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A “Solution” to the “Energy Situation”? (Glenn Schleede Responds to a Critic)

Mr. Schleede:
I’ve read your position on wind farms and their associated problems with a great interest.  Can you tell me when we can expect to receive your solution to the energy situation here in the US?

I look forward to your response. 

Regards, ______________ Fairfax, VA

Dear Ms. _____:

Thanks for your note. You certainly do flatter me with your expectation that I could produce a “solution to the energy situation here in the US.”  (But I suspect that was not your purpose.)

As you may know, U.S. political leaders and government officials at both the federal and state levels — not to mention hundreds of smart people in universities, business and non-profit organizations — have been seeking that solution for at least 35 years.

The U.S. Department of Energy and its predecessors have spent over $150 Billion (2006$) on “energy R&D” and, unfortunately, have little to show for it.  That doesn’t include more billions in federal and state tax credits, credit programs and other subsidies of various kinds (e.g., cash, regulatory, government official lobbying) to promote energy technologies selected by government officials.

Numerous “promising,” government-selected energy technologies have emerged and retreated during the past 35 years.  (You can find references to dozens of them in Presidential messages, the Congressional Record, or in hundreds of press releases.)

Looking back, it’s now quite clear that these “promising” technologies that were selected for government support always

(a) take longer to develop,

(b) face technological hurdles,

(c) have unacceptable environmental impacts, and/or

(d) cost much more than their promoters claimed.

As indicated above, “energy R&D” has not been the only area for extensive government activity.  Successive Administrations and Congress (with supplements from state governments) and lots of help from lobbyists have proposed and adopted dozens of tax breaks, credit programs and other subsidies that have had enormous impact on capital investment and other energy market decisions.  The US EIA recently issued a report that identifies more than 60 “federal financial interventions and subsidies in energy markets” that were in place during 2007.

In truth, these well meaning “interventions” are now distorting energy markets and, in particular, capital investment decisions.  Anyone with significant money to invest now understands that the safest investment with the highest return is to find something that qualifies for federal and/or state tax breaks and subsidies or qualifies under a credit program.  It make little sense for them to invest in (a) producing energy — e.g., from oil or natural gas — because the risks are higher and returns less assured, or (b) investing with some entrepreneur who might develop a new energy technology that could turn out to have commercial applications — which is also risky.

So, the smart money people “mine” Washington and state capitals for tax breaks, subsidies, and credit programs and, of course, they hire lobbyists.  A prime example of “mining in Washington” was T. Boone Pickens announcement that he was going to make a 25% return by building a $10 billion “wind farm”  — which current tax breaks will permit him to do.  Mr. Pickens has advertised both his planned “wind farm” and then his grand “energy plan” to make money by pursuing wealth via government subsidies.   Others (e.g., GE, FPL, Goldman-Sachs) follow the same strategy but “fly under the radar” while they capture tax breaks and subsidies.

Political leaders, other government officials, and academics lament the “unacceptably low” private sector investments in R&D.  The obvious answer is that governments, in their infinite wisdom, have made private sector decisions increasingly unattractive compared to following government dictates.

In fact, there is little reason to expect the “solution to the energy situation here in the US” that you seek from the current administration or the Congress or from many who are seeking election or reelection.  There is far more rhetoric than substance.

A few have had the courage to admit that the U.S. will continue to be dependent on the “traditional” energy sources — coal, oil, natural gas, nuclear, and hydro — for at least 90% of US energy requirements for several decades into the future .  However, most add that we must “continue to pursue ‘alternative’ energy sources such as wind and solar” and increase spending for “energy R&D” without admitting that

(a) no one with knowledge of energy markets expects a significant contribution from either wind or solar,

(b) that the technologies they trumpet have not been successfully demonstrated, and

(c) they have no idea what those other “alternative” energy sources are.  Instead, the rhetoric is merely something that seems to fit popular wisdom and, they hope, will get them by the next election.

Similar rhetoric comes from executives of energy companies who know from their PR departments that they must say the “right things” publicly or be beaten up by the media, regulators, and/or political leaders.

So, what “solutions” are being pursued by government officials and political leaders and — based on yesterday’s Congressional hearings — academics?  The answer clearly is “more of the same.”   Many of the actions proposed in “energy bills” now being considered in Congress would merely expand existing programs or add to EIA’s long list of “federal financial interventions” that are already distorting energy market decisions, and discouraging energy R&D and capital investments that have not been selected as “technology winners” by political leaders in Washington or state capitals.

This is occurring despite years of experience world-wide that demonstrates that governments are not well equipped to select “winning technologies,” i.e., those that will survive in a competitive marketplace.  This kind of “central planning” has not worked well in other countries and the past 35 years of government energy policy suggests that it will not work in the US.

So, is there any reason to expect that more government “interventions and subsidies” in energy markets will help?  I believe the honest answer is “No.”

Now, to return to your question:  Do I have THE solution?  Again, the honest answer is “No.”  I am very confident that the grand strategies being pursued by our federal and state political leaders will not work, but that’s hardly a startling new insight.  Experience is very convincing.

I believe that the longer-term solutions (beyond the several decades referred to above) will come from technological advances, but those advances are unlikely to be ones selected in Washington or state governments.

I am more comfortable in NOT being able to identify the technologies that WILL provide the solutions than you are likely to be because I know that very few people if any are good at predicting technological advances.  All that I need to do is to look back 20 years and admit that I would not have dreamed that the technologies I’m enjoying today would be available.

If you are looking for something to propose to your elected representatives as a solution, you might suggest that they start by (a) not adding more costly, distorting government “interventions” and (b) undoing those have been put in place during the past three decades.

Regards, Glenn R. Schleede

8 comments

1 Kent Hawkins { 03.24.10 at 5:29 am }

This is a brilliant response by Glenn Schleede. I also suggest that readers see my article on the problems of windpower as a “solution” at the US Association for Energy Economics’s Dialogue at http://dialogue.usaee.org/index.php?option=com_content&view=article&id=95&Itemid=113

2 Answer to the “energy problem” « Green Grift { 03.24.10 at 9:55 am }

[...] record, could it be the answer to the energy problem is for government to stop trying to solve it? Successive Administrations and Congress (with supplements from state governments) and lots of help f… have proposed and adopted dozens of tax breaks, credit programs and other subsidies that have had [...]

3 SD { 03.24.10 at 4:10 pm }

GREAT post. Great great great. Couldn’t agree more.

4 Steve C. { 03.24.10 at 6:05 pm }

But “We’ve got to do something to save our phoney baloney jobs!?
(Mel Brooks in Blazing Saddles)

5 Kev { 03.24.10 at 7:42 pm }

You’ll probably see this politicking as being apace with the other rent seeking going on to:

http://www.nytimes.com/gwire/2010/03/24/24greenwire-dont-risk-clean-energy-future-to-save-coal-job-50806.html

6 Tom Stacy { 03.25.10 at 7:30 am }

Once again Glenn’s realistic approach to our energy future gleams as a gem on the trash heap. The solution to our energy problems lies in the government getting out of the way, and thereby directing utilities’ and entrepreneurs’ and investors’ attention away from what the taxpayer can do for them, and back to what they can do for their country.

7 Kennedy Maize { 03.28.10 at 12:07 am }

My friend Glenn has again hit the nail on the head with his experienced hammer. As a Democrat and, by most definitions, a liberal (whatever the heck that means), I could not agree more with my Republican and conservative (whatever the heck that means) friend of more than 30 years.

8 Rocky Mtn, Energy Economist { 03.23.11 at 1:44 pm }

Mr. Schleed, Just came across your article, Your spot on regarding your analysis of ancillary service and increased cost of wind in a traditionally vertically integrated utility without a market . However, in RTO’s wind is a viable resource in that it has pushed the LMP down in many hours of the day providing a benefit to retail rate payers. Additionally, the Midwest has recent approved a DIR tariff for wind resources that will require them to adhere to a schedule. Furthermore, the cost to provide regulation and imbalance in a 5 minute market is very small due to diversity and available spin reserves as well as the reduction in variable fuel cost . I would be very interested in our opinion of wind in RTO’s or a a 5 minute balancing market in the Western Interconnection as well as your analysis of the viability of solar energy on a distributed scale. On another note Wind only Balancing Areas have proven to be a low cost resource since they are required to sell a firm product and maintain NERC standards. Remove the PTC and you still have brown energy below 50 bucks with TRECs going elsewhere.

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