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Bingaman’s Renewable Energy Standard: Another Proposed Energy Tax

Congress seems intent on imposing energy taxes on the American public. First, there was the proposed cap-and-trade legislation; now there’s a renewable energy standard.

While cap-and-trade legislation appears to be dead for now, the same can’t be said for a renewable energy standard. On September 21, 2010, Senator Bingaman (D-NM) introduced the Renewable Electricity Promotion Act of 2010 (S. 3813). A bipartisan group of 32 cosponsors gives this bill a legitimate chance of passage this year. At a minimum, it’s a bill that warrants significant attention.

Background

The legislation would create what is referred to as a renewable energy standard (RES). The RES is a combination of two discreet policy programs. The first is a renewable energy mandate and the second is an energy efficiency mandate.

Electric utilities would be required to meet a 15 percent RES and would have to generate at least 11 percent of their electricity from renewable energy sources. The remaining 4 percent could come from energy efficiency savings—utilities could not exceed this 4 percent number.

The requirements would phase in over time, as shown in Figure 1. (Note: The energy efficiency requirement could never exceed 26.67 percent of the total RES requirement).

Figure 1

Calendar year: Minimum annual percentage

2012 through 2013: 3.0

2014 through 2016: 6.0

2017 through 2018: 9.0

2019 through 2020: 12.0

2021 through 2039: 15.0

The Biggest Subsidy of Them All

Renewable energy sources have been receiving massive subsidies for decades. Even with these subsidies, electric utilities have not purchased renewable energy, such as wind and solar power, because of their high costs and unreliable nature.

As can be seen in Figure 2, renewable energy sources receive an excessive amount of federal subsidies when broken down by megawatt hour. Moreover, this EIA data only includes federal subsidies and doesn’t capture the many subsidies that states also offer renewable energy sources.

Figure 2

Subsidy and Support per Unit of Production (dollars/megawatthour)

Coal $0.44

Natural Gas and Petroleum Liquids: $0.25

Nuclear $0.1.59

Biomass (and biofuels): $0.89

Geothermal: $0.92

Hydroelectric: $0.67

Solar: $24.34

Wind: $23.37

Source: U.S. Energy Information Administration

Figure 3

FY 2007 Subsidy and Support (million 2007 dollars)

Coal: $854 million

Natural Gas and Petroleum Liquids: $227 million

Nuclear: $1,267 million

Biomass (and biofuels): $36 million

Geothermal: $14 million

Hydroelectric: $174 million

Solar: $14 million

Wind: $724 million

Source: U.S. Energy Information Administration

Compared to natural gas, wind power receives 93 times more money per megawatt hour and solar receives 97 times more money per megawatt hour.

The subsidies for wind power are so extreme that the total amount of the federal subsidy ($724 million), as shown in Figure 3, is not that different from the total subsidy for coal ($854 million). The big difference between the two though is coal generates 63 times more electricity.

Despite all these subsidies, electric utilities still don’t voluntarily purchase renewable energy. Imagine running a business and creating a service that is so bad nobody wants it, then imagine that the government helps you out by forcing the public to buy your inadequate service.

This is precisely what a renewable energy mandate is—it forces utilities to buy renewable electricity even though they don’t want to. Practically, electricity customers are being forced to buy renewable energy because utilities pass off their costs to customers.

Energy Tax

Electric utilities won’t be the ones stuck with the higher costs imposed by an RES. Since these costs won’t be labeled in electricity bills, they will be hidden from electricity customers.

An RES may not be as severe as an economy-wide cap and trade program for CO2, but that doesn’t change the fact that it’s an energy tax, created by forcing electricity customers to buy unreliable and costly renewable energy.

As can be seen in Figure 4, the costs for wind and solar power, in particular, are very high compared to other sources of electricity. The EIA’s costs estimates don’t take into account many factors, such as back-up generation for wind power, which could drive up these costs even further.

Figure 4

Total System Levelized Cost, 2016

($2008 per megawatt hour)

Conventional Coal: $100.4

Natural Gas (Conventional Combined Cycle): $83.1

Advanced Nuclear: $119.0

Wind – Onshore: $149.3

Wind – Offshore: $191.1

Solar PV: $396.1

Geothermal: $115.7

Biomass: $111.0

Hydro: $119.9

Source: U.S. Energy Information Administration

The Costs of an RES

If the RES becomes law, the resulting higher energy taxes will have a detrimental impact across the economy. If electricity customers, including businesses, are forced to pay more for electricity, they will be hurt financially.

Many states have already adopted renewable energy standards. One such state is North Carolina. The Beacon Hill Institute, in conjunction with the John Locke Foundation, published a study on the impact of North Carolina’s law. While the impact of the federal RES would vary based on state, this study provides a sense of what could be expected.

The requirements in North Carolina are not as extreme as the proposed federal mandate. The RES is 12.5 percent with a 7.5 percent renewable energy mandate, with five percent that can be met through energy efficiency savings.

There are cost caps in the North Carolina bill that prohibit utilities from passing on excessive costs to customers to meet the law’s requirements. The study makes two estimates based on if the caps remain in place and if the caps no longer existed.

Figure 5

BHI Estimates of Economic Impacts of the NC Mandate in 2021 with Caps (NPV 2009 $)

Total Employment (Jobs) (3,592)

Investment ($ millions) (43.20)

Real Disposable Income ($ millions) (56.80)

Real Gross Domestic Product ($ millions) (140.35)

State and local Revenues ($ millions) (43.49)

Figure 6

BHI Estimates of Economic Impacts of the NC Mandate without Caps in 2012 (NPV, 2009 $)

Total Employment (Jobs) (15,373)

Investment ($ millions) (182.61)

Real Disposable Income ($ million) (271.15)

Real Gross Domestic Product ($ millions) (606.65)

State and Local Revenues ($ millions) (246.57)

Regional Inequities: What About States with Limited Renewable Potential?

Many states do not have the same renewable energy resources as other states. To meet the renewable energy requirements in the Bingaman bill, electric utilities could purchase renewable energy across state lines. Those within a particular state, though, would likely never use this out of state electricity. For example, an electricity customer in Georgia would be subsidizing the electricity generation for people in Texas.

While the motivations of Senators certainly can’t be stated definitely, two of the Republican sponsors of the Bingaman bill may have very clear state-based interests for supporting the legislation. Some Midwest states, such as Kansas and Iowa, have some of the best wind resources in the nation.

This means that utilities in states with poor renewable energy resources would be forced to buy renewable energy, such as wind power, from those states. With such vested special interests, it is unsurprising that Senator Brownback (R-KS) and Senator Grassley (R-IA) support the Bingaman RES.

Moreover, there’s a reason why there’s only one state in the southeast (North Carolina) that has its own RES: southeastern states don’t have strong renewable energy resources. A federal mandate would act as a wealth transfer from southeastern states to states with strong renewable resources.

Nine states and the Southeastern Association of Regulatory Utility Commissioners, sent a letter to Congress in 2007 opposing a federal renewable energy requirement, arguing:

The reality is that not all states are fortunate enough to have abundant traditional renewable energy resources, such as wind … this is especially true in the Southeast and large parts of the Midwest.

Federal Government Violates State Rights Again

This new proposed energy tax has a lot in common with ObamaCare – it mandates the purchase of a good or service and completely ignores state rights.

Since many states are unfortunately already mandating the generation of renewable energy, there’s no need for a one-size-fits-all federal mandate. As stated above, not every state has the same renewable resources.

Also, many states have what are called off-ramp provisions in their mandates—this simply means that utilities do not have to meet the RES requirements if it becomes too costly to do so. If the Bingaman RES were passed, these off-ramp provisions would no longer apply.

For those states that have cost caps in their RES, such as North Carolina, the caps would also no longer apply. Consequently, utilities would be forced to impose whatever necessary costs existed to meet the requirements.

The proposed RES does have a ratepayer protection provision that allows utilities to petition the Secretary of Energy to waive some or all of the RES requirements in a given year if the extra costs of generating renewable energy and promoting energy efficiency would increase rates by more than four percent per customer.

However, this still allows for substantial increases in electricity prices—four percent per year is significant, especially when electricity rates can increase for many other reasons. Through this provision, at least the Senators are expressly acknowledging that the bill would likely be an energy tax.

Addressing the Key Myths

1) An RES would help the economy and increase jobs.

To buy into this myth, one has to assume that the economy is better off when individuals and businesses are forced to pay more for energy. There may very well be an increase in green jobs, but they would come only at the expense of shifting resources from more productive uses.

As discussed by Dr. Carlo Stagnaro on MasterResource:

Recent studies on Spain, Germany, and Denmark suggest that, in fact, RES subsidies destroy, not create, jobs – a remarkable result, since these three countries are widely regarded as the most successful models in Europe. The U.S. Congressional Budget Office found similar results.

We performed a similar study on Italy. Our estimates on the opportunity cost of green jobs show that, on average, every single green job comes at the expense of 4.8 “grey” jobs.

2) An RES would reduce CO2 emissions.

Assuming that the reduction of CO2 emissions is a worthy goal, it is unlikely that sources such as wind and solar would have any meaningful effect on CO2 emissions.

Rick Webb, who is a scientist at the University of Virginia, served on a committee for the National Research Council that investigated the environmental impact of wind power. He concludes that by 2020, based on the information in the NRC report:

Wind power development will offset emissions of carbon dioxide by 1.2 to 4.5% from the levels of emissions that would otherwise occur from electricity generation. At present, electrical generating units account for 39% of total U.S. CO2 emissions from energy use. If the 39% value does not change, wind power development will offset only 0.5 to 1.8% of U.S. CO2 emissions from energy use.

Kent Hawkins, on MasterResource discussed studies showing how CO2 emissions actually increase with the introduction of wind power:

In general, the studies show that as wind penetration increases, the effect on fossil fuel and CO2 emissions worsens. Specifically, at wind penetrations of about 3% (as is the case in the Netherlands), the savings are zero. At 5-6% (as for Colorado and Texas) the “savings” become negative, that is, emissions actually increase due to the presence of wind power.

This may seem counterintuitive since wind turbines do not themselves emit CO2. However, since wind power (and solar) is an intermittent source of power, back-up electricity generation is necessary. The back-up sources generally are conventional sources of power such as natural gas plants. If these back-up sources are then forced to ramp up and down to meet the variable nature of wind, their CO2 emissions could increase.

3) An RES will reduce our dependence on foreign oil.

This may be one of the biggest myths to address because many legislators that would normally oppose an energy tax could justify supporting it based on security grounds.

An RES mandates that electric utilities generate electricity from sources such as wind and solar power. In 2008, electricity generation accounted for only about 1 percent of all petroleum consumption in the United States.

This number is calculated by dividing petroleum used for electricity generation by total petroleum consumption in the United States.

An RES is designed to change how we get our electricity. Changing our mix of electricity sources though isn’t going to have an impact on our dependence on foreign oil because we don’t use oil to produce electricity.

To put it simply: Any argument by legislators using national security as a basis for an RES either is designed to mislead people or is based on a woeful lack of knowledge regarding energy.

Conclusion

There was significant concern about a cap and trade bill, but that concern is not as evident when it comes to an RES. If the RES doesn’t receive more attention, Americans will find that after a long and apparently successful fight against a cap and trade energy tax, they will likely be forced to incur an energy tax through other means.

An RES is a combination of bad elements of a cap and trade bill and ObamaCare. It’s an energy tax. It ignores state rights and forces Americans to buy something they don’t want. Even worse, a federal RES would fundamentally alter the underlying principle that utilities should be focused on using the lowest cost and most reliable sources of electricity. Common-sense electricity policy would be destroyed in favor of environmental extremism and self-interested politicians.

———

Daren Bakst (J.D., LL.M.) is director of Legal and Regulatory Studies at the John Locke Foundation.

10 comments

1 Breaking Wind – Quick hits from the industry for October 13, 2010 « Allegheny Treasures { 10.13.10 at 8:15 am }

[...] Bingaman’s Renewable Energy Standard: Another Proposed Energy Tax – MasterResource [...]

2 Jon Boone { 10.13.10 at 9:39 am }

Good discussion of the general issue. Three observations, however.

About 80-90% of the mandated 11% RES sources would come from industrial wind. None of the stipulated “power” sources in this bill would be indexed to actually achieve reductions in fossil fuel usage or greenhouse gas emissions. The bill only requires them to be deployed. Given the additional thermal stress that wind volatility imposes, the irony is that the bill is likely to increase use of fossil fuels, which may be a good reason that Grassely and Bingaman, as well as so many other senators and congressmen, maintain support for the bill. Look for corporations like GE, FPL, AES, Siemens to support it as well.

As Kent Hawkins and others show, highly variable and uncontrollable technologies like wind must be accompanied by reliable conventional generation to maintain the continuous balance between supply and demand. This is hardly “backup” power, for it must proactively cover the entire range of the installed capacity from any wind project. In most areas of the country, coal units, not natural gas, will provide the compensation, as is the case in Texas and Colorado, particularly since wind activity is typically greatest at times of highest demand–the time when baseload coal plants are the primary and lowest cost supplier. Scroll over any state at this site to see the generation mix for each:http://www.instituteforenergyresearch.org/states. Note the percentage of coal used in Iowa, Michigan, Ohio, Tennessee, Kentucky. The entire PJM Interconnection, the nation’s largest grid, uses coal for over 50% of its generation. The Bentek report showed that even in Texas, where natural gas provides nearly 50% of that state’s electricity, it is coal, at 35%, that does much of the wind balancing.

Any price for wind in an effort to compare wind with high-capacity generation is the price for pixie dust. There can be no functional comparison.

This awful bill exemplifies the rot at the core of our political culture. It says one thing, but will achieve the exact opposite. In the process, it will regressively raise electricity costs and lower reliability and security. It will give the impression, through the dumbest. most pliant media in Christendom, that politicians and our regulatory agencies are taking bold and revolutionary action to challenge the energy status quo–when in fact they’re reinforcing it. The bill is a cynical exercise that combines equal parts ignorance and greed to scam an American public deemed too moronic to know otherwise.

People should be mad as hell. And stay that way through the November elections and beyond….

3 Tom Tanton { 10.13.10 at 10:36 am }

” One man’s ceiling is another man’s floor” With the inclusion of renewable energy credits (RECs or TRECs) the only difference between Cap and Trade and RES is whether the “number” set by bureacrats is a floor (in the RES) or a ceiling (as in Cap)
I wish the intruders would come up with something NEW, rather than just putting a different costume on the same tired nag. (with apologies to the Wringling Brothers’ family)

4 Congress Set to Raise Utility Rates for South Carolina Consumers? « The Palmetto Insider { 10.13.10 at 10:39 am }

[...] Daren Bakst, director of Legal and Regulatory Studies at the John Locke Foundation of North Carolina, discusses the federal legislation here. [...]

5 Nick Lobachevski { 10.14.10 at 7:09 am }

The threat of the RES actually suppresses energy efficiency. The RES-mandated improvements are measured against a baseline. So, to be sure that they can meet the mandates, energy producers (e.g., power companies) and large energy consumers (e.g., manufacturing) want the baseline to be low. So, they are in effect banking improvements for use if/when RES is implemented rather than implementing them now. They want to be sure they have the improvements needed to meet the mandates, and implementing improvements now would only raise the baseline against which the RES-mandated improvements would be measured. (And where in the Constitution is the national government given authority to set such limits, anyway? {And please do not answer the Commerce Clause.})

6 Clothcap { 10.15.10 at 6:42 am }

A good demonstration of commonsense Mr Bakst. Thanks.
Have I got this right?
A more realistic value for WE subsidy, the usable/used energy is around 8% of capacity (kent Hawkins). Being generous, production is around 30%. That means 3.75 times more per UoP (23.37×3.75=$87,6375) when production that is actually consumed is considered.

Gas produces ~50% less CO2 compared to coal. Do you have any idea what the CO2 emissions reduction would be if all the US coal burning plants were converted to or replaced with gas?

7 Alan F { 10.15.10 at 10:15 am }

Clothcap,

Do you have any idea what happens to the price of natural gas when its consumption goes up drastically? Any idea at all what happens in states which experience seasonal temperatures where fishing then requires an auger? There’s the rub when those in Florida and California give advice on energy. To them there exists only electricity and gasoline.

8 Clothcap { 10.15.10 at 3:23 pm }

Alan F, because of its availability and the “kill CO2″ nonsense the price is something like 50% of its realistic price in the absence of gov’t interference. Absent that and the price will float to what the mkt will pay versus availability.
The chance of its rapid rise in use is good and availability will rapidly increase if the misanthropics don’t stymie exploitation of the abundant reserves in shale both in Europe and in the American continent.
It really is a wind energy killer when everything is considered, the absence of WE’s (senseless) CO2 emission reductions, the increase in WE driven fosfuel consumption, especially once the next scam bites, CCS, 30% is a ballpark est. of the increase, the additional increase in energy bills to pay for the infrastructure to enable the square peg WE to fit, the spy meters and on and on and on.
I can live with a gas price hike if it kills the WE white elephant and gets energy policy out of the “renewables” quicksand fraud.

9 Clothcap { 10.15.10 at 5:39 pm }

Afterthought. Research shows that wind farms cause the local climate to cool in daylight and warm in moon light. A reduction in the difference between day and night temperatures. Isn’t that what they are supposed to be countering, i.e. CO2 is “supposed” to make evenings warmer?

10 Cooler Heads Digest 15 October 2010 | GlobalWarming.org { 12.27.10 at 11:14 am }

[...] Another Proposed Energy Tax Daren Bakst, MasterResource.org, 13 October 2010 [...]

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