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Category — Fisher, Travis

Wind Power Unclothed: ‘Economics in One Lesson’ Applied (Hazlitt in 1946 versus AWEA today)

“Economics is haunted by more fallacies than any other study known to man. This is no accident. The inherent difficulties of the subject would be great enough in any case, but they are multiplied a thousand fold by a factor that is insignificant in, say, physics, mathematics or medicine – the special pleading of selfish interests.”

- Henry Hazlitt, Economics in One Lesson (1946)

A year ago, the American Wind Energy Association (AWEA) was desperately fighting against the scheduled expiration of its most prized federal subsidy, the wind production tax credit (PTC). As I wrote at that time, AWEA’s argument–please government, keep our activity going for job creation and other economic gain–rested on a basic, long-debunked fallacy of economics.

AWEA believes that wind’s ”is” equals ”ought”–that recorded activity is a per se good. But there is an opportunity cost of action–what is not seen but known to exist from the economic law of scarcity.

Wind interests conclude that resources expended by them come from thin air rather than from the productive sector (taxpayers, ratepayers). Resources that do not go to wind, in other words, are resources lost to the economy as a whole.

This is wrong. A free-market redirection of resources away from wind power would free land, labor, and capital (the factors of production) for goods and services as determined by consumers, not government. [Read more →]

December 16, 2013   3 Comments

FERC’s Wellinghoff: An Energy Technocrat Steps Down

“It is difficult to overestimate Jon [Wellinghoff]‘s impact on the electricity industry in recent years — or for that matter in the years to come.”

-Dan Delurey, Executive Director of the Association for Demand Response and Smart Grid

As the administrative head of an agency with approximately 1,500 employees and a $300+ million budget, the Chairman of the Federal Energy Regulatory Commission (FERC) sets the priorities of an otherwise fairly independent agency. [1] Current Chairman Jon Wellinghoff recently informed the Obama administration he would not seek an additional term, ending a seven-year stay as Commissioner (2006–09) and as Chairman (2009–2013).

Wellinghoff was appointed a FERC Commissioner in 2006 by President Bush, largely on the support of Harry Reid, his fellow Nevadan and ally in the Senate. With Reid’s continued support and a staunchly pro-renewable record at FERC, Wellinghoff was promoted by President Obama from Commissioner to FERC Chairman in 2009.

Throughout his FERC career, as in his earlier career, Wellinghoff consistently advocated for more demand response and more renewable energy investment, including a new influx of transmission projects largely devoted to integrating wind projects.

Unfortunately, his futurist predictions about an inevitable and necessary “green” transition and his technocratic plans to effect such a change are misguided. He also stands as a key example of how the Obama administration has attempted sweeping policy shifts without legislative help by channeling efforts through federal agencies. For better or worse, the FERC Chairman does wield power, and Wellinghoff has not wielded it well.

[Read more →]

June 17, 2013   4 Comments

FERC Order 1000: Cost Socialization for ‘Green’ Energy (NRDC, AWEA Rejoice)

“Regular people only need to understand that this is likely the most progressive clean energy action the federal government will take this year.”Center for American Progress

The Federal Energy Regulatory Commission (FERC) is capable of making bold moves under the radar. Last year it imposed a $245 million sanction on a major utility without too much fuss. Beginning this year, as part of a landmark rulemaking called Order No. 1000, FERC will be lending a multi-billion-dollar hand to large wind developers.

Overview

According to FERC, “Order No. 1000 is a Final Rule that reforms the Commission’s electric transmission planning and cost allocation requirements for public utility transmission providers.”

At the risk of oversimplifying a 600+ page document, Order No. 1000 essentially adds a requirement that (1) transmission providers consider new projects driven by state and federal “public policy,” and (2) planning regions do away with “participant funding,” at least at the regional and inter-regional level, which means that transmission costs must be allocated over a broad region. There was also a third major requirement (that transmission providers remove language regarding the “right of first refusal” from their tariffs), but let’s save that for another day.

If the combination of (1) and (2) above sounds like a rent-seeker’s dream, then kudos for seeing through the jargon. To put it differently, regional electricity transmission plans must take state and federal public policies into account, no matter how costly or ineffective they are (think renewable energy mandates).

Then the costs of the transmission lines built according to those plans are socialized. How great is that if you’re a large wind developer? States mandate that their citizens buy your intermittent power, and then a regulatory agency helps you spread one of your biggest costs far and wide, across state lines and to countless unaware consumers. [Read more →]

April 8, 2013   12 Comments

The Light Brigade: Confronting the Anti-Energy, Pro-Blackout Rally in DC

“We love energy with conviction, while they hate it with confusion.”

- Alex Epstein

On Sunday, February 17th, 350.org and the Sierra Club hosted the “Forward on Climate” rally on the National Mall in Washington D.C. It was billed as thelargest climate rally in history.” Just like the anti-Keystone XL rally in 2011, protesters pushed the Obama administration to continue to block the Keystone XL pipeline, which would bring crude oil from Alberta, Canada, to U.S. refineries.

But unlike the 2011 rally, Sunday’s protesters were challenged by Alex Epstein and his Light Brigade, an “educational counter-protest” whose members wore bright yellow t-shirts and shared their sincere appreciation for life-giving energy. I am proud to say I was part of that group.

Alex et al. did a great job of explaining to an adamantly anti-oil crowd just how much better their lives are because of oil. It was interesting to watch people realize that their whole day was predicated on oil – the polyester clothes they were wearing, the ibuprofen they took that morning, the computer chips in their phones, their plastic water bottles, the synthetic rubber in their shoes, not to mention the gas in the cars they drove to get there (even an abridged list is mind-boggling).

However, one key point that unfortunately never sank in with anyone we talked to is that the climate has become dramatically safer with fossil fuel-driven industrial improvements. It seemed like no one cared about that crucial fact. [Read more →]

February 25, 2013   7 Comments

PURPA: Another Subsidy for Intermittent Energies

“PURPA has been the most effective single measure in promoting renewable energy.”

-Union of Concerned Scientists

What if Congress passed a law that forced you to buy intermittent energy for the same price as reliable energy? What if, in an attempt to promote “alternative” energy sources such as wind power, Congress passed a law that enabled wind to crowd out reliable resources? Congress actually passed that law in 1978, the Public Utility Regulatory Policies Act (PURPA). Its role has changed and its scope has narrowed, but “PURPA is still alive and kicking.

Background

President Jimmy Carter, working from the viewpoint that the federal government had to intervene in markets to reduce demand and increase supply, formulated PURPA as part of a five-part National Energy Plan.

Oil and gas were seen as wasting resources relative to plentiful coal, so public policy needed to transfer demand from the former to the latter. (This was before the global warming issue took hold.) Advised by peak-oil (and peak-gas) proponent  James Schlesinger, the first secretary of the Department of Energy, Carter introduced a new energy plan for America. In a cozy fireside chat on national TV, Carter emphasized sacrifice, energy efficiency, and 55-degree thermostats as demand-side strategies to construct a new energy balance.

Other parts of the National Energy Plan included the Energy Tax Act (which introduced the gas-guzzler levy for vehicles), the National Energy Conservation Policy Act, the Power Plant and Industrial Fuel Use Act (repealed in 1987), and the Natural Gas Policy Act. These laws were aimed at reducing consumption of both natural gas and Arab oil.

The repealed Fuel Use Act essentially mandated that coal plants be built in place of natural gas-fired power plants (for nine years it was against the law to build a natural gas-fired power plant, although exemptions were granted). Given the recent surge in production of natural gas from shale formations in the U.S. and elsewhere, the idea of conserving natural gas seems absurd. It also runs contrary to PURPA’s secondary goal to promote fuel diversity.

PURPA can be seen as yet another element of conservation by decree, or conservationism, based on the view that resources are fixed in both the physical sense and the economic sense.  It was an integral part of Carter’s and Congress’ technocratic solution to the “fixity” problem as they saw it. [Read more →]

January 22, 2013   5 Comments

Economic Failure at U.S. EPA: NAM Study Raises the Hard Questions

A recent study commissioned by the National Association of Manufacturers critically assessed the U.S. Environmental Protection Agency’s cost- benefit analysis with respect to six key regulations: Utility MACT, Boiler MACT, Coal Combustion Residuals, the Cross-State Air Pollution Rule, Cooling Water Intake Structures, and Ground-Level Ozone. The NAM study details the significant differences between EPA’s cost estimates and those of industry sources, while highlighting problems and inconsistencies with EPA’s methodology. Most importantly for manufacturers, the study estimates the impact of EPA rules on the manufacturing industry, directly and through indirect macroeconomic effects.

A key finding of the report is that “the annual compliance costs for all six regulations range from $36 billion to $111.2 billion (by EPA estimates) and from $63.2 billion to $138.2 billion (by industry estimates).” Notably, the study was picked up in the trade press and recognized by the House Energy and Commerce Committee, which reiterated the study’s finding that “major new EPA rules could cost manufacturers hundreds of billions of dollars and eliminate millions of American jobs.”

Textbook Regulation: Forgetting Government Failure

The NAM study acknowledges significant gains in air and water quality in the United States since the creation of the EPA but contends that federal regulators are up against steeply diminishing returns.

After more than 40 years of improvement in air and water quality, further progress is still possible. But how much more? What would be the benefits? And at what cost? Economics is about making the best use of scarce resources, and public policy formulation must heed its implications: policy decisions may produce economic benefits, but they also impose costs. Economics also teaches the theory of diminishing marginal returns, which holds that even though an additional unit of input may generate more output, there is a point beyond which the addition to total output from each new increment of input begins to decline. These economic concepts are relevant to the public’s understanding of the implications of these emerging EPA regulations.

Or, as Julian Simon put it when he discussed the trade-offs of dealing with pollution: [Read more →]

January 9, 2013   2 Comments

Bastiat on Malthus: Wisdom from 1850 for Optimism Today

“If we face the facts courageously, we shall see that a large area has been left open for the exercise of our initiative.”

The holiday season is not only a time to count our blessings, but also to imagine (or perhaps simply recognize) an ever-improving future for ourselves and the broader society. To that end, we can be thankful that the theories of doom-and-gloom are wrong, and the disastrous predictions drawn from those theories bear no resemblance to reality.

Being both a great fan of the 19th century classical-liberal political economist Frederic Bastiat and a critic of neo-Malthusianism, I was surprised to discover recently that Bastiat devoted an entire chapter of his work “Economic Harmonies” to Malthus’s theory on population. As Master Resource readers probably know, it was Malthus’s theory on population that prompted historian Thomas Carlyle to refer to economics as “the dismal science.”

It was also Malthus’s theory on population that spawned the still-thriving “neo-Malthusianworldview, which has been laughably wrong but still bleeds into discussions on energy policy. Fears of rampant population growth leading to environmental degradation and shortages in food, resources, energy, etc. were at the core of the environmental movement in the early stages, and neo-Malthusianism still colors the debate on energy abundance and the “sustainable” use of energy-rich resources such as fossil fuels. Prominent neo-Malthusian Paul Ehrlich has even said “[m]y view has become depressingly mainline!” Yes, depressing indeed. [Read more →]

December 7, 2012   2 Comments

Saving the Wind Industry: Henry Hazlitt’s Lesson Applied Today

“Economics is haunted by more fallacies than any other study known to man. This is no accident. The inherent difficulties of the subject would be great enough in any case, but they are multiplied a thousand fold by a factor that is insignificant in, say, physics, mathematics or medicine – the special pleading of selfish interests.”

- Henry Hazlitt, Economics in One Lesson (1946)

Henry Hazlitt (d. 1993) was born on this day in 1894. As has been done with other great classical liberal thinkers at MasterResource, this post celebrates Hazlitt’s birthday by applying his thinking to the current policy debate.

Specifically, Chapter 14 of Hazlitt’s book Economics in One Lesson, “Saving the X Industry,” despite being published in 1946, enlightens the current discussion about the wind production tax credit, which is set to expire at the end of this year unless Congress extends it.

I first read Hazlitt’s book while studying economics in college. It was a refreshing departure from the textbooks I was reading at the time, which were more numbers-focused and removed from reality. Economics in One Lesson is easy reading (some might say that’s because the truth is easy to understand), but for me it carried much more weight than the average textbook. It reframed my thinking and showed how widespread the broken window fallacy (the fallacy of believing that destruction creates positive net economic activity) is in our energy debates.

Economics in One Lesson traces through the many applications of the broken window fallacy, as they arose in past debates over economic policy. Those selfish interests repeated the same argument for nearly all industries that struggled to succeed in a competitive environment, so Hazlitt devoted a chapter to the “X” industry (the fill-in-the-blank industry). [Read more →]

November 28, 2012   3 Comments

‘Demand Response’ in Electricity: Economists vs. FERC on (Over)Pricing

“The [Federal Energy Regulatory] Commission’s recent progress in promoting competitive wholesale energy markets has the potential to be undone as a result of this well-meaning, but misguided Rule.”

- FERC Commissioner Philip Moeller, ”Demand Response Compensation in Organized Wholesale Energy Markets,“ Order No. 745 (2011).

Renewable energy subsidies are at the forefront of the public policy debate with constant talk of “green” jobs and the looming expiration of the production tax credit, a familiar subject at this blogsite. But qualifying renewables get other subsidies too, such as accelerated depreciation and state-level must-buy mandates.

The Federal Energy Regulatory Commission (FERC), regulating interstate electricity, is arguably subsidizing another favorite “green” resource – the practice of energy abstinence called “demand response.”

FERC Order Nos. 745 and 745-A established, for the first time, a uniform compensation scheme for demand response in organized electricity markets. Before Order No. 745, each regional transmission organization was free to develop its own compensation scheme, and demand response was already being implemented in organized markets such as PJM. Commenters disagreed with several aspects of the order, including the appropriate level of compensation. When FERC denied rehearing on that issue (and others), protesters sought review by the Court of Appeals (Electric Power Supply Ass’n, et al. v. FERC, No. 11-1486, et al.). The case is at the briefing stage, with oral arguments to be scheduled.

The MasterResource-worthy part of this case is the amicus brief filed by a group of academic energy economists. It takes a lot for economists to agree in the first place, let alone to jointly file a 30-page brief on a nuanced issue in the field of electricity markets. To raise the stakes a bit, I should also note that one of FERC Chairman Jon Wellinghoff’s main priorities, along with integrating renewables, is encouraging demand response. A reversal on this issue would be a big deal.

Background: ’Demand Response’

Retail electricity customers tend to pay a fixed rate for their electricity. However, in organized wholesale markets, the price of electricity at different points in the transmission grid can vary widely between seasons and even throughout the day depending not only on demand and supply, but also on transmission constraints. That wholesale market price is often referred to as the Locational Marginal Price (LMP).

That price structure means there is a disconnect between wholesale and retail electricity markets, and therefore retail customer usage is not responsive to wholesale price fluctuations. This can be troublesome as price-insulated electricity demand reaches the upper limits of the grid’s physical capacity to supply. Grid reliability is threatened, and despite sky-high prices at the wholesale level, retail customers carry on using electricity, blind to the wholesale price signal.

Enter demand response (or imputed demand response to be fair to the electricity nerds out there). The promise of demand response is to bridge the wholesale-retail gap by giving retail customers the incentive to withhold consumption when wholesale prices are high, easing the strains on the system at times of peak electricity usage. This “peak-shaving” effect can strengthen the reliability of the system and put off costly transmission investments. However, significant differences of opinion remain as to the best way to send wholesale price signals to retail customers. This is where the economists and the FERC majority are at odds.

The FERC Majority: Pay Demand Responders Full LMP

In Order No. 745, FERC reasoned that, “when a demand response resource has the capability to balance supply and demand as an alternative to a generation resource,” the demand response resource should be paid the full LMP. Some commenters agreed – some not so much. As FERC stated: [Read more →]

September 13, 2012   13 Comments

Energy Consumers vs. Regulators: Who Knows Best? (Mercatus study stands up to critics)

“Perhaps the main failure of rationality is that of the regulators themselves.”

-Ted Gayer and W. Kip Viscusi, authors, Overriding Consumer Preferences with Energy Regulations

In a working paper for the Mercatus Center titled Overriding Consumer Preferences with Energy Regulations, economists Ted Gayer and W. Kip Viscusi examine several energy use regulations and the accompanying Benefit-Cost Analyses (BCAs). They find the regulations would not pass a BCA (provide net benefits) without two assumptions: first, that individuals make systematic and financially significant mistakes in their energy consumption choices, and second, that government policies can correct these mistakes.

The regulations cited in the paper include mileage requirements for vehicles and energy efficiency standards for household appliances and light bulbs. The BCA numbers are telling – the authors show, for example, that the vast majority (about 85 percent) of the estimated benefits of the mileage requirements proposed in 2011 accrue to the individual user, mostly in the form of avoided fuel costs.

Without counting these private benefits (strictly counting avoided external costs, including CO2 emissions), the regulation would fail the BCA. That is, the regulations only make economic sense if we assume consumers behave irrationally when left to their own devices.

“Energy Efficiency Gap”

One type of irrationality discussed in the paper manifests as an energy efficiency gap, defined by some as “the difference between the actual level of energy efficiency and the higher level that would be cost-effective from the individual’s or firm’s point of view.” (International Energy Agency, 2007) The idea is that consumers neglect significant future energy savings by forgoing gainful investments in more energy-efficient cars, appliances, light bulbs, etc. According to proponents of the concept, consumers in such situations reveal irrationally high discount rates by their willingness to pay higher energy costs over the life of the product.

However, the authors criticize the concept of the energy efficiency gap on several levels, including the basic methodology for calculating the gap. ”Since the engineering studies focus only on capital costs and operating costs,” the authors find, “they do not allow for any heterogeneity of preferences and use of products across consumers.” [Read more →]

August 6, 2012   8 Comments