The EIA found that under the CES:

• Average electricity generation costs would increase by 16 percent in 2025 and 29 percent in 2035.
• Household electricity bills would increase by $115 in 2025 and by $211 in 2035 (in 2009 dollars).
• Expenditures on electricity would increase by $41 billion in 2025 and by $77 billion in 2035 (in 2009 dollars).
• Gross Domestic Product would be reduced by $127 billion in 2025 and $74 billion in 2035 (in 2005 dollars).
• Manufacturing employment would decline by 1 million jobs in 2025.
• Average natural gas prices would be 9.3 percent higher in 2025 and 5.4 percent in 2035. Natural gas accounts for much of the compliance with the CES in the early part of the projection period, resulting in the increase in price. As other compliance options become available, the price impact is lessened.
• Electricity prices in 2035 would increase by at least 40 percent in seven market regions: Texas (42 percent), Oklahoma (46 percent), Tennessee/Kentucky (47 percent), Colorado (48 percent), Eastern PA and New Jersey (50 percent), Long Island (51 percent) and Southern Illinois/Eastern Missouri (61 percent). Regions that are more dependent on generation fuels that are not CES-eligible, primarily coal, have a higher price impact.
• Coal-fired generation, which grows by nearly 23 percent between 2009 and 2035 in the Reference case, decreases by 46 percent between 2009 and 2035 under the CES. Coal is primarily displaced by increased natural gas generation, which is 38 percent greater in 2025 and 30 percent greater in 2035 under the CES. Generation from nuclear and renewable sources is also higher under the CES with nuclear generation increasing primarily after 2025. Nuclear generation is 30 percent higher in 2035 under the CES.
• Wind and biomass would be the renewable generating sources that have the largest generation increases under the CES. Wind generation almost doubles by 2035. Additional biomass generation is met primarily through increased co-firing in existing coal plants, but it decreases in the latter part of the projection period as new nuclear generation capacity comes online and existing coal capacity is retired.
• Electricity sector carbon dioxide emissions would be lower by 35 percent in 2025 and 60 percent in 2035.

Conclusion

It seems that the Obama Administration is pursuing energy policies that limit energy consumption or production, and increase energy prices. According to Chairman Ralph Hall, “This report—prepared by independent government experts—makes clear that the CES amounts to an expensive new electricity tax on the American people. With an anemic economy and unemployment stuck above nine percent, it is very troubling that the President continues to pursue an energy policy that would add billions to Americans’ energy bills.”[ii]

Economic Theory Says Renewable Mandates Will Lead to Higher Electricity Prices

Currently 29 states have some type of renewable mandate, meaning that their legislature requires that a certain percentage of electricity be produced from “renewable” sources. The specific targets, timelines, and even definition of “renewable” vary from state to state. But the common theme is that many state governments use their power to push their electricity sectors away from a purely market-driven outcome.

Economic theory predicts that, other things equal, government mandates requiring a higher percentage of “renewable” electricity sources will lead to higher prices. After all, the reason the market avoids such sources in the first place, is that there is some drawback making them less attractive than sources considered “non-renewable” (such as those based on fossil fuels).

Left to its own devices, the free-market economy tends to deliver the highest quality products and services, at the lowest possible prices, to consumers. If the government declares that this market-based outcome is now illegal, and requires electricity providers to alter their business models, then something has to give. Once the industry settles into a new equilibrium, we would expect to see higher retail prices for consumers, to reflect the fact that the government forced providers into using techniques that would not be profitable on the open market.

In Actual Practice, Renewable Mandates Associated With Higher Prices

If we compare 28 states with renewable mandates, against 19 states with no mandate,[i] we find that average electricity prices are 38 percent higher in the first group:

Now it’s true, we cannot say that these large price differentials are due entirely to the imposition of renewable mandates. For one thing, state legislatures that impose such mandates, probably are more likely to impose other inefficient policies as well, which contribute to higher prices. It is also possible that states with access to low-cost sources (fossil fuels and large, existing hydroelectric) enjoy lower average electricity prices, and precisely for that reason their legislatures are not as likely to impose renewable mandates.

Isolating the Impact of Renewable Mandates

To minimize the problems of causation versus correlation noted above, we conducted another test. Rather than focusing on recent price data, we looked at energy prices between our two test groups for the year 1997, the latest year in which the modern renewable mandates did not exist. We found that the first group of states (i.e. the 28 that currently have renewable mandates) even then had higher energy prices across the board. The crucial point however is that the difference was smaller than in June 2010:

This second table illustrates that something caused the price gap to increase between the two sets of states, during the time in which the renewable mandates were introduced.

Conclusion

Economic theory suggests that imposing renewable energy mandates will tend to raise electricity prices. State-level data are consistent with this result: States with renewable mandates have much higher prices than those without such mandates. It is true that only a portion of this differential can be attributed to renewable mandates. Even so, legislators at both the state and federal levels should consider the full economic impact of their policy decisions. Attaining higher proportions of “renewable” energy may not come cheaply.

[i] The states of Hawaii, Alaska, and Vermont were excluded from the two categories. Vermont has a unique hybrid RPS, while Hawaii and Alaska are obviously special cases and could skew the averages without shedding much light on the effects of renewable mandates.

“It is nothing short of misleading for the Administration and Congress to tell the American public that China is ‘beating us’ in the race to produce green energy,” said IER President Thomas J. Pyle. “In reality, China is dominating the world in all forms of energy—particularly their coal, hydropower and nuclear efforts, which bury their commitments to so-called green sources.

“While the U.S. government holds hearings on China’s success in the ‘clean energy’ race, China is burning three times as much coal as the U.S., building 24 nuclear reactors to our two and has double the U.S.’s hydroelectric capacity,” Pyle continued. “China uses its hawkish energy plan to spur economic growth while the U.S. government deliberately works to increase the price of energy—and, thus, the price of everything in our economy. This contrast suggests, at the very least, that the Obama Administration and some in Congress are applying a very strange set of priorities to the governance of this nation.”

###

FOR IMMEDIATE RELEASE:
September 22, 2010
CONTACT:
Laura Henderson 202.61.2951

In response, the Union of Concerned Scientists (UCS) has recently released a new study prepared by the Southern Alliance for Clean Energy.[i] The study surveys some of the literature and declares that:

The Southeast has the ingenuity and renewable energy resources to become more prosperous and energy independent. Utilities across eleven Southeastern states can tap homegrown clean energy resources to meet a significant percentage of electric power demands. Our analysis of renewable energy estimates in the region show sufficient resources to fulfill an aggressive national mandate for renewable energy.

Yet despite the triumphant conclusion, the UCS’s touted study does little to move the debate forward. For one thing, its projections of renewable “potential” rely on very optimistic assumptions, and pick only the most favorable estimates from among the spectrum of plausible forecasts. Perhaps more significant, because the study focuses on matters of engineering, rather than economics, it almost entirely misses the point: The issue is not whether a proposed renewable electricity mandate is technically feasible, the question instead is how much will it hurt the economy? Unfortunately, the UCS study contributes nothing to answering this crucial issue.

Rosy Scenarios

The UCS study explores the feasibility of a national renewable electricity mandate that requires 15% generation from renewables by 2015, 20% by 2020, and 25% by 2025. (It’s fortunate they did not attempt such legislation a few decades ago; one can imagine President Jimmy Carter signing a law requiring 85% renewables by 1985, 90% by 1990, and 95% by 1995…)

In achieving its optimistic projections for renewable electricity production in the Southeast, the UCS study relies on many assumptions. In its words:

Twenty-first century policies must prioritize actions that will achieve energy independence and minimize global warming pollution. In addition to a national Renewable Energy Standard (RES), the following policies are needed (and assumed in this analysis) to help achieve these goals:

• National carbon dioxide “cap-and-trade” or equivalent policy.
• Third party suppliers of electricity paid at market-based cost of service, reflecting off-peak and peak system value.
• A solar “carve-out,” feed-in tariff, or other policy that provides a premium value for investment in solar energy (to the extent that this value is not already reflected in payments at a market-based cost of service).
• Complementary government biofuel policies.
• Responsible and predictable permitting for low-impact hydro, onshore wind, offshore wind and biomass power plants.
• Extension and expansion of state and federal tax credits for renewable energy and efficiency through 2020.

Beyond the above, the study goes on to explain that its analysis also assumed:

• Moderately high fossil fuel costs.
• Relatively low capital costs for renewable energy projects that are sustained from recent experience.
• Biomass resources proven to be available at the higher end of resource potential range.
• Relatively rapid rate of technology adoption.

The Energy Information Administration (EIA) has done various studies on renewable mandates[ii] that show that the Southeast would need to buy credits from other regions to meet the mandate and that the Southeast’s major renewable technology is biomass.[iii] The EIA analyses compare favorably with the assumptions for biomass resources and capacity in the UCS study’s “feasible” category,[iv] but the resources in the study’s “potential” category[v] are more than double EIA’s total “potential” for biomass.  EIA’s maximum generation capacity in the Southeast from biomass is 40.5 gigawatts, irrespective of price, while the UCS study purports over 90 gigawatts of “total biomass potential.”[vi]

Other renewable technologies are even more exaggerated in the study, relative to the government estimates.  For example, EIA indicates about 7 gigawatts of offshore wind “potential” for Florida, which is in relatively deep water and of the lowest quality wind resource.  Yet incredibly, the UCS study shows over 40 gigawatts of “potential” offshore wind resource in Florida with no indication regarding depth or wind quality, and claims that 612 megawatts are “feasible.”  If offshore wind gets built in the U.S., it is unlikely to be built any further south than Cape Hatteras since the wind quality drops off quite precipitously in the south and decent quality wind is in very deep water. Costs would be prohibitively too high to access these lower quality wind resources and would not make economic sense unless there is a very severe push toward local renewable generating technologies.  Further, the UCS study indicates that 14 gigawatts of onshore wind are “feasible,” while EIA analyses show that low quality wind resources in the West would be built before lower quality wind resources in the Southeast—a situation that would require the Southeast to buy credits from other states.  Some federal lawmakers from the Southeast are quite worried about this potential wealth transfer from their region to other parts of the U.S.

Solar technology is another area of major discrepancy between the UCS report and official government projections.  EIA does not believe that solar will be competitive for wholesale markets through 2030. In EIA’s renewable electricity analyses, solar energy penetration, which is all in end-use markets, reaches 20 gigawatts for the nation due to being awarded a “triple credit” in the proposed bill analyzed, meaning that distributed photovoltaics (PV) is awarded three times the credit price. That is, if renewable credits are trading at 2 cents per kilowatt-hour, end-use PV would be awarded a credit of 6 cents per kilowatt-hour. The UCS study believes that almost 80 gigawatts of solar are “feasible” in the Southeast alone, with a total “potential” of 545 gigawatts. While it is true that there is enough sunshine in the Southeast to serve energy needs several orders of magnitude in excess of expected demand, the economics for solar central station generation are not competitive with other renewable technologies, with its cost being more than three times higher than onshore wind and biomass and 1.5 times higher than offshore wind.[vii]

Finally, the UCS study also has extremely high values for total “potential” capacity for geothermal in the Southeast, at over 1,000 gigawatts, though they admit that the “feasible” capacity is zero. EIA’s analyses of renewable electricity mandates result in less than 10 gigawatts of geothermal capacity nationwide.

Engineering versus Economics

In the section above, we explained the numerous shortcomings in the study’s estimation of renewable potential. But even if we conceded the UCS study’s numbers, just for the sake of argument, it would still not follow that a national renewable electricity mandate is a good idea, or that the Southeastern economy would absorb the blow easily. This is because the UCS study has confused engineering with economics.

At best, all of the tables and citations in the UCS study prove only that it is physically possible for the utilities in Southeastern states to adapt to the renewable percentage mandates under a national renewable mandate. But so what? Just because something is technically feasible, does not make it economically efficient.

For an analogy, suppose that in an effort to reduce carbon emissions, the federal government mandates that 20 percent of every large corporation’s employees must ride bicycles to and from work. Business groups would of course complain that this would put an undue burden on large corporations and many employees would likely quit and seek work elsewhere. It would also impose huge new expenses on municipalities, who would have to completely revamp their roads to accommodate the huge surge in cyclists. Yes, these adaptations would be possible, but nonetheless, the draconian measure would still be incredibly costly. It would make business operations much less efficient and Americans on average would be poorer, because many workers would now be producing less output per day.

We face a similar situation when it comes to electricity generation. Currently, the United States only relies on the politically correct “renewable” technologies to produce 3% of its electricity.[viii] The reason for this isn’t some pro-fossil fuel bias on the part of the utilities; on the contrary, they rely on coal, oil, and natural gas because these are the most economical and dependable sources of power, at least with current technologies.

The marketplace is perfectly capable of fostering innovation. It didn’t take a federal tax on buggies or an annual cap on horse manure to force the U.S. transportation sector to switch over to automobiles in the early 20^th century. By the same token, as wind, biomass, and other sources of electricity generation become more competitive with coal, oil and natural gas, then utilities will naturally expand their use. The UCS study had to assume “Extension and expansion of state and federal tax credits for renewable energy and efficiency through 2020” precisely because renewable energy sources can’t survive without government handouts.

An Energy Information Administration (EIA) report[ix] indicates that Federal subsidies for renewable generation for wind and solar in fiscal year 2007 were almost 100 times those for oil and gas-fired generation and over 50 times that of coal-fired generation. For example, EIA data show that solar power was subsidized at $24.34 per megawatt hour and wind power at $23.37 per megawatt hour for electricity generated in 2007.  By contrast, traditional coal received 44 cents, natural gas and petroleum received 25 cents, hydroelectric power 67 cents, and nuclear power $1.59 per megawatt hour.[x] For wind power, these subsidies include a production tax credit of 2.0 cents per kilowatt-hour.[xi] However, they do not include accelerated depreciation (a five-year write-off), a favorable accounting treatment that wind developers receive.

As these facts indicate, for the UCS study to point to even the existing level of renewable electricity generation as proof that it “can work” misses the big picture: An operation isn’t efficient if it requires government support against its competition. If the government cut off its preferential treatment for wind and solar, these sources would become an even smaller portion of the current energy mix.

In a small section at its conclusion, the UCS study briefly addresses the economic impacts of a renewable electricity mandate. Yet here the study informs the reader that an additional set of government constraints will help the economy. In its words:

A national Renewable Energy Standard (RES) that reaches a target of 25% by 2025 can play an important role in strengthening our region’s economy. Developing the Southeast’s renewable energy potential will create new economic opportunities and spur demand for a variety of skilled trades and professional careers.

This is quite simply a crude fallacy. There is nothing intrinsic to the argument here about “green” jobs. If this logic is correct, then any government mandate on business—for example, to put polka dot wallpaper up on all their offices—would “create new economic opportunities” and “spur demand.” Yet that analysis can’t possibly be right. It overlooks all of the jobs that would be destroyed by the new mandate. And in the same way, the UCS study is ignoring the jobs that are destroyed by an renewable electricity mandate. It cites studies purporting to show otherwise, but such studies often contain very basic methodological errors.[xii] They can’t disprove the commonsensical insight that the government doesn’t make the economy more efficient by imposing more hoops for businesses to jump through. If it really made economic sense for the solar panel and wind turbine industries to grow and attract new workers, then those industries would do so in a free market.

John Adams once said “Facts are stubborn things; and whatever maybe our wishes, our inclinations, or the dictates of our passion, they cannon alter the state of facts and evidence.” All too often, this important edict gets lost in the public debates on energy and environmental policy. By focusing on the technically “possible” and then claiming that new business regulations would boost the economy, the UCS study ignores the reality that certain and immediate economic harm would come from federal intervention into energy markets. And while some may support such a policy without regard to the costs, they cannot – and should not – be ignored.

[ii] For example, see Energy Information Administration, “Impacts of a 15-Percent Renewable Portfolio Standard,” June 2007, www.eia.doe.gov/oiaf/servicerpt/prps/pdf/sroiaf(2007)03.pdf; and Energy Information Administration, “Energy and Economic Impacts of Implementing Both a 25-Percent RPS and a 25-Percent RFS by 2025,” September 2007, http://www.eia.doe.gov/oiaf/servicerpt/eeim/policy.html

[iii] Energy Information Administration, “Regional Generation Impacts of a 15-Percent Renewable Portfolio Standard,” August 2007, http://www.eia.doe.gov/oiaf/servicerpt/prps/regional_generation.html?slide=13

[iv] The UCS study defines a feasible resource as “one that can be developed without compromising an obvious restriction or and under a reasonable (but perhaps aggressive) policy scenario.”

[v] According to the UCS study, “total potential capacity indicates the potential maximum peak output if all resources identified in the study were used to generate power.

[vi] EIA’s Southeast region includes Maryland and West Virginia, which are not in the UCS’s Southesat region.

[vii] Energy Information Administration, “Annual Energy Outlook 2009,” levelized generation costs.

[viii] Energy Information Administration, Monthly Energy Review, Table 7.2a, http://www.eia.doe.gov/emeu/mer/pdf/pages/sec7_5.pdf.

[ix] 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.

[x] For more information on renewable subsidies, see http://www.instituteforenergyresearch.org/2008/07/30/energy-subsidies-study/.

[xi] Energy Information Administration, Assumptions to the Annual Energy Outlook 2008, page 155, http://www.eia.doe.gov/oiaf/aeo/assumption/pdf/renewable.pdf

[xii] For a critique of several leading “green jobs” proposals, see: “Green Jobs: Fact or Fiction?” at: http://www.instituteforenergyresearch.org/green-jobs-fact-or-fiction/.