Editor’s Note: EarthTechling, always looking to bring you interesting cleantech reading, is proud to repost this article courtesy of partner American Enterprise Institute for Public Policy Research. Author credit goes to Benjamin Zycher.
Also, references to (Note) in this piece refer to supporting materials found at the end of the article.
Public policy support for renewable electricity—wind and solar power in particular—is substantial, taking the form of large subsidies both direct and indirect. A number of rationales usually are offered in support of those public policies; whatever their surface plausibility, they are deeply problematic both conceptually and in terms of the available data. In short, they are wholly unpersuasive and provide a weak basis for policy formulation. This second in a three-part Outlook series discusses these rationales. [Read part 1]
Key points in this Outlook:
- The public subsidies that support wind and solar power in America are fueled by a set of rationales that are superficially appealing but deeply problematic.
- Supporters say renewables need subsidies because they are an “infant industry” or because they need to “level the playing field” with conventional sources. But the data show that scale and learning efficiencies are very unlikely and that solar and wind already receive the highest levels of taxpayer assistance.
- Unreliable wind and solar sources require backup power generation—a dual setup that imposes costs higher than the adverse environmental effects of conventional sources alone.
- The hoped-for creation of “green jobs” confuses benefits for special interests with costs for the whole economy. The net effect would be a reduction in overall employment.
As illustrated in the first in this series of Outlooks (No. 1, January 2012), wind and solar power are proving themselves uncompetitive even with large subsidies, both direct and indirect, at the state and federal levels. This policy support has yielded only small increases in the supply of electric power, at a very high cost. And so, a fortiori, the preservation and, perhaps, expansion of that policy support somehow must be justified. The central arguments for this prominent, long-standing support are numerous and varied but generally fall into the following categories:
• renewable energy as an “infant industry”;
• offsets for the subsidies enjoyed by conventional generation;
• the adverse environmental effects of conventional generation;
• resource depletion, or “sustainability”; and
• renewable electricity as a source of expanded “green” employment.
The Infant Industry Argument
This argument begins with the assumption that new technologies often cannot compete with established ones because the initial available market is too small for important scale economies to be exploited and because the downward shifts in costs that might result from a learning process, again, cannot be achieved without substantial expansion in market share. Accordingly, policy support for expansion of the newcomers’ share of the market is justified by supporters as a tool with which to allow the achievement of both scale and learning efficiencies.
One obvious problem with this argument is that the market for electric power already has several competing technologies, each of which began with a small market share, as is the case with all new technology. More generally, many industries employing competing technologies are characterized by the presence of scale economies, learning efficiencies, or both, but market forces operating through domestic and international capital markets provide investment capital in anticipation of future cost savings and higher economic returns. Accordingly, the infant industry argument is a non sequitur: the market can foresee the potential for scale and learning efficiencies and invest accordingly. No efficiency rationale for subsidies or other policy support follows from this argument.
In any event, the narrower issue is whether important learning or scale efficiencies remain available to be exploited for cost reductions for wind or solar generation. The pattern of average costs over time, controlling for the size of projects, should yield inferences about the remaining importance of learning efficiencies; if the infant industry argument is correct, we should observe in the data over the last decade or two declining costs for renewable electricity. For wind generation, the US Department of Energy (DOE) reports data on average project cost per megawatt (MW) over time, beginning in the early 1980s.
These data, while somewhat crude, show a rough pattern of declining average costs from the 1980s through about 2001 and then rising average costs through 2009: from about $4,800 per MW in 1984 to about $1,300 per MW in 2001, rising to about $2,100 in 2009, all in constant 2009 dollars. Because these data are weighted by capacity, the rising average costs per wind MW after 2000–01 suggest that further learning efficiencies no longer are available to be exploited unless, perhaps, future technological advances are made.
Other DOE data are available on average costs by project size for wind projects installed in 2007–09. The short period reduces the likely impact of learning efficiencies, yielding important information about the availability of scale economies. The data show that scale economies are important for only small wind projects (about $2,700 per MW for projects smaller than 5 MW) and that constant or slightly increasing average costs (about $1,800-$2,000 per MW) characterize projects larger than about 20 MW.
Reliable time-series data on costs for photovoltaic and thermal solar systems are more difficult to find; perhaps the only consistent series is provided by the US Energy Information Administration (EIA) for 2000–09. (Note 1) These data show a decline in costs per MW for both photovoltaic and thermal systems early in the decade, suggesting the exploitation of learning efficiencies and, perhaps, the use of more suitable (that is, lower-cost) sites. The data show also an increase in costs per MW after 2002; this suggests that no further learning efficiencies are available to be exploited, that the problem of rising site costs is significant, or both. (Note 2) On the other hand, a different DOE data analysis for photovoltaics only shows a decline in the capacity-weighted average installed cost between 1998 and 2008, from $10.80 per watt (2008 dollars) to $7.50 per watt. In short, the data are mixed in the case of solar generation systems. The infant industry assumption of significant learning and scale economies as a barrier to adoption of renewable technologies at best is far from obviously correct.