Institute for Energy Research Economist Travis Fisher and Policy Associate Mark Febrizio penned an article for the September issue of USAEE Dialogue, a tri-annual publication of the United States Association for Energy Economics. The article, titled “Broken Windows and Electricity Generation: The Cost of Prematurely Closing Existing Plants,” analyzes economic tradeoffs in electricity generation policy, specifically looking at regulations that close existing power plants prematurely and replace them with new, politically-favored generation resources.
Using a recent IER study, Fisher and Febrizio argue that closing existing, reliable power plants and building new, intermittent ones closely mirrors the “broken windows” fallacy as laid out in economist Frederic Bastiat’s essay “What Is Seen and What Is Not Seen.” In short, destroying valuable power plants increases costs for Americans, even if those costs are hidden and the new power plants appear to some observers to be a sign of economic progress. The authors argue it is important for energy economists to consider the tradeoffs when thinking about energy policy and to convey those ideas to policymakers.
Below is an excerpt from the piece:
Simply examining forward-looking estimates like those of the EIA does not provide the full picture. If one merely looks at the benefits of new power plants and doesn’t assess the costs of destroying existing things of value, the analysis will be skewed and incomplete for policymaking purposes.
The late French economist Frederic Bastiat examined the concept of unintended consequences in his essay, What Is Seen and What Is Not Seen, where he discussed the less apparent ramifications of destroying things of value in order to spur economic activity in another area. His best-known example is that of a child breaking a shop window, causing the people of the town to take comfort in the increased business for the glazier to repair the window. Ultimately, Bastiat disagrees with that common sentiment and argues that breaking windows to encourage industry in another sector is harmful, since “society loses the value of things which are uselessly destroyed.”
Similarly, policymakers must understand the full context of electricity generation and analyze the cost of breaking windows in the electricity generation sector—i.e. retiring existing generation resources before the end of their economic lives. In order to perform that analysis, policymakers need an apples-to-apples metric—the LCOE for existing sources. The IER study provides this much-needed cost information and illustrates the competitiveness of current resources with the politically favored, emerging ones.
Click here to read the entire article.
Click here to view IER’s “True Cost of Electricity” study.