Executive Summary
The words “Renewable Portfolio Standard” (RPS) should strike
fear into the hearts of all Americans.
Unfortunately, most Americans don’t understand the concept of RPS, much
less its dire consequences. To date, 29
states have passed RPS legislation which requires utilities to, over time, increase
the amount of renewable energy delivered to its customers. On the surface this sounds like a laudable
goal. Unfortunately, there are two major
problems with RPS legislation.
·
Utilities are forced to purchase uncompetitive electricity
generated from renewable sources (These much higher costs, sometimes 2 to 3
times higher than electricity generated from fossil fuel, are passed along to
the consumer or electricity).
·
Taxpayers foot the bill for direct subsidies,
grants, loan guarantees etc. while rate payers are saddled with higher energy
costs for the life of the renewable energy power contract (usually 20-25
years).
Since RPS projects thwart the principles of free market
economics, they have and will continue to result in disastrous unintended consequences. These consequences include but are not
limited to the following.
·
Electric bills will increase unnecessarily by up
to 30% in RPS states.
·
Manufacturing in RPS states will be less
competitive with non-RPS states or foreign countries utilizing low cost fossil
fuels.
·
Fewer manufacturing companies will migrate or
start up in RPS states.
·
Retailers in RPS states will be forced to charge
more for their products and services due to unnecessarily high energy costs
·
Fewer jobs will be created in RPS states
·
Economic growth will slow in RPS states
·
RPS states will suffer from a lower tax base
To date, public outrage over RPS has been quite
limited. The reasons are quite simple.
·
Media coverage of RPS programs have been limited
·
Government officials have sold RPS programs as
“jobs bills”
·
The true impact of RPS programs on energy costs
is initially quite small but grows as more uneconomic green projects are
implemented
·
The exorbitant prices that consumers pay for
electricity generated by a particular project are not disclosed “due to
confidentiality” of power purchase contracts.
By the time the general public realizes they are being
fleeced, it will be too late. RPS
projects have 20-25 year contracts with the utility at a fixed price plus
escalation per KWH (at prices far above market rates). Therefore, future RPS projects can be
stopped but existing contracts cannot be broken and existing projects impact
the prices for electricity for long periods of time.
Principles and
Application of RPS
To
date, no national RPS legislation has been passed. Instead, 29 states and D.C. and Puerto Rico
have enacted RPS legislation (see map below).
In a nutshell, RPS laws force electric utilities to purchase ever
increasing amounts extremely high priced renewable electricity. The utility simply rolls the high priced
electricity into its rate base which in turn forces consumers to pay
unnecessarily high prices for electric power.
Each state law is different but most include the following
·
Utilities are required to purchase a certain amount
of qualified renewable energy.
·
Programs are designed to increase the amount
of renewable energy in electricity supply mix over time.
o
Oregon’s Program is typical and imposes the
following numeric targets
|
Years
|
% Renewable
|
|
2011-2014
|
5
|
|
2015-2019
|
15
|
|
2020-2024
|
20
|
|
2025
|
25
|
·
Numeric targets vary by State. California has the most ambitious program
requiring 33% renewable penetration by 2020.
·
RPS purports to rely on market forces by
encouraging competition among renewable projects. What this means to the consumer is that only
the best of the worst will be selected
·
RPS requirements are often backed up with
non-compliance penalties.
·
State laws vary on what is considered to be
“qualified” renewable for RPS purposes.
o Wind,
solar, geothermal, landfill-gas, and ocean-based energy resources are typically
eligible
o There is
often less agreement, however, on the eligibility of biomass, municipal solid
waste (MSW) incineration, and hydro-electric resources. For example, Oregon refuses to count large
hydro-electric projects as renewable
Studies on the Impact of RPS
The Beacon Hill Institute in
concert with the Cascade Policy Institute published as study in 2011 entitled
“Economic Impact of Oregon’s Renewable Portfolio Standards” (See the link http://cascadepolicy.org/pdf/2011-3-9-RPSreport.pdf
). The study concluded that the RPS
legislation in Oregon would unnecessarily increase electricity costs up to 34%
by 2025.
The Manhattan Institute published
a study in February, 2012 entitled “The High Cost of Renewable Energy Mandates”
(See the link http://www.manhattan-institute.org/html/eper_10.htm
). The study focused on actual data from
Coal producing States, 7 with and 7 without RPS mandates. The results were striking. In 2001 the 7 RPS states electricity prices
were 10.91% higher than the non-RPS states.
The differential ballooned to 37.56% in 2010. The implication is that RPS programs
contributed to the explosion in costs in the RPS states.
In a paper entitled “Five Reasons
the EPA Should Not Attempt to Deal with Global Warming” (Heritage Foundation, April 23, 2009 by Ben
Lieberman and Nicolas Loris – link http://www.heritage.org/research/reports/2009/04/five-reasons-the-epa-should-not-attempt-to-deal-with-global-warming
), the following points are made.
·
Regulation of Carbon is devastating to the
economy
o
Single year losses to GDP
could exceed $600 Billion
o
Energy Costs would skyrocket an additional 30%
·
Annual job losses could exceed 800,000 for
several years. (manufacturing would be hardest hit)
·
Higher energy costs and job losses would fall
disproportionally on the poor and uneducated
·
The benefits of controlling carbon emissions are
negligible
·
EPA suggests that a 60% decrease in carbon
emissions would reduce global warming by .1-.2 degrees Celsius by 2095.
A Tale of Three Projects
It is nearly impossible to evaluate the impact of particular
RPS projects due to the “confidential” nature of the Power Purchase Agreements
(PPAs) which are contract documents between the provider of RPS power and the
utility company. It is also difficult to
obtain accurate figures on capital expenditures, operating costs, efficiency
figures etc. However, in the case of two
projects, Cape Wind and Topaz, the public has been made aware of a substantial amount
of detail. In the case of California
biomass project a few details are emerging thanks to an article published in
the Wall Street Journal.
In recent blogs, I have discussed in detail the Topaz
project which is a large solar farm to be built in Southern California by
Warren Buffett’s Mid America Energy Holdings (Blog entitled “Buffett’s Green
Sure Thing- Topaz” published May 14, 2012) and the Cape Wind Project which is a
large offshore Massachusetts Wind Farm (Blog entitled “Cape Wind Blows for
Taxpayers and Ratepayers” published May 15, 2012). Both projects produce lucrative results for
their owners and cost taxpayers and ratepayers plenty. Below are brief summaries of each project.
Topaz
·
California 550 Megawatt Solar Farm
·
Project cost estimated between $2-2.4 Billion
·
25 year PPA with PG&E at 15 cents/KWH with
price escalations
·
Mid America Energy Holdings has secured agreements
for construction, operation and maintenance
o
Fixed Cost Construction Contract
o
O&M Contact at fixed cost with escalation
·
Federal Tax Credit of 30% of the investment cost
(Cost between 2 and 2.4 Billion yields tax credit of between $600 million and $720million).
Cape Wind
·
Massachusetts
468 Megawatt Wind Farm
·
Project cost estimated at $6 billion
·
Long term PPA at approximately 20.7 cents/KWH
with escalations
·
Subsidies
o
Federal production tax credit - $337 million
over 10 years
o
Massachusetts “Green Credits” - $1.7 billion
over 25 years
o
Accelerated depreciation - $65 million in
present value terms
The Wall Street Journal published an interesting article
entitled “Green Wood-Fired Plants Generate Pollution Violations” (July 24,
2012). The article focused on the Blue
Lake Power LLC, a biomass power plant in California. Biomass plants are fueled by organic waste
including construction debris, wood chips, corn stalks, animal waste, etc. According to the Journal, the Blue Lake Plant
is selling its power to a San Diego utility at twice the market rate. The Journal also reported that the plant has
been plagued by operational problems and cited for pollution violations. In fact, the Blue Lake Plant was put on the
EPA watch list of plants with compliance issues. The Journal article also reported that
“nearly all U.S. biomass plants receive Government support from subsidies,
grants or state-approved power contracts”.
In fact, the Economic Stimulus act set aside $270 million for biomass. A real
success story, huh? – Higher prices for electricity and more pollution!
In a free market environment none of these projects would be
built. Massive subsidies and sales of
electricity at above market rates are the factors making these projects
viable. Taxpayers and ratepayers foot
the bill. Furthermore, we live in a
global marketplace. Businesses faced
with exorbitant electricity costs will be less competitive. Faced with these higher costs, businesses
will either hire fewer people, move operations to states or countries with more
competitive rates or be forced to close.
In the end, Lawmaker advocates of the “Green Agenda” will deny that there
is any link between RPS and higher electricity costs. Instead they will blame “greedy” utility
companies or other “demons” for the disastrous consequences of RPS legislation.
It’s Not Easy Being
Green
In February 2011, the American Enterprise Institute
published a report entitled “The Myth of Green Energy Jobs: The European
Experience” (See the link http://www.aei.org/outlook/energy-and-the-environment/the-myth-of-green-energy-jobs-the-european-experience/
). The principal conclusions of the
Study are:
·
“Green jobs simply replace jobs in other sectors
and actually contribute less to economic growth”
·
“Experiments in renewable energy in Europe have
led to job loss, higher energy prices and corruptions”
Below are some real world experiences with Green Electricity
·
The province of Ontario, Canada became a “green
leader” through the decommissioning of an efficient fleet of coal fired power
plants and moving toward renewables. The
result is that Ontario experienced a 50% increase in electrical rates since
2005 and it is estimated that another 46% increase is in store in the next 5
years
·
Denmark was an early adaptor to green power and
now boasts one of the highest prices for electricity in the World – about 40
cents/KWH (more than 4 times of what Americans currently pay)
·
Most European countries which have been
proponents of green energy are beginning to see the light and have cut back on green
subsidies
Conclusion
RPS programs pose a significant threat to economic growth
and competitiveness of domestic business.
In the end, they destroy more jobs than they create and have little or
no impact on the environment.
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