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wind energy policy, transmission & regulation
AWEA
Response to the Natural Gas Supply Association's Attack on the Renewables Portfolio
Standard
September 3, 1997
Summary
The NGSA has claimed that a national Renewables Portfolio Standard (RPS) (a minimum renewable energy content requirement on electricity suppliers) would significantly raise the cost of electricity, disrupt the electric system, and increase environmental impacts as compared to a competitive electric industry with no policy supporting renewable energy.[1] The NGSA's report contains serious errors and misrepresentations, resulting in deeply flawed conclusions.
Once the miscalculations and misrepresentations are cleaned up, the NGSA's own results indicate that even a 10% renewable energy requirement would raise electricity prices by approximately 3 - 5%. This would raise the average monthly household electric bill by only a dollar or two — a cost that Americans consistently say they are willing to pay for renewables. The rest of NGSA's arguments show that its consultants made no attempt to review, let alone seriously challenge, the literature that is available on the economic, technical, environmental and operational characteristics of renewable energy technologies, which demonstrates the ability to successfully integrate renewables into the electric system.
Finally, NGSA never questions the effectiveness and efficiency of the RPS policy itself as the best mechanism for increasing the diversity of the electric system with renewables.
Arithmetic Error
The major conclusion of the NGSA's May 28 report and the highlight of its related press release and Congressional testimony was the claim that an RPS requirement that reached 10% by 2010 "could raise electricity prices 12 percent or more above projections."[2] It turns out that this figure was the result of a gross arithmetic error. The authors explain that the method they used to calculate the cost of the RPS involved multiplying three factors together, but they neglected to use one of the factors, which was the fraction 2/3.[3] This gross oversight indicates the careless nature of the NGSA's attack on the RPS.
- In a July press release, the NGSA admitted the error and reduced its estimate from 12% to 8%.[4]
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Misleading Representation of Findings
The original NGSA paper stated (p. 15) that a 10% RPS requirement in 2010 would cause a 12% increase in the "cost of generation," and then concludes that "the price of electricity will rise by at least 12%." This was reasonably, but wrongly, interpreted by trade press to mean that "Americans would see 12% higher prices for electricity in 2010." Since generation costs account for only a portion of the total price of electricity paid by consumers (which also includes transmission, distribution, administrative and other costs), an increase in the cost of generation does not translate to the same increase in the total price of electricity. While the NGSA cleaned up its deceptive wording in its revised report, it did not draw attention to its earlier misrepresentation of its findings in the press release that informed the press of the 12% error. As a result, trade press continued to portray the results as meaning that the total price of electricity would go up by 8%.[5]
- In fact, using the NGSA's own figures, the estimated impact on the price of electricity of a 10% RPS in 2010 would be in the range of 3 - 5%.[6] This would mean an added cost of about $1.20 - $2 on the average monthly household electric bill,[7] a figure that is more in line with other estimates.[8]
Undocumented and Unsubstantiated Assertions
The NGSA paper contains numerous weak and unsupported arguments, such as:
NGSA Claim: The RPS "will impose significant and unnecessary operational inefficiencies on the electric production and delivery system." No evidence is cited.
Fact: Renewable energy (not including large hydropower) grew to supply 12% of California's electricity supply in less than a decade with no technical difficulties. Many detailed technical studies have shown that the electric system can grow to accommodate very high levels of renewable energy (30% or more) with no operational difficulties.[9] In California, where wind projects generate 3.2 billion kWh (over 1% of California's load), a technical study of the utilities' experience with these resources concludes that the "integration of wind resources into electric power systems has not been a problem, and any issues . . . can be addressed by accepted power system procedures and practices."[10]
NGSA Claim: "The price of electricity is expected to be more volatile as a result of the higher proportion of solar and wind power in the supply mix." This argument is supported by one sentence and no references.
Fact: No charges have ever been made in California that intermittent renewables cause price volatility. Indeed, since renewable fuels (i.e., the wind, sun, biomass wastes, and the earth's own heat) are not subject to price disruptions, carbon emission controls, or international politics, they have a stabilizing effect on energy prices. The NGSA did not attempt to rebut well-documented studies indicating that large amounts of wind can be successfully integrated in most electric systems even in the absence of storage.[11]
NGSA Claim: "Biomass combustion imposes greater environmental damages than that of coal." (p. 1)[12]
Fact: A recently-completed examination of the environmental impacts of California solid- fuel biomass plants conducted for the National Renewable Energy Laboratory concludes that "the use of biomass residues as fuel leads to large net reductions in emissions of air pollution" as compared to gas-fired generation, let alone coal.[13] Combustion of biogas, including landfill gas, would compare even more favorably. The study points out that any consideration of the environmental impacts of solid-fuel biomass must take into account the avoided fate of the biomass fuels (e.g., uncontrolled open-field burning of agricultural wastes, methane emissions from rotting biomass, and increased fire hazard) as well as the effects of power production. Further, new biomass gasification technologies, which could be expected to develop commercially in a strong market for renewables, produce fewer emissions than current biomass technologies.
NGSA Claim: A major premise of the NGSA's paper is that immediate environmental benefits are the only reason to care about renewable energy.
Fact: Though the relatively low environmental impact of renewables is one of their major benefits, the report completely ignores:
- the price stability benefits of renewables, which result from a more diverse resource base, a greater number of small facilities, and reduced exposure to fossil fuel price increases;
- other risk-hedging benefits, such as reduced exposure to the likely costs of future environmental regulations such as carbon- reduction policies; and
- domestic economic and energy security benefits due to reduced reliance on imported fuels. Though the NGSA report correctly notes that the electric sector does not use much imported oil, it neglects to mention that imports of natural gas are also steadily rising. The use of domestic renewable energy will produce more domestic economic benefits than more imported gas. The report also fails to appreciate the future role that renewable fuels and electricity can play in the oil-dependent transportation sector. Renewables are not subject to the politics of other nations, and therefore enhance our energy security.
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Flaws in Economic Analysis
In addition to the basic arithmetic and representational errors in the economic analysis, as described above, the NGSA's consultants used a very rudimentary method of calculating the cost of the RPS, made arbitrary assumptions, and made a number of arguments that are contrary to basic economic logic.
- To calculate the cost of a 10% RPS in 2010, the report authors assume that the standard is satisfied entirely by "lower-cost" biomass, and assume that the current cost of biomass is static until 2010. They assume that biomass costs 66% more than the capacity it replaces and simply multiply that by the share of capacity that it replaces. Compare this back-of-the-envelope approach to the rigorous approach used in another recent study of the potential costs of the RPS conducted by the Tellus Institute.[14]
The Tellus analysis used the National Energy Modeling System (NEMS), which contains a detailed representation of the 13 regions of the U.S. electric system, to simulate how renewables would likely develop in the market created by the RPS. This method recognizes that the incremental cost of renewable energy is properly estimated by finding the lowest difference between the avoided cost of power and the last renewable kilowatt- hour sold to meet the national RPS requirement. The NEMS model embodies the technology learning effects, improved manufacturing efficiencies, and technological innovation that would occur with increased market penetration, all of which reduce the cost of renewables.
This more sophisticated analysis shows that biomass is likely to account for a relatively small fraction of the renewables deployed under the RPS, rather than 100% as NGSA assumed. Analyzing a 10% renewables portfolio standard in 2010, the Tellus study estimates that biomass would capture only 6% of the renewables market while wind, solar and geothermal resources would capture 84%. The Tellus Institute's overall results were that a 4% standard in 2010 would add 20¢ per month to the typical monthly residential electricity bill (500 kWh), an 8% standard would add about 85¢ monthly, and a 10% standard would add $1.30 monthly.
- The NGSA paper arbitrarily excludes geothermal and landfill gas resources from consideration under a 10% standard, and declares that "biomass would be the most competitive renewable as a baseload supplier" (p. 11). No explanations are given. Consider that virtually all of the winning projects in a 1993 solicitation for renewable resources in California—the largest bid ever conducted for renewable energy, soliciting some 1,500 MW of net capacity—were wind and geothermal projects. There was virtually no competition from biomass.[15] The winning bidders came in at an average cost of 5.1 cents¢/kWh; [16] the NGSA paper assumes a 6.1 cents¢/kWh cost for biomass.
- In addition to the paper's "finding" that the price of electricity will rise, the paper finds that "the electricity industry will perform less efficiently" as a result of an RPS. This claim is followed by the list of the purported "inefficiencies," including "above- market costs of renewables," "increases in the amount of non-dispatchable power" that will decrease system efficiency, "more volatile" electric prices, and renewable power that is "located away from electricity consumption centers." By separately representing these two "findings," the authors imply that they are additive, when whatever costs these "inefficiencies" impose are already reflected in the estimated cost of the RPS.
- The paper states that there is only one market imperfection that might limit the adoption of renewable energy in competitive markets: external environmental costs that fossil fuel generators do not have to pay for ("environmental externalities"). It then declares that "in a competitive market, there are no net benefits from additional mandates for renewable energy" because "current environmental regulations already limit emissions from powerplants." (p. 17)
To accept NGSA's argument that renewables offer no benefit if they are not chosen by industry to meet existing environmental regulations, one would have to believe that the pollutants allowed under existing regulations impose no costs on society. One would have to ignore the fact that 90 million people still breathe air below minimum air quality standards and that 33 metropolitan areas still exceed federal smog standards, causing tens of thousands of premature American deaths per year.[17] A blind eye would also have to be turned toward international scientific consensus that carbon from fossil fuels, now completely unregulated, poses a serious threat to the earth's climate. Clearly, renewables offer environmental benefits because they do not contribute to these problems, yet they will receive no credit for their environmental value in the market. This market failure requires correction through public policy.
- The paper ignores other market barriers that renewables will face in a competitive market:
- Free Rider Effect: — The NGSA paper claims that "an inefficiency results [from the RPS] because consumers are not necessarily buying the share of renewable power they would choose if given the option." Here, the economist-authors have the "inefficiency" backwards. Renewable energy policy is necessary for the market to produce an efficient outcome, and the one that consumers want.
The basic economic principle known as "the free rider effect" refers to a phenomenon where goods that people value remain unproduced. It occurs when the value of a product benefits the public at large, not solely the purchasing consumer, because most consumers tend not to volunteer to pay for benefits received by others unless they know that the others will reciprocate. Especially with public goods that involve the air and global climate, there is no disagreement among economists that solving the market inefficiency requires public policy.[18] Public opinion polls consistently show strong public support for renewable energy policy.
- Short-Term Investment Horizons — In highly competitive, unpredictable markets, investments in low-capital-cost technologies will be preferred by investors because their investments can be quickly recovered. Because of the higher risk associated with capital-intensive projects, financing will be more expensive and difficult to obtain, which raises costs. Because renewable technologies are far more capital-intensive than gas plants, and because they are relatively unfamiliar to investors, they will suffer disproportionately from this phenomenon, even if they produce more cost-effective power over their lifetime.
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Conclusion
It is interesting to note that NGSA never attempts to discredit the RPS itself as a policy mechanism for promoting renewables in a competitive market. The effectiveness and efficiency of the RPS in achieving the goal of advancing renewables is not challenged. The RPS will create competition among renewable providers and create an incentive for the larger competitors in the electric industry to facilitate cost reductions because it will affect their own competitive position in the market. The result will be renewable energy at the lowest possible cost to consumers.
The NGSA's consultants make the absurd statement that "mandates do not offer consumers the freedom to choose." (p. 16) Of course, the RPS in no way infringes on customers' ability to purchase renewable energy in the market, and in fact ensures that the renewable energy industry will be strong and healthy enough to compete effectively for those consumers. Judging by its desperate attack on the RPS, the NGSA appears to be afraid that American citizens may exercise their democratic freedom to choose, through their representatives in Congress, a sustainable energy path for their country. Such a path requires the increased utilization of three resources: renewable energy, energy efficiency and natural gas. To maintain the renewable energy part of the solution, the RPS is essential.
Notes
[1] "Renewable Energy Mandates and Electric Utility Restructuring," prepared for the Natural Gas Supply Association by Charles River Associates, May 28, 1997.
[2] This quote from "Natural Gas Producers Point to High Costs of Proposed Renewables Mandate," NGSA press release, May 8, 1997. Similar statements appeared in the May 28, 1997, NGSA Report.
[3] The error was detected by Ryan Wiser, an analyst at the Lawrence Berkeley National Laboratory, who informed Charles River Associates of the error. Wiser describes the error in a July 8, 1997, memo to Diane Pirkey of the U.S. Department of Energy.
[4] "Charles River Associates Makes Correction in Renewables Study Done for NGSA," NGSA press release, July 1, 1997.
[5] See The Oil Daily, May 8, 1997, p. 2.
[6] We infer from the report that NGSA's consultants meant that the RPS would cause an 8% increase in the long-run marginal cost of generation. Currently, the marginal cost of generation is approximately 40% of the total cost of delivered electricity, and thus the 8% figure would translate to a 3.2% increase in the overall price of electricity. It is impossible to predict what percentage of total costs will be accounted for by generation in the year 2010, but if it were to rise to 60% of total costs, then an 8% increase in the marginal cost of generation would translate to a 4.8% increase in the total price of electricity.
[7] Estimate assumes 500 kWh consumed monthly at a rate of 8 cents/kWh.
[8] As discussed in more detail below, the Tellus Institute estimates that a 10% RPS in the year 2010 would add approximately $1.30 on a typical monthly household electricity bill.
[9] See, e.g., Henry Kelly and Carl J. Weinberg, "Utility Strategies for Using Renewables" in Renewable Energy: Sources for Fuels and Electricity (prepared for the United Nations Conference on Environment and Development), Island Press (1992).
[10] Robert G. Putnam, Electrotek Concepts, Inc. (Arlington, VA), "Assessment of California Wind Plant Operating Experience," published in Conference Proceedings, Conference on Integration of Wind Power Plants in the Environment and Electric Systems," European Wind Energy Association, October 7-9, 1996.
[11] Michael J. Grubb and Niels I. Meyer, "Wind Energy: Resources, Systems, and Regional Strategies," in Renewable Energy: Sources for Fuels and Electricity (prepared for the United Nations Conference on Environment and Development), Island Press (1992).
[12] Though four reports are vaguely referred to in the body of the report, they are not documented in the reference section or are not yet published, so that a response to the studies cited is not possible.
[13] Future Resources Associates, The Environmental Costs and Benefits of Biomass Energy Use in California, National Renewable Energy Laboratory (NREL/SR-430-22765). May 1997.
[14] See: Steve Bernow, Bill Dougherty, and Max Duckworth (all of the Tellus Institute), "Quantifying the Impacts of a National, Tradable Renewables Portfolio Standard," The Electricity Journal, May 1997; and Stephen Bernow, "Analysis of Renewable Portfolio Standards," June 1997.
[15] See California Energy Markets, Issue #270, 1994; and Domenic Falcone and William Short, "FERC Rules, Geothermal Shrinks," GRC Bulletin, June 1995.
[16] Coalition Energy News, Center for Energy Efficienty and Renewable Technologies, Winter 1994.
[17] Irving Mintzer, Alan Miller and Adam Serchuk, "The Environmental Imperative: A Driving Froce in the Development and Deployment of Renewable Energy Technologies," REPP Issue Brief, Renewable Energy Policy Project, April 1996.
[18] See, e.g., Tyler Cowen, "Public Goods and Externalities," in The Fortune Encyclopedia of Economics. David R. Henderson, Ed. Warner Books. 1993.
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Environmental Impacts
Response to U.S. Fish & Wildlife Service Interim Guidance for Wind Projects
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