the world’s rare earth supply. In contrast OPEC (Organization of the Petroleum Exporting Countries) produces about 1/3 of the world’s oil supply.

Rare Earth Elements

Rare earth elements are chemical elements that are used in many modern technological devices, including wind turbines[iii], fluorescent light bulbs, catalytic converters for diesel engines, superconductors[iv], electronic polishers, refining catalysts, hybrid car components (primarily batteries and magnets)[v], laser applications, optical-fiber communication systems, and cathode ray tube technology, among other uses. Despite their name, most rare earth elements are found in relatively high concentrations in the earth’s crust. The first rare earth element came from a mine in Sweden. Until 1948, India and Brazil were the principal sources of rare earth elements. South Africa became the world’s rare earth source in the 1950s,[vi] but by 1966 the Mountain Pass mine in California became the world’s largest producer of rare earth elements.[vii] From the mid 1960s through the mid 1980s, the Mountain Pass was the largest source of rare earth elements and the United States was self sufficient in the production of these resources. By the mid 1980s, the Chinese ramped up rare earth production and environmental and regulatory problems at Mountain Pass lead to a near shutdown at Mountain Pass.  By 1999, 90 percent of rare earth elements required by U.S. industry came from Chinese sources.[viii]

China’s Strategy

In 1987, when rare earths’ use started to dramatically increase to make computers and other electronic gadgets, Chinese leader Deng Xiaoping said,  “The Middle East has oil, but China has rare earth.” China has 53 percent of the world’s rare earth deposits. Most of the world’s rare earth comes from a single mine in Baotou in China’s Inner Mongolia, with much of the rest coming from small, often unlicensed mines in southern China.[ix] As the Organization of the Petroleum Exporting Countries has done with oil, China may now do with rare earth elements.[x]

China’s Ministry of Industry and Information Technology has drafted a six-year plan for rare earth production and submitted it to the State Council, the equivalent of the cabinet. Tighter limits on production and exports, part of the plan from the Ministry of Industry and Information Technology, would ensure China has the supply for its own technological and economic needs, and force more manufacturers to make their products in China in order to have access to the minerals. That is, Chinese officials are forcing global manufacturers to move factories to China by limiting the availability of rare earths outside China. “Rare earth usage in China will be increasingly greater than exports,” said Zhang Peichen, the deputy director of the government-linked Baotou Rare Earth Research Institute.[xi]

In the last 10 years, a 40,000-ton per year global market for rare earth has grown to 125,000 tons per year, and by 2014 demand is predicted to reach 200,000 tons per year. Yet China’s Ministry of Industry and Information Technology has cut the country’s target output from rare earth mines by 8.1 percent in 2009 and is forcing mergers of its mining companies in a bid to improve technical standards, according to the government-controlled China Mining Association, a government-led trade group.[xii]

Other Sources

Outside of China, only two projects are expected to be producing rare earth in the next five years: Molycorp Minerals/ Mountain Pass in California and Lynas Corporation’s Mount Weld in Australia. That’s because developing and operating a rare earth mine to Western environmental standards is expensive. China can extract the minerals for about a third of what it would cost in the West mostly because of lax environmental standards.[xiii]

Unocal used to own the Mountain Pass mine in California, which suspended mining in 2002 because of weak demand and a delay in an environmental review. China’s State-owned Cnooc almost acquired the mine in 2005 with an unsuccessful bid for Unocal, which was bought instead by Chevron. Chinese buyers tried to persuade Chevron to sell the mine to them in 2007, but Chevron sold it to Molycorp Minerals, a private American group.[xiv]

Molycorp hopes to generate profit at Mountain Pass by building an integrated manufacturing chain that starts with raw ore and ends with finished products ready for market. “We don’t want to be just a supplier of basic materials to other industries,” said Benfield, the operations chief. “We want to develop our own technologies so we can determine our own destiny rather than rely on others. We’re not just a mine.” It will cost $100 million to $400 million to make that plan a reality. [xv]

Environmental Issues

To get at the rare earth elements, powerful acid is pumped down bore holes. There it dissolves some of the rare earths, and the slurry is then pumped into leaky artificial ponds with earthen dams.[xvi] Those living near China’s rare earth mines and processing plants are experiencing environmental concerns from this procedure. Farmland surrounding a tailing lake in Baotou that stores the toxic rare earth elements before processing has been affected by seepage from the lake. Crops stopped growing after being irrigated by water from the lake, and the local council compensated the villagers for their loss.[xvii]

Conclusion

“If the purpose of putting hybrid vehicles on the road is to lower our dependence on foreign oil, and all we’re doing is buying cars that need Chinese rare earth materials, aren’t we trading one dependence for another?” asked Mark Smith, chief executive of Molycorp Minerals.[xviii] That use of rare earth elements along with their use in wind turbines and light bulbs makes one question whether we are trading OPEC’s sources of oil for China’s sources of rare earth elements in our going green strategy. Wouldn’t it be better to further all of our energy sources rather than picking favorites that have underlying issues of which most American citizens are not aware?

[ii] http://en.wikipedia.org/wiki/Rare_earth_element

[iii] A three-megawatt wind turbine uses around two tons of neodymium, a common rare earth that is used in hyper-efficient motors and generators.

[iv] Rare metals lower the friction on power lines, thus cutting electricity leakage.

[v] Toyota’s hybrid Prius car contains 25 pounds of rare earth elements.

[vi] http://en.wikipedia.org/wiki/Rare_earth_element

[vii] United States Geological Survey, Rare Earth Elements—Critical Resources for High Technology (2002), http://pubs.usgs.gov/fs/2002/fs087-02/fs087-02.pdf.

[viii] United States Geological Survey, Rare Earth Elements—Critical Resources for High Technology (2002), http://pubs.usgs.gov/fs/2002/fs087-02/fs087-02.pdf.
[ix] China’s monopoly on “green” minerals, December 9, 2009, http://www.upi.com/Science_News/Resource-Wars/2009/12/09/Chinas-monopoly-on-green-minerals/UPI-59441260381971
[x] China Tightens Grip on Rare Minerals, The New York Times, August 31, 2009, http://www.nytimes.com/2009/09/01/business/global/01minerals.html?_r=1

[xi] Ibid.
[xii] China’s monopoly on “green” minerals, December 9, 2009, [xiii] Ibid.

[xiv] China Tightens Grip on Rare Minerals, The New York Times, August 31, 2009, http://www.nytimes.com/2009/09/01/business/global/01minerals.html?_r=1

[xv] California metal mine regains luster, Los Angeles Times, October 14, 2009, http://articles.latimes.com/2009/oct/14/business/fi-rare-earth14?pg=2

[xvi] China Tightens Grip on Rare Minerals, The New York Times, August 31, 2009, http://www.nytimes.com/2009/09/01/business/global/01minerals.html?_r=1
[xvii] China’s monopoly on “green” minerals, December 9, 2009, [xviii] Ibid. ]]> http://www.instituteforenergyresearch.org/2010/02/17/rare-earth-elements-are-vulnerable-to-supply-disruptions-when-china-controls-97-of-the-world%e2%80%99s-production/feed/ 0 http://www.instituteforenergyresearch.org/2010/02/16/a-primer-on-energy-and-the-economy-energys-large-share-of-the-economy-requires-caution-in-determining-policies-that-affect-it/ http://www.instituteforenergyresearch.org/2010/02/16/a-primer-on-energy-and-the-economy-energys-large-share-of-the-economy-requires-caution-in-determining-policies-that-affect-it/#comments Tue, 16 Feb 2010 18:23:33 +0000 admin http://www.instituteforenergyresearch.org/?p=4837 Two of the biggest issues in national politics over the past few years have been health care policy and energy policy. The reason is simple—health care policy impacts us in very personal ways. When we get sick or injured, we want to get better at a reasonable price. Energy use is equally as personal. All of our decisions depend in some way on energy and the price of energy—how we travel, what we eat, what temperature we keep our houses, and which jobs we work. Affordable energy, like affordable health care, makes our lives better.   In fact, because energy is “the capacity to do work,” it facilitates all other economic endeavors, including increasingly technically-advanced health care delivery.

Affordable energy would help to heal an ailing economy because affordable energy facilitates economic growth. Energy’s share of Gross Domestic Product is one measure of the relative importance of energy in the overall economy. While the share of energy in the U.S. economy has declined from its high in the early 1980’s, it still remains a large component, and energy as a share of world GDP is also large.

United States

The Energy Information Administration calculates the share of U.S. Gross Domestic Product (GDP) that is energy-related and publishes it in its Annual Energy Review.[i] Prior to the embargo of 1973-74, total energy expenditures constituted 8 percent of U.S. gross domestic product (GDP), the share of petroleum expenditures was just under 5 percent and natural gas expenditures accounted for 1 percent. The price shocks of the 1970s and early 1980s resulted in these shares rising dramatically to almost 14 percent, 8 percent, and 2 percent respectively, by 1981. Since that time, the shares have fallen until the early part of this decade when they began to rise again.

The energy component still remains a major share of GDP in 2006 at 8.8 percent.[ii] In 2006, Americans spent $1,158 billion on energy, 2.7 times more than in 1981, when they spent $427 billion on energy (both in nominal dollars).  The U.S. economy in 1981, however, was about one-fourth of its 2006 size. That fact and lower Middle Eastern crude oil production due to Iraq’s invasion of Iran raising energy prices in 1981 are some of the reasons why energy represented a larger share of GDP in that year.

Another reason for energy’s lower share of GDP since 1981 is that energy intensity has been declining. Energy intensity is energy consumption (measured in physical terms, such as BTUs) per dollar of GDP. Its decline means that the American economy uses less physical energy to produce a dollar of output (GDP) because of efficiency improvements in energy consuming technologies and structural shifts in the U.S. economy. The U.S. economy has become more service oriented, requiring less energy than many manufacturing industries, such as steel and cement, that have been moving offshore due to competition and lower energy prices in other parts of the world.

World

Neither the Energy Information Administration nor the International Energy Agency publishes energy expenditures for the world. Thus, there is no definitive number or source of energy expenditures as a percent of the global economy. Energy journalist Robert Bryce estimated global energy expenditures at $5 trillion, of which at least $4.4 trillion is directly derived from hydrocarbons—coal, natural gas, and petroleum.[iii] According to Bryce, total global energy use in 2008 was 11.29 billion tons of oil equivalent, which is about 82.8 billion barrels, using the conversion factor of 7.33 barrels per ton. Assuming an average oil price of $60 per barrel, results in energy expenditures at $4.968 trillion.[iv] The world economy in 2008 was $60.587 trillion. Thus, the energy share of the global economy is about 8.2 percent according to this method.

Another way to calculate the global share that energy represents of world GDP is to assume that the entire world shares U.S. prices for energy and a fuel distribution similar to that of the U.S. This improves upon the calculation by recognizing other fuel prices besides that of oil, but may still overstate the global share that energy constitutes of GDP since the U.S. uses more oil (about 3.5 percentage points more) and less coal  (about 4.5 percentage points less) than the world. Using the following formula,

(US physical energy use / US GDP) /percent of US economy that is energy = (world physical energy use / world GDP) / percent of world economy that is energy, and solving for the percent of the world economy that is energy results in a 7.9 percent share.  Global energy intensity (world physical energy use/world GDP) can be obtained from the International Energy Agency’s Key World Energy Statistics 2009.[v]

Conclusion

Under either method of estimation, about 8 percent of GDP is associated with energy expenditures worldwide, and a slightly higher 9 percent is associated with U.S. GDP. In many countries, this may be second only to health care costs, which are almost 16 percent of GDP for the U.S., but in the 8 to 11 percent range for many European countries and Canada.[vi] This means that energy prices, like health care, have a large effect on the economy and policies that promote energy price increases may result in negative consequences to economic growth. Politicians worldwide should be cautious regarding energy policies that may disrupt their economies.

[ii] The share was also 8.8 percent in 2007 when energy expenditures were $1,233 billion, and GDP was $14,078 billion. See www.bea.gov/national/pdf/dpga.pdf and www.eia.doe/emeu/states/sep_prices/notes/pr_print2007.pdf .

[iii] Robert Bryce, Energy Tribune, December 18, 2009, www.energytribune.com/articles.cfm?aid=2746

[iv] Roger Pielke Jr.’s Blog: How Large is the Global Economy? December 21, 2009, http://rogerpielkejr.blogspot.com/2009/12/how-large-is-the-global-energy-economy.html
[v] International Energy Agency, Key World Energy Statistics 2009, http://www.iea.org/publications/free_new_Desc.asp?PUBS_ID=1199

[vi] Health Care Spending as Percentage of GDP, Robert Wood Johnson Foundation, June 30, 2009, http://www.rwjf.org/pr/product.jsp?id=45110 , and The Commonwealth Fund, January 29, 2007,

www.commonwealthfund.org/Content/Publications/Fund-Reports/2007/Jan/Slowing-the-Growth-of-U-S-Health-Care-Expenditures–What-Are-the-Options.aspx

It has recently come to light, through a Freedom of Information Act (FOIA) request by American Solutions, that there may be more here than meets the eye. More on that in a second; first, a bit of history on what led up to what is now called “drill gate.”

In July 2008, when oil prices reached $147 a barrel, the Institute for Energy Research called on President Bush to end the moratorium on additional offshore energy exploration and development. For years and through both Republican and Democratic administrations, the Federal government had not allowed new offshore energy exploration or production. But when oil prices hit new highs, President Bush saw the light and started the process of opening up new areas for energy development.

President Bush saw that the public wanted new offshore energy production. The public favored additional offshore drilling by a 2 to 1 margin and President Bush acted accordingly, implementing the necessary regulation to open up new areas for energy development.

Less than a month after taking office, instead of moving forward with the plan the Bush Administration proposed, President Obama and his Interior Secretary Ken Salazar decided that first, they needed 6 additional months to hear from the American people. They made this decision despite the fact that the Bush Administration had already solicited comments from concerned citizens; the Obama Administration wanted more time for even more comments.

Maybe they hoped that by waiting 6 months, environmental groups and their well-honed letter writing operations would send more comments to the Administration than people who want increased energy security and jobs created by offshore energy development. But if that was the Administration’s plan, it backfired.

The Institute for Energy Research and several other like-minded groups organized our own plans to help Americans let their government know they favored additional offshore energy production. Unfortunately for the Obama Administration, our efforts paid off. The Administration received pro-drilling comments from the public by a 2 to 1 margin.

But here’s the catch… the Obama Administration didn’t publicize this information, despite having the information months ago. We only recently found out because another pro-energy, pro-jobs, pro-economic growth group, American Solutions used the Freedom of Information Act to pry this information from the Administration.

So why does offshore drilling matter? One reason is that it will create a lot of new jobs. In fact, one study estimates that over a million U.S. jobs are locked away in the job-creating energy resources we have offshore. Also, by producing oil and natural gas at home we’ll help stabilize the world market for oil, holding the price lower.

In his State of the Union address, President Obama said that he was open to offshore energy production. Now is the time for him to walk the walk and not just talk the talk on offshore energy and jobs production.