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Ending Windpower Subsidies for Deficit Reduction (failed promises have consequences)

“The interventionist in advocating additional public expenditure is not aware of the fact that the funds available are limited. He does not realize that increasing expenditure in one department enjoins restricting it in other departments. In his opinion there is plenty of money available. The income and wealth of the rich can be freely tapped…. It never occurs to him [think Obama] that grave arguments could be advanced in favor of restricting public spending and lowering the burden of taxation. The champions of cuts in the budget are in his eyes merely the defenders of the manifestly unfair class interests of the rich.”

- Ludwig von Mises, Human Action: A Treatise on Economics (1949), 1966, pp. 856–57.

“This is where we stand in our current debt ceiling debate. Government is too big, too bloated. Washington faces a spending problem, not a revenue problem.  But too many within the economy depend on the government transfers to live and to work. Yet the economy is not growing at a rate that can afford the illusion. Where are we to go from here?”

- Peter Boettke, “Why The Great Stagnation Thesis is the Most Subversive Libertarian Argument of Our Age,” July 15, 2011.

Energy subsidies are now on the table in the debt-ceiling debate now raging before Congress. But a macro approach needs to be taken to encompass subsidies in the electric generation market (wind and solar in particular), not only in the transportation fuels (oil and ethanol).

Background

Congressional lawmakers interested in budget reduction have set their sights on eliminating ethanol subsidies and oil and gas tax breaks. But renewable energy subsidies–the holly grail of Big Environmentalism and the Obama Administration–are also under pressure.

Earlier this year, the Department of Energy’s Section 1705 loan guarantee was cut. The popular Section 1603 cash grant program created under ARRA is expected to expire later this year. And some industry insiders indicate the federal production tax credit, in effect since passage of the Energy Act of 1992, will be allowed to sunset at the end of 2012.

Indeed, the moment has come to consider eliminating all of the energy subsidies–simultaneously–to let the natural economics of a freer market prevail.

Consumer-driven energy decisions will create winners and losers, for sure. That is the creative destruction of the marketplace. The public is far better served when industries compete for market share and profits rather than fight for political favoritism and handouts.

Windpower: A Trail of Broken Promises

The U.S. wind market, which has relied on public funding since its inception in the 1970s, has a long trail of false expectations and broken promises.

The history of governmental handouts to the wind industry dates to the Carter Administration. Billions in public dollars have poured into this industry since, and more is obligated per year for the next decade.

Wind proponents have again and again touted their technology’s coming viability. For example, Chris Flavin of the Worldwatch Institute said back in the 1984: “”Tax credits have been essential to the economic viability of wind farms so far, but will not be needed within a few years.” (2) More such promises have been made over the decades.

Yet for all the promises made, we have little to show for the money spent.  Consider these points:

Promise #1: Meeting U.S. Electricity Needs.

A 1976 study by the Department of Energy estimated that wind power could supply nearly 20% of all U.S. electricity by 1995. By the end of 1995, wind represented only one-tenth of 1% of the U.S. market. Today, wind delivers about 2% of the U.S. electricity market, and only because of mandates (such as in Texas) and very generous subsidies.

DOE now claims we will reach 20% wind power by 2030. Moving the goalpost does not address the logistical and cost barriers to reaching the 20% goal. These barriers are significant and it’s time DOE considers the realities of what a 20% wind world would look like. It’s very unlikely that anything near this scenario will ever be realized.

Promise #2: Reducing Cost.

In the mid-1980′s wind power sold at around 25 cents per kilowatt hour. By 1995 prices dropped dramatically but were still double the cost of gas-fired generation, even after allowing for the production tax credit (1.5 cents per kwh in 1995). Today, wind pricing is even higher, despite continued federal support (figure 22, 2010 Annual Wind Market Report). Promises of technology improvements that could drive down costs have not translated into energy price improvements.

Wind’s intermittency still means that high upfront capital costs are spread over fewer hours of operation which places upward pressure on the price of the energy sold. Cost pressures are also tied to policies on renewables.

Aggressive renewable policies have placed developers in strong negotiating positions relative to energy buyers. They know full well that state regulators will approve their pricing demands and pass through the higher costs to ratepayers (footnote 50, 2010 Annual Wind Market Report). And with power purchase agreements now a requirement in order to attract investor financing, above-market energy prices are locked in for extended terms ranging between 10-20 years.

Promise #3: Improved Performance.

In 1994, ninety percent of the U.S. wind energy capacity was located in the State of California and operated at a 24% annual average capacity factor. In 2010, the capacity-weighted average capacity factor for Californian projects in 2010 was only 27.2%. In most regions of the US, wind operated at under 30% capacity factor. New York State wind performed at 22.7% last year. While newer technology has resulted in modest production improvements, U.S. wind has failed to meet the promised 35% capacity factor

Promise #4: Jobs creation.

Over 80 percent of the nearly $6 billion in Section 1603 grants paid out in 2009 and 2010 went to wind energy projects. Yet by the end of 2010, the American Wind Energy Association reported jobs declined from 85,000 to 75,000. When installations dropped in 2010, it was no surprise that jobs dropped as well. And since growing the manufacturing base is predicated on installing more wind turbines it’s hard to see where job growth is sustainable.

The Perpetual ‘Infant Industry’

In his 1997 touchstone piece, Renewable Energy: Not Cheap, Not ‘Green’,” Robert Bradley wrote: “Wind power has proven itself to be a perpetual ‘infant industry’ with its competitive viability always somewhere on the horizon.”

What caught Bradley’s eye was quotations such as this one from the American Wind Energy Association et al. from 1983:

“The private sector can be expected to develop improved solar and wind technologies which will begin to become competitive and self-supporting on a national level by the end of the decade if assisted by tax credits and augmented by federally sponsored R&D.” (1)

This week, GE’s ecomagination vice president Mark Vachon stated the troubling truth about windpower:

“Without clean-energy mandates or tax subsidies, wind struggles to compete with cheap natural gas. And there’s uncertainty about those subsidies, particularly in the U.S. where Congress is looking to manage budget deficits.”

The American Wind Energy Association insists wind is now a mainstream energy resource but blames the 50 percent drop in U.S. installations between 2009 and 2010 on a lack of long-term, predictable federal policies.

After 30 years of paying the way for this infant industry, apparently the public has still not done enough to create a market for its product! It is time to cease enabling and send the wind industry into rehab.

Call to Action

Energy realists, taxpayers, and true environmentalists should be heard on the wind power (and solar power) issue. Remind your representatives that wind energy has yet to deliver on any of its promises. And history has shown we have no reason to believe things will change.

Eliminate all wind energy subsidies as part of the debt ceiling compromise. Let’s finally move on to energy solutions that can deliver on their promise.

—————————————–

(1) Quoted in Renewable Energy Industry, Joint Hearing before the Subcommittees of the Committee on Energy and Commerce et al., House of Representatives, 98th Cong., 1st sess. (Washington, D.C.: Government Printing Office, 1983), p. 52. (Booz, Allen & Hamilton study for the Solar Energy Industries Association, American Wind Energy Association, and Renewable Energy Institute.)

(2) Christopher Flavin, “Electricity’s Future: The Shift to Efficiency and Small-Scale Power,” Worldwatch Paper 61, Worldwatch Institute, November 1984, p. 35.

18 comments

1 Duggan Flanakin { 07.21.11 at 1:54 am }

Even the radicals know wind is nonsense. In “Deep Green Resistance,” Lierre Keith (p. 201) condemns Lester Brown for making wind energy the centerpiece of his Plan B. She notes that wind will at best be able to provide “a rather small fraction” of electricity demand, and even worse, when winds are high, most of the power generated has to be kept out of the grid to keep the system from frying. In Denmark, for example, only 4% of wind power generated goes to the Danish grid. Solar is even worse, requiring lengrthy transmission lines that ruin efficiencies. As a person whose goal is the destruction of civilization and the end even of agriculture, Keith states that the costs of renewable energy are so high they would lead to the collapse of the traditional economy.

2 john { 07.21.11 at 7:08 am }

Bravo!

3 Jon Boone { 07.21.11 at 9:01 am }

Brava!
Another well-reasoned presentation from Lisa Linowes. Her arguments are solid. Perhaps this is the year when the leadership both in the Administration and in Congress will stop pooling nonsense into the tax code, aggregating pretenders along with the real performers to appease lobbyists. Perhaps this is the year when these politicians consider the implications behind the idea it’s “only money” they’ve been spending–the taypayers’ money–and the well has finally dried up. Perhaps this is the year when the many ratholes forged from government largesse–ethanol, wind, solar, clean coal, carbon capture–are finally exposed and closed off.

Good articles like this make such a dream more likely to become reality.

4 Ray { 07.21.11 at 1:46 pm }

Have you noticed that the enviros are always enamored with old technology like trains, bicycles, electric cars and windmills? They always claim this old technology is the technology of the future. The electric car has been the technology of the future since Baker came out with his electric car a century ago.

5 Mark Heslep { 07.21.11 at 3:37 pm }

Hayek seems right to me on this (and on most things). I agree w/ the elimination of subsidies (slowly) for wind. However, if the author truly takes Hayek at his word, why waste time with the relative pittance of a tax break given to wind and say not a word about the subsidies given to fossil fuels and nuclear, at the rate of many billions per year and totaling now over time a trillion or more dollars?

6 Ed Reid { 07.21.11 at 4:28 pm }

Mark,

The subsidies to fossil fuels and nuclear are minuscule, relative to the quantities of energy they provide, compared to the subsidies provided for solar and wind. They are also minuscule relative to the taxes paid by the suppliers.

I am with you on eliminating subsidies totally, though I would favor just pulling the plug on all of them at the same time, quickly.

7 Jon Boone { 07.21.11 at 5:14 pm }

Mark:
I know you’re incorrect about the amount of subsidy provided to fossil fuels and nuclear. They have amounted over the years to more than that given to wind and solar in the aggregate. But not on a per kWh production basis, where wind and solar are given 26 times the subsidy as fossil fuels and 16 times the subsidy as nuclear.

But all of this would be a bagatelle if wind and solar provided substantial capacity–on a par with fossil fuels and nuclear. Which is why subsidy to the latter makes sense–while subsidy to the former makes for–well–nonsense, since they provide for nothing and very little respectively. You might read this commentary by Chris Horner to see how wind subsidy now surprises that of ethanol: http://biggovernment.com/chorner/2011/03/07/meet-the-new-ethanol-wind-blows-past-corn-as-subsidy-king-no-end-in-sight/. This is hardly a “relative pittance.”

As I read Lisa’s take on this, she’s calling for an end to subsidies both for conventionals and so-called renewables. And her other point is rock solid: Wind is hardly the baby that is getting thrown out with the bath water….

We surely agree regarding the wisdom of Hayek.

8 Mark Heslep { 07.21.11 at 5:30 pm }

Ed,

We’re agreed that the lot should go. Yes I am aware of the relative quantities of energy per tax dollar, but raising that issue in defense means one ignores Hayek’s thesis which rejects the dollars per ‘good we can do’ argument, for whatever purpose. Put another way, the moment one embarks on that kind of calculation as a defense of a preferred program or section of the economy, he necessarily joins ranks with the central planners.

Also, the relevant issue from only my wallet’s perspective is total taxes taken from within. In that context fossil and nuclear is a far greater burden. In the larger scope of the current US fiscal crisis, fossil and nuclear contribute far more to the deficit than wind’s PTC.

9 Mark Heslep { 07.21.11 at 5:35 pm }

Jon –

I wasn’t referring to dollars per energy produced but total dollars.

And as soon as anyone states “…subsidy to the latter makes sense”, regardless of the cause, then they necessarily have either misunderstood Hayek or chosen to reject him.

10 Jon Boone { 07.21.11 at 6:34 pm }

Mark:
I didn’t mean to imply subsidy to productive power was Hayekian. But rather, that it had a rational basis–encouraging firm capacity, which is the foundation for having a large reliable, secure, affordable electricity supply. Whether such encouragement is necessary, given the importance of electricity to modern society, is questionable, as you imply. Cheers! Jon

11 Power Engineer { 07.21.11 at 6:48 pm }

I understand that the wind subsidy has significantly increased. It’s now a 30% investment tax credit like solar. Taking the average of onshore/offshore that’s a federal subsidy of 50$/MWH times 4 billion MWH per year times 20% renewables for an annualized subsidy of $80 B per year.

But this is just the beginning as the state subsidies are another $80B per year. And state solar subsides are about 7-10 times larger per MWH.

States seem to be avoiding cutting programs that involve large federal subsidies as they want to get all that “free” money. Instead they should be targeting these programs as the need for both state and federal subsidies indicates an economic boondoggle.

Anther example is the high speed rail. Connecticut recently cut existing train service while it persists in building billion dollar high speed upgrades to existing rail service that doesn’t make economic or transportation sense.

12 john { 07.21.11 at 6:50 pm }

Here is a project that has wind links (ownership).

http://bangordailynews.com/2011/07/18/business/maine-tidal-firm-partners-with-canadian-company/

[snip]

The Canadian project is getting assistance from the government of Nova Scotia, which has established a special rate of 65.2 cents per kilowatt hour for tidal power to be paid by utilities to promote community-based tidal energy projects. The so-called feed-in tariff is about six times higher than the typical rate for electricity.

13 john { 07.21.11 at 8:58 pm }
14 Brad Blake { 07.21.11 at 10:18 pm }

I have always been fiscally conservative. So when it comes to trying to gain control of spending and start to make a dent on the vast national debt, all energy subsidies should be cut. Let the market decide sources of electricity generation and prices. Encourage innovation through the consumer market. I guarantee if all energy subsidies were cut, only energy dense sources of electricity generation will remain. There won’t be a wind turbine or solar array built anywhere until (or if) the economics of these sources of electricity generation can become competetive in the unsubsidized—and unmandated—consumer market.

15 Wind powered deficit reduction | JunkScience Sidebar { 07.21.11 at 11:53 pm }

[...] Ending Windpower Subsidies for Deficit Reduction (failed promises have consequences) Lisa Linowes “The interventionist in advocating additional public expenditure is not aware of the fact that the funds available are limited. He does not realize that increasing expenditure in one department enjoins restricting it in other departments. In his opinion there is plenty of money available. The income and wealth of the rich can be freely tapped…. It never occurs to him [think Obama] that grave arguments could be advanced in favor of restricting public spending and lowering the burden of taxation. The champions of cuts in the budget are in his eyes merely the defenders of the manifestly unfair class interests of the rich.” [...]

16 Mark Heslep { 07.22.11 at 10:20 am }

Brad –
How does one address the external factors in the laissez faire scenario? Absent a good answer my default is to still go with laissez faire, but I’m still mindful of all the SOX, NOX, mercury and radioactivity going up the stack of the local coal plant. One hundred and seventy years ago one could (and did) find a remedy in the courts when a passing belching locomotive set fire to your barn or blackened the laundry, but no more. So what now?

17 Mark Heslep { 07.22.11 at 1:15 pm }

PowerEngineer –

Perhaps you were attempting to forecast far into the future? Otherwise your annual wind – electric energy figure is far off. The 2010 figure for the ~41GW (peak) wind installed in the US was 100 *million* MWH at most, not billion, making the subsidy, if your other figures are correct, $5B.

18 Kansas and Wichita quick takes: Tuesday August 16, 2011 { 06.24.12 at 11:52 am }

[...] market is a key component accomplishing that.” Contrary to the governor’s rosy picture, Lisa Linowes details the long string of failures of the wind power industry, including the fact that wind power is becoming more expensive, despite its massive federal [...]

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