Last month, our friends over at the Heartland Institute published a front-page lead story in the April, 2009 edition of Environment & Climate News. Alyssia Carducci’s “Palin Energy Plan Receives High Praise” begins:
“Alaska Gov. Sarah Palin (R) has announced an ambitious plan to produce half of the state’s electricity from renewable sources by 2025. Palin’s plan, which empowers local municipalities to identify and develop the most cost-efficient renewable power sources available to them, won immediate praise from environmental groups, consumer groups, and industry.”
This article is yet more evidence that the inexplicable conservative love affair with Sarah Palin remains unrequited—at least, when it comes to economic policy in general and energy policy in particular. But Republicans, as the kids might say, “She’s just not that into you.” Let’s examine the litany of problems with Plain’s approach to energy.
First, how does Sarah Palin (or anyone else for that matter) know a priori that the best (that is, the most efficient) electricity sector in Alaska is one that will deliver 50 percent of its energy from renewable sources in the year 2025? No analytics whatsoever have been forwarded to back this number up. No reason is offered for rejecting 46 percent, 38 percent, or for that matter, 65 percent or any other figure. The 50 percent goal, put bluntly, simply sounds good to voters (and thus, to politicians), which is a one very good reason to be suspicious of that goal from an economic perspective.
Second, let’s pause a moment on the title of the document at issue; Alaska Energy: A first step toward energy independence. Has it not occurred to Sarah Palin that if energy independence were so wonderful, no one would buy Alaskan oil and gas outside of Alaska? If dependence on energy imports is an economic poison, then Sarah Palin is both a pusher and a prohibitionist.
The point is not that Sarah Palin is being a hypocrite. The point is that the governor of all people should realize that if it’s cheaper to buy energy from a supplier that comes from out-of-state, then it makes sense to buy from that supplier and not from the fellow selling more expensive energy in-state. If that weren’t so, the Alaska state government over which Sarah Palin presides would have only a fraction of the dollars to spend relative to what it has to spend at present.
Third, consider the plan’s goal: “to reduce the cost of energy to all Alaskans through deployment of energy technologies that are vertically integrated, economic, long-term stably priced, and sustainable.” Only one of those four criteria for energy makes any sense. Let’s look at them one at a time.
Vertically integrated power - Why is Alaska so hell-bent on vertically integrated power? While I’m one who thinks that the case for vertical integration in the electricity sector makes a lot of sense, I’m not sure why the state should—or needs to—rule out the provision of vertically de-integrated power. If the electricity in question is otherwise “economic, long-term stably priced, and sustainable,” then what difference does it make if it is supplied by vertically de-integrated power companies or not?
Economic Power – “Economic” power is all well and good, but can’t the private sector be relied upon to gravitate toward lower-cost sources of energy without state mandate? After all, the cheaper it is for plant owners to generate power, the more profit they can make. There is simply no obvious need for the government to lift a finger if economic (in the sense of “low-cost”) energy is the goal . . . a point implicitly made in passing in the report (p. 46 to be exact).
Long-Term, Stably Priced Power - The case for “long-term stably priced” energy is far weaker than one might think. The reason generation costs vary from year to year is related to the cost of fuel. Generators with low and stable fuel costs—say, nuclear power facilities, dams, and wind and solar power plants—have generating costs that don’t vary much. But because they are very capital intensive, the levelized cost of power (roughly defined as [construction costs + operation costs + maintenance costs over the lifetime of the facility] / total energy produced) is generally higher for those facilities than for plants with more variable fuel input costs (coal and natural gas). Question: Are relatively high but stable generating costs economically preferable to relatively low but more variable generating costs? Answer: sometimes they are, sometimes they aren’t. If buyers were willing to pay a premium for expensive but stable energy supplies, then market agents would supply that energy. Alas, electricity consumers are seldom interested in such deals.
Even so, “stable prices” are a function of several things beyond the cost of producing the energy in question. It is also a function of the availability of energy and the demand for the same . . . and neither of those two things is answerable to the state. For instance, dry periods mean that hydropower is less available even if the costs of generating that power remain stable (note – it was a dry spell that shut down a vast amount hydroelectric power supply and triggered the events that led to blackouts in California back in 2000-2001). Likewise, a surge in demand as a consequence of economic growth or a drop in the same will have a big impact on energy prices if those prices are freely set in the market place. Hence, “stable prices” are also a call for energy supplies less vulnerable to disruption and generators that can be built on short notice to accommodate demand surges . . . and renewable energy underperforms relative to fossil fuels on both of those fronts.
Sustainable Power - The goal of “sustainable” energy is silly. First, it is vague; must the energy source in question be available forever or just for a long time? Second, it is economically counterproductive. If the oil fields in Prudhoe Bay, for instance, have a production life of only a few decades, that means they are unsustainable sources of supply but that doesn’t mean they are not worth exploiting. If Alaska eschewed “unsustainable” energy, its main industry would disappear overnight. If the rest of the world likewise eschewed unsustainable resource use, it never would have entered in to the Industrial Revolution. If we opted for “sustainable” versus “unsustainable” energy (strictly understood) whenever we had the choice, we never would have left the energy market of 13th century England.
With that out of the way, let’s look at the specifics of the document that so enamors Heartland. First, it is the work product of:
“28 Town Hall Meetings across the state, engaging many Alaskans through the process of seeking answers to three fundamental questions: 1) What resources near your community—where you live, work, play, fish, and hunt—could possibly be developed to help lower energy costs? 2) What resources should not be developed? 3) Why not?”
Now, isn’t this what power companies already do? What makes Sarah Palin think that the state could do better? And what makes her think that central planning via town hall meeting is any better than central planning via some other process? Economist Bryan Caplan demonstrates that the public’s working knowledge of the economic issues in play are close to that of a . . . well, I won’t get nasty.
Nevertheless, armed with the knowledge gleaned from these meetings and supplemented by the usual bureaucratic suspects, the state produced a “resource matrix” for each and every rural community in Alaska and formed “Technology Teams made up of people with expertise and a passion for energy solutions who were asked to identify technologies options and limitations for each identified resource.” The result is the work product of the report: “a focusing tool that will provide each community with a high-level snapshot of the least-cost options for electricity, space heating, and transportation for their community.”
If this sort of process could reliably be expected to produce the requisite information necessary to efficiently plan subsectors of the economy, then the only problem with the old Soviet Union is that state planners there never relied on town hall meetings in the course of constructing their 5, 10, and 15 year economic plans.
Nevertheless, the report released in January that prompted the Heartland story offers a broad overview of the prospects for various energy sources in “non-railbelt” Alaskan communities (meaning those communities outside of the service areas of the six public utilities doing business from Fairbanks to Anchorage and the Kenai Peninsula). Unfortunately, the cost examinations were “conducted at the conceptual level with no site-specific design or scope development.” The upshot is that “The numbers are reported as specific values for convenience, but in actuality contain a high degree of uncertainty as a result of incomplete data, conceptual cost estimates and estimates based on models.” This report—along with an upcoming report to inform regional “non-railbelt” planning and another to lay out an “integrated resource plan” for Alaskans in railbelt communities (where 65 percent of Alaskans live)—is intended to guide the disbursement of targeted state grants for renewable energy facilities and a related restructuring of state utilities to promote Gov. Palin’s renewable energy goals.
The report, however, is nothing to write home about. The main problem is that, with the exception of solar power, the report too often parrots the overambitious claims made by renewable energy proponents.
Palin’s Energy Inventory
Energy Efficiency – The report claims that energy efficiency will reduce the problems associated with “energy security, global warming, and fossil fuel depletion.” Nonsense. History well demonstrates that the more efficiently we use energy, the more energy we will use. That stands to reason; the more efficiently we use energy, the lower the cost of energy-related services at the margin, and reductions in marginal costs lead to increases in demand. This is known to economists as “Jevons Paradox” and it applies to trends in resource efficiency and resource consumption outside of the energy sector as well. It is a myth—albeit a widely shared myth—that energy efficiency on balance leads to reduced energy consumption.
The report then goes on to say that energy efficiency measures are often overlooked in favor of measures that would add supply to the market, an unfortunate phenomenon given that “energy efficiency has the highest return on investment of any energy source” (p. 82). No reference is given to back up that claim, which is just as well because it is screamingly false. RAND economists David Loughran and Jonathan Kulick calculate that $14.7 billion was spent by electric power companies to subsidize ratepayer conservation investments between 1989-1999 (undertaken primarily at the behest of—and under the supervision of—state utility regulators, with more spent since then), but those expenditures reduced mean electricity sales by only 0.2 and 0.4 percent at an average cost of 14–22 cents per kilowatt hour, a cost much greater than the cost of additional electricity during that period.
Wind Energy – Wind energy also gets more boosterism than it deserves. The report tells us, for instance, that capacity factors for wind power plants (defined as the amount of energy that the plant will produce relative to theoretical maximum production capacity under ideal conditions) “of 25%-40% are typical, while values up to 60% have been reported.” While reliable figures are hard to come by, compare those claims with some of the concrete facts available to us from states that have heavily invested in wind power. Prof. Robert Michaels (U. Cal., Fullerton) reports that average California wind generation during on-peak hours (7AM to 10 PM) in July 2006 was 495 megawatts (21 percent of capacity) and 464 megawatts in August of that same year. Similarly, the average output of Texas 2,800 megawatts of wind generators is but 16.8 percent of capacity, most of which occurs off-peak. For system planning purposes, its grid operator set a wind turbine’s “effective capacity” at 10 percent of its nominal amount, a figure later downgraded to 8.7 percent. Vaclav Smil (U. Manitoba) reports that “annual load factors of wind generation in countries with relatively large capacities (Denmark, Germany, Spain) are just 20%–25%.”
Biomass – Biomass (burning plant matter or wood for power) likewise gets kid-glove treatment. The report, for instance, concedes that air emissions are a major environmental problem from these facilities, but argues that “community-scale and industrial scale systems for heat or power . . . present less of a threat to health” than “individual user systems” (like, say, fireplaces and wood-burning stoves). That may be, but a review of the literature by Thomas Sundqvist and Patrik Soderholm finds that central station biomass is little better than coal or oil from an environmental perspective.
Geothermal – Geothermal energy gets lots of love in the report, but the authors concede that “geothermal heat needs to be close enough to the surface and in the right geologic setting to make it economically feasible for development. This is a rare occurrence in Alaska.” Nonetheless, the report recommends the creation of “regional geothermal development plans” and a “state drilling program as part of the state energy plan.”
Hydropower - Hydropower likewise receives lots of love, but the report acknowledges that the costs associated with building dams in Alaska is so staggering that it is simply too expensive to build new facilities at present. Yet the authors nonetheless conclude that “The future looks bright for hydropower development in Alaska. Hydropower projects produce power that is reliable, renewable and nonpolluting.” Yeah, and they also produce power that is so expensive that it wouldn’t sell in a competitive market. No matter—renewables we have promised and renewables we shall have!
Coal – Contrast the sunny discussions above with the report’s oddly ambivalent posture regarding coal. Coal gets 7 pages of rather cursory discussion, a rather striking lack of attention given the 17 pages devoted to hydro, 19 pages devoted to wind, and the 15 pages devoted to both biomass and geothermal. Heck, even make-believe “hydrokinetic/tidal power” gets more attention from these authors (14 pages) than does coal.
Those seven pages, however, are revealing. The authors note that Alaska’s coal reserves are a potentially staggering 5.6 trillion tons or more, most of which is high quality, low sulfur coal. Yet they also tell us that “most coal resources in Alaska are in the hypothetical resource class because they have been poorly studied, there are few data points of measurement, and there has been little or no drilling to substantiate resource claims.” Why is that? No idea. What to do about? Apparently nothing. No “regional development plans,” no “state drillings programs”; no policy of any sort is recommended. Given that the report is ostensibly a comprehensive overview of energy resources in Alaska, this relative lack of interest in coal is fairly surprising.
Energy Subsidies – Also surprising is the report’s nonplussed attitude about state policies that actively frustrate efforts to promote energy conservation and efficiency. The main issue in play here is the Power Cost Equalization (PCE) program, a state initiative launched in 1984 to help pay for electricity bills in rural Alaskans where, we are told, power often sells for 3-5 times more than it does in Anchorage, Fairbanks, or Juneau. In 2007, 78,500 Alaskans in 183 communities were assisted with these payments to the tune of several hundred dollars a year. While the report observes that the PCE program reduces the incentive to invest in energy conservation and renewable energy, it concludes that this offers yet one more rationale for countervailing state policies to promote energy efficiency and renewables because such investments will reduce PCE payments!
There are three problems with this claim. First, it does not follow that residential investments in energy efficiency will necessarily reduce PCE payments. If lower marginal operating costs for various energy-related appliances increase energy demand (as it surely will to some extent), it may actually increase state PCE payments! Second, if renewable energy increases fuel costs—as even this report makes clear would likely happen—then rural generating costs will go up, not down, which further increases PCE payments. Third, a better and much cheaper way to promote conservation and renewable energy in rural Alaska would be to get rid of the PCE program—which subsidizes conventional energy and energy consumption—and stop forcing urban Alaskans to pay for the energy used by rural Alaskans.
Meet the New Plan, Same as the Old Plan
The best thing about the report is the frank, if brief, discussion of past state plans and past state reports. Not surprisingly, it turns out that this report is but the latest in a long line of allegedly comprehensive efforts to achieve wonderful, low-cost, renewable energy goods and services courtesy of the state. Over the past 30 years, billions of state dollars have been spent, thousands of pages have been published, an avalanche of claims have been offered, and all sorts of glorious promises have been made. None have had the slightest impact. What makes the authors of this report think that this latest state swing at the energy policy piñata will prove any more fruitful than past swings at the same? Nothing as far as I can tell from this report.
Hence, we return to nub of the matter: Exactly what is in this report (or in the renewable energy subsidies that this report is intended to facilitate) that is responsible for making the conservative heart flutter? If you stripped the report of all references to Alaska, you would be hard-pressed to differentiate it from a report issued by, say, Nancy Pelosi’s office.
To paraphrase a line from an old rock song, something else is going on here. Exactly what isn’t exactly clear.