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The Case Against Section 1603 Grants ($5 billion easy pieces)

Congress is rightfully concerned about closing the huge, systemic budget deficit. In this climate, eliminating Section 1603 grants for politically correct renewable energy should be considered an easy target.

By way of background, this particular subsidy came about due to persistent pressure from lobbying groups like American Wind Energy Association (AWEA). Their main argument is that these grants will promote jobs and economic benefits. Of course, as lobbyists this is what they are paid to say. But in these times of more focused financial prudence, we need to critically look at such expenditures in a more objective light — especially since we are talking about some five billion dollars.

The 1603 Grants should be cancelled entirely. In my view the best way to see how ineffective these expenditures are is to consider what the alternatives are for this same money. In other words, if the U.S. Congress wants to subsidize the energy business (a matter that is beyond the realm of these brief comments), then the real question is: Are 1603 Grants the most effective way to do this? If not, then they should be defunded.

Claim One: Jobs

1) If the Five Billion was spent on other, more reliable forms of energy (e.g. gas, nuclear or geothermal) it is very likely that MORE jobs would be created.

2) Numerous independent reports have concluded that the cost per job that these and similar grants generate is VERY high.

3) Some independent studies have concluded that when we look at the big picture, that there is actually a net job LOSS from subsidizing renewables. One of the key reasons for this is that the electricity produced by renewables is higher than our conventional sources, which leads to business and consumer cut backs. There is no such job loss for building economic forms of power generation; quite the opposite.

4) Some independent studies have shown that many of the jobs created when supporting renewable energy are actually foreign jobs. Is that a good use of our limited funds?

Claim Two: Economic Development

The fact is that if this same money went to fund reliable, clean, sustainable energy like nuclear power, that there would be just as much (if not more) economic development that will result. A particular area of importance is mini-nuclear. Providing political and economic support for that one area would be a game-changer in the energy business and have profoundly beneficial economic results for the US. We need to be the leader in this technology of tomorrow. (See here for more info.) There is also merit to supporting industrial geothermal. This could provide reliable 24/7/365 energy (which wind and solar do not) and be a sustainable, CO2 free source of electricity. An MIT study also concluded that it would be economical.

Claim Three: ‘Energy Independence’

Funding wind energy with 1603 Grants does nothing for energy independence which is really about oil imports and transportation fuel, not electricity generation.

Also consider the fact that in every wind turbine there is something like 4,000 pounds of rare earth elements. China produces 95± percent of these rare earth elements, so the more turbines we buy, the more dependent we are on the China–hardly a good or “sustainable” energy-related strategy.

Claim Four: CO2 Reduction

Despite all the claims of the wind lobbyists there is zero independent scientific proof that wind energy makes a consequential reduction in CO2.

One reason is that there is no such thing as wind generation by itself. Wind must ALWAYS be augmented by a conventional source of power, usually by a low-cost but low-efficiency version of gas turbines. Thus the net CO2 savings of this combination are very low — significantly less than would be attained by the same amount nuclear or geothermal capacity.

Mini-nuclear and geothermal are stand-alone power sources, in contrast, and produce no CO2.

Claim Five: Handouts Needed

Wind lobbyists are always pleading poverty, which is also what they are paid to do. The fact is that wind energy development is one of the most profitable businesses in the country. T. Boone Pickens stated that as a wind developer, he expected to make at least 25% ROI per year! Why do we need to subsidize such a lucrative business?

Additionally the OMB and Treasury found severe problems with “the economic integrity of government support for renewables.” Such an assessment should give Congress severe pause for continuing such handouts when sooner or later, the bubble industry will pop.

Summary

When all is said and done, Section 1603 Grants (and other such nostrums) support a high-cost, low-benefit sources of energy. Clearly resources can be spent better from any political perspective. The Right can say that the resources belong in the private sector for better deployment. The Left can chose human-need budget items over aiding rent-seeking corporations.

We should focus on solutions that have a genuine scientific assessment (i.e. technical, economic and environmental) that prove that they are cost beneficial. No such assessment exists for industrial wind and off-grid solar projects that are government dependent.

Afternote: Here is a new report about the record profits of Spanish wind company Iberdrola. The statement is made: ”The Group has benefited from more than $1 billion in U.S. government incentives for wind power, the largest obtained to date by any renewables company.” So why are we borrowing a Billion dollars from China to enrich the coffers of this very profitable foreign company? What am I missing?

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Note: This brief introduction can be supplemented by this blog on windpower: http://tinyurl.com/343wrzv.

23 comments

1 Droz: The Case Against Section 1603 Grants « Corporate Energy Subsidies { 02.28.11 at 2:16 am }

[...] Section 1603 grants for politically correct renewable energy should be considered an easy target. John Droz Jr., MasterResource LikeBe the first to like this [...]

2 uvdiv { 02.28.11 at 5:44 am }

For a self-styled “free-market” blog, it’s astonishing to see so little respect for the essentials of free markets. What are all these anti-market boogeymen doing here, these strange notions of “energy independence” (trade is bad?), “foreign jobs” (trade is bad?), “job creation” (socialism is good?), corporate subsidies (but only for what we like, which is mini-nuclear and geothermal?).

“Also consider the fact that in every wind turbine there is something like 4,000 pounds of rare earth elements. China produces 95± percent of these rare earth elements, so the more turbines we buy, the more dependent we are on the China–hardly a good or “sustainable” energy-related strategy.”

What’s wrong with trading with China? Particularly with importing a product subsidized by the Chinese government, essentially giving free money to American purchasers?

You tickle dragons when you fight with the economic force that led to that 95% figure. The world chooses Chinese rare earths because they are cheap and subsidized (the externalities in health and pollution, sadly, are another matter). If the US gets lanthanides from China — and not, say, California, which at one time was the world’s leading rare earth producer — it’s because it makes economic sense, and your silly calls for protectionism do not.

Now if China moved to block rare earth exports (as they seem to be doing already), and if crazy California bureaucrats got their grubby hands away from Mountain Pass mine, then we’d get our rare earths from California. There are good arguments against wind turbines, and rare earths are not one of them. Rare earths are no more “dependent” on Chinese mining then, say, US oil consumption is “dependent” on OPEC, or nuclear fuel is “dependent” on decommissioned Russian warheads. To argue so is to conflate availability with short-term economic advantage. And the protectionist calls for forcing long-term national self-sufficiency, at the expense of economic advantage, are economically destructive.

3 rbradley { 02.28.11 at 9:36 am }

UVDIV:

MasterResource does allow ‘fellow travelers’ to join us with posts.

Perhaps the takeaway from Droz’s argument is that from the viewpoint of our energy planners, their solution has its own problems. In other words, there is a fundamental contradiction in the statist argument for ‘energy independence’ when it comes to windpower.

This said, it is very helpful to have comments like yours to make the free market position clear. Thank you.

4 uvdiv { 02.28.11 at 10:11 am }

My mistake: I didn’t realize the author was a guest commenter.

Perhaps the takeaway from Droz’s argument is that from the viewpoint of our energy planners, their solution has its own problems. In other words, there is a fundamental contradiction in the statist argument for ‘energy independence’ when it comes to windpower.

I would dispute that. There’s “rare” earths everywhere on earth, and particularly massive and concentrated deposits in parts of the US. If the green-energy interests want to argue for “energy independence”, they could do so consistently: e.g. advocating for tariffs against Chinese metals, subsidies for Molycorp, “buy American” regulations, etc.

In the news:

Today, that mine, chock-full of so-called rare-earth metals, is responsible for one of the fastest windfalls in private-equity history: Turning $200 million into a paper profit of about $2.3 billion in just 30 months, or roughly $2.6 million in profit each day.

http://online.wsj.com/article/SB10001424052748704071304576160753303293530.html

5 Jon Boone { 02.28.11 at 10:37 am }

uvdiv:
The silliness of national energy independence and the problematic nature of economic protectionism, both historically and on the contemporary front, give ballast to your general proposition. Much cheaper Chinese labor, combined with virtually no environmental regulations on the strip mining of Chinese rare earths, tilt the playing field for the acquisition of lanthanides decidedly toward that nation’s corner. Despite much huffing and puffing about rare earth mining operations in the US, not much is likely to come of it, if only because environmental regulatory restrictions would increase cost rather substantially–which would make it much less competitive with lanthanides produced in China. So, yes, the world will continue to beat a path to China’s door for rare earths.

Although the general logic of this is undeniable, there is wholesale daffiness injected into the situation when discussing the situation vis a vis wind and solar, particularly the former. The idea that China might hold the wind industry hostage to rare earths is a Mouse That Roared circumstance that deserves the comedic touch of Peter Sellers. Evidently, the Chinese are only too willing to play along with, and profit handsomely from, the West’s penchant for subsidizing dysfunctional technologies, giving preferential access to rare earths to those companies that agree to build wind manufacturing plants in China–and using the monies that flow from Section 1603 grants to do so. What is particularly galling, as John Droz points out, is that most of the jobs created in this transaction will be for Chinese workers–not for workers in the US, as mendaciously claimed by wind trade organizations.

What Mr. Droz did not mention is that, over the long haul, wind projects with a capital cost of a billion dollars, say, would likely employ less than a hundred full time workers in this country, many of them at or only slightly above a minimum wage level, maintaining equipment for perhaps ten or fifteen years.

The cynicism involved with using billions of US Treasury treasure to conduct robust trade with China–or any nation–to promote energy ideology and not functional power capacity should be exposed for the perfidy it is, as Droz has done here.

6 uvdiv { 02.28.11 at 1:48 pm }

So, yes, the world will continue to beat a path to China’s door for rare earths.

See the WSJ article I mentioned. China is restricting exports of rare earths (I think redirecting them to domestic manufacturers, as a form of protectionism), so the world probably won’t have a choice. At least the market thinks that, if Molycorp stock (owns Mountain Pass mine in the US) is an indicator. Or rare earth prices themselves.

What Mr. Droz did not mention is that, over the long haul, wind projects with a capital cost of a billion dollars, say, would likely employ less than a hundred full time workers in this country, many of them at or only slightly above a minimum wage level, maintaining equipment for perhaps ten or fifteen years.

I don’t understand this argument. Jobs are a cost, not a value. People don’t want to perform labor for its own sake; they have to be paid to work. The reason anyone works at all is it because it is useful, it creates value.

More productive work means more value for the effort. A energy source which could “create five times more jobs” per kWh is an inferior source which is five times more laborious to obtain. (This is obvious on a micro scale — would you rather chop wood with axe, or a pocket knife — but apparently not on a social scale). It has five times the labor cost; or on the flip, each worker’s labor is worth 1/5th as much. Which would mean (naively) they could negotiate 1/5th the salary, or (more realistically) they would not be employed. And if government fiat makes one pay another full salary for only 1/5th the productivity, then you’re 4/5th of the way towards Bastiat’s “digging ditches and filling them back in”. (My take on that: it’s probably more efficient to simply pay people not to work; there’s less overhead).

So I don’t accept the premise of this argument. If wind turbines “create” fewer job-hours per kWh (which I highly doubt), then they would be more labor-efficient, hence superior.

7 uvdiv { 02.28.11 at 1:54 pm }

(I neglected a key conclusion of my argument: less-productive labor means, on the whole, everyone is collectively poorer. Instead of doing more-useful things, people do less-useful things, and in the end less gets done.)

8 Jon Boone { 02.28.11 at 2:33 pm }

uvdiv:
Your arguments simply slide downhill. The WSJ article is late to the issue of US lanthanide resources. Time will tell if this latest public birth announcement about their abundance will eventuate in no public notices of their obituaries. Which has been the case for decades. There are also a trillion dollars worth of diamonds embedded in the earth’s crust. But it would take more than a trillion to extract them. How much more would you pay for US-mined molybenum than for a much lower priced Chinese brand? Maybe Molycorp will be able to successfully lobby Congress for price supports to create yet another level playing field–at which point look for Indonesian rare earths to enter the fray….

The issue on Section 1603 grants on jobs shouldn’t concern your labor theory of value. Rather, it should attempt to track the number of US jobs those grants produce. If most of jobs are produced in China, then what’s the point? You might explain that to the jobless here.

Regarding jobs per kWh for wind compared to those for capacity generating systems, I suggest you put your shoulder to the wheel in search of facts. Start with coal and work your way through to natural gas and up through hydro and nuclear….

9 uvdiv { 02.28.11 at 2:38 pm }

The issue on Section 1603 grants on jobs shouldn’t concern your labor theory of value.

I did not argue for a labor theory of value. Please do not misrepresent me like this.

10 Jon Boone { 02.28.11 at 2:58 pm }

I know, uvdiv–I was being perhaps too coy. Still, I was hoping to communicate a larger point.

11 Richard Haydn { 02.28.11 at 6:06 pm }

“T. Boone Pickens stated that as a wind developer, he expected to make at least 25% ROI per year! Why do we need to subsidize such a lucrative business?”

What ever happened to T. Boone’s big wind project? We listened to a presentation by a regional “wind power” business group to get our products on the turbine vendor list. The next week T. Boone bowed out. Since they indicated Mr. Pickens already had a large number of turbines under construction . . . . did he sell them on Ebay?

12 Tom Stacy { 03.01.11 at 1:18 pm }

I have long felt that the rare earths argument was distracting silliness, but what strikes me as most odd about this series of comments is that both Boone and uvdiv appear to think “more direct jobs” resulting from any generation project is something worth selling.

The first quandary I sense, and as Rube Goldberg might point out, competitive businesses should not (and do not) try to maximize the number of people they employ. Job growth is a byproduct of filling needs effectively – not an end in itself.

Second, jobs need to be bench marked against something. In this case, I argue that contribution to peaking capacity is the most valid benchmark (since this is the highest cost part of our electric supply) – so MINIMIZING expenses (including wages, salaries and benefits) per unit if contribution to peaking capacity should be the internal goal of an “electricity production company.” Then any government incentive should be congruent, not contradictory to that natural competitive business goal. Remember – filling needs more effectively increases market share and then results in job growth. The cycle does not work in reverse order.

As renewables PTC morphed into ITC and on into the 1603 grant, the lieage of incentives strayed further and further from the subsidy goal: keeping electricity rates in the US as competitive and stable as possible over the medium and long term.

The question remains, though, how to let markets work in the realm of utilities with their capital intensities, long build cycles, and prospect of oversupply making investment too risky without some regulated, guaranteed market and profit for those in a position to capitalize large generation projects.

13 Jon Boone { 03.01.11 at 1:44 pm }

Mr. Stacy:
How anyone could infer from my comments here that I think “‘more direct jobs”‘ resulting from any generation project is (sic) worth selling.”What in fact I am doing is taking on, in the spirit that John Droz has done in this article, the notion that a mainline justification for Section 1603 grants was as a stimulus for creating new jobs in the United States. And only in this narrow and worm-holed sense. Using energy policy as a means to create jobs is fraught with nonsense, and should be exposed as such, which is easy to do but not within the scope of this argument. It is even more egregious in the sense I discuss, because I believe most of any jobs this benighted handout will stimulate will be those in China.

I submit that no one has done more to argue the need for capacity generation as the sine qua non of an electricity policy serving the entwined goals of high reliability, security, and affordability.

14 Tom Stacy { 03.01.11 at 3:28 pm }

Sorry, Jon. I mistakenly attributed this passage to you: ” If the Five Billion was spent on other, more reliable forms of energy (e.g. gas, nuclear or geothermal) it is very likely that MORE jobs would be created “

15 uvdiv { 03.02.11 at 4:23 pm }

Tom Stacy –

but what strikes me as most odd about this series of comments is that both Boone and uvdiv appear to think “more direct jobs” resulting from any generation project is something worth selling.

But I argued precisely the opposite!

Job growth is a byproduct of filling needs effectively – not an end in itself.

That’s just what I wrote: “Jobs are a cost, not a value. …More productive work means more value for the effort. A energy source which could “create five times more jobs” per kWh is an inferior source which is five times more laborious to obtain.” (#6)

I agree with your point: all the discussion about “creating green jobs” (millions of them, according to CAP and friends) is a bizarre rationalization for economic inefficiency.

16 John Droz { 03.02.11 at 5:09 pm }

Reading through the comments I’m sure I could have done a better job at communicating. I was NOT saying to do something just because more jobs would result.

From what little I know, the government doesn’t decide that they have X energy dollars and then give it out.

My understanding (hope) is that they start with identifying that a certain amount of electrical capactity is needed. Let’s keep it simple and say 1GW.

So the choices would be: 1) wind + low efficency gas, 2) conventional nuclear, 3) mini-nuclear, 4) industrial geothermal, 5) high efficiency gas, 6) whatever.

Sooo each of those choices should be looked at regarding technical, economic and environmental considerations. For example: how do the resulting number of jobs compare for each 1 GW of capacity? How much CO2 is saved for each? etc.

My point was that in doing such a comparison, wind+ low efficency gas is at or near the bottom every time.

Considering that, why do subsidies of any kind (esp 1603 Grants) make sense?

17 Some Energy and Environmental News-3/4/11 « PA Pundits – International { 03.05.11 at 6:29 am }

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