Dr. Gabriel Alvarez from King Juan Carlos University authored a May 2009 study entitled “Study of the effects on employment of public aid to renewable energy sources” (KJCU Study). Dr. Alvarez has tried repeatedly to correlate the Spanish investment and experience with Renewable Energy technologies (RETs) with that of the U.S. However, even cursory analyses of the Spanish public policies that have been employed over the past decade reveal significant and dramatic differences from the current and proposed domestic (U.S.) approach to RET deployment, and thereby obviate any implied correlation between the negative conclusions of the KJCU Study and the impact of the domestic RET investment. Additionally, included within the KJCU Study are several assumptions with respect to the economics of the U.S. investment in RETs that are fundamentally incorrect.
I have outlined a few of the most critical issues affecting the relevance of the KJCU Study to current and potential U.S. RET investments below:
Incorrect Assumption #1: The US is following the Spanish model…
Response #1: Dr. Alvarez claims that statements by President Obama indicate that U.S. domestic investment in RETs is being modeled after Spanish activities, yet this is patently untrue. Since 1997 Spanish incentives in support of RET has been in the form of Feed In Tariffs (FITs) that have reached levels up to $0.60/kWh of energy produced. This varies markedly from the typical U.S. approach of employing Producer Tax Credits (PTCs) to stimulate growth, which are typically on the order of $0.02/kWh. One can easily see that Spanish RET subsidies peaked at values roughly 30 times greater than those typically employed in domestic U.S. energy policy.
Additionally, the dissimilarities between the FIT (Spanish) and PTC (U.S.) mechanisms for encouraging RET deployment cannot be overstated. Without digressing into an esoteric public policy debate, the simple explanation of the difference is that the very high Spanish FIT guarantees a substantial and dramatic return on investment for many years to come, while the U.S. PTC harnesses the power of the market by providing only a minimal subsidy above the market rate for electricity. Therefore, if the market for renewable energy saturates and electricity prices drop, U.S. domestic investment in RETs will slow due to reduced profits whereas the Spanish investment in RETs continues unabated due to the guaranteed very high profits. The dissimilarities between these approaches along with the order of magnitude differences in the levels of government subsidy obviate any attempted correlation between the current U.S. approach to RET investment and the Spanish situation since 1997.
Incorrect Assumption #2: The U.S. should expect the same impacts as the Spanish experience…
Response #2: There has not been a single model of the U.S. energy market that has corroborated Dr. Alvarez’s conclusion that the impacts of U.S. policies encouraging RET deployment will mirror those of Spain’s policies since 1997. In fact, many recent models refute his claims outright.
One claim of Dr. Alvarez’s is that the U.S. should expect increases in residential electricity rates of 31%, similar to those experienced by Spain. The Energy Information Administration (EIA) recently completed an analysis of the potential impacts of the 25% Renewable Electricity Standard currently proposed in the American Clean Energy and Security Act (EIA Report #: SR-OIAF/2009-04, April 2009), in which electricity prices are predicted to exceed those of the reference case by no more than 6% even in the most costly regions, but should actually fall below the reference case in more renewable-resource-rich regions of the country. Again, even the most expensive price increases are predicted to be 80% less than those experienced in Spain.
Another claim of Dr. Alvarez’s is that the U.S. economy should expect a boom and bust cycle. Again, the different U.S. subsidy mechanism that harnesses the power of the market to guide investment is expected to result in a very different scenario. In the Department of Energy’s 20% Wind Energy by 2030 report (July 2008), the modeled scenario results not in a boom/bust cycle but instead a steady and consistent buildout of wind energy capacity that eventually sustains the manufacturing base due to required end of lifetime asset replacement.
Incorrect Assumption #3: Dr. Alvarez’s job-loss calculation is applicable to U.S. Recovery Act investments…
Response #3: There are a host of issues with the approach to quantification of job loss employed in the KJCU Study. From the lack of actual verification of jobs lost to the assumption that public subsidies for RETs would otherwise have been used to create average salary jobs, there is little support for any relevance of the KJCU Study conclusion that 2.2 jobs will be lost for every 1 created through investment in RETs. In truth, the fundamental assumption that money spent on RETs would otherwise be spent to generate average jobs is counterfactual within the context of the Recovery Act, as the Recovery Act is not solely targeted at RETs but is in fact a broad investment across the economy which in turn will create jobs economy wide.
To build on this point, there is no support for the principal assumption of the KJCU Study that in the current economy $1 of government spending (creating RET jobs) replaces $1 of private sector spending (creating “average” jobs). In a recent article by Heintz and Light (Tall Tales from Spain – May 7, 2009), the authors reveal that this simplistic approach to economic modeling that was used to reach the main conclusion of the KJCU Study applies only to extreme situations when a nation’s workers or financial resources (e.g. bank loans) are being used to their fullest extent, or in a situation where any level of public spending would have no effect on the productive capacity of an economy. None of these situations exist in modern economies, including those of both Spain and the U.S.
Conclusion:
Despite the claims of Dr. Alvarez and his coauthors, their conclusion that jobs are lost by investment in RET holds absolutely no relevance to current U.S. policy or RET investments as outlined in the Recovery Act. Correlations outlined between the Spanish and U.S. approaches to energy subsidies are counterfactual from both public policy and market perspectives, and peer reviewed analysis outlining the projected price impacts of pending U.S. renewable energy legislation indicate economic scenarios that differ greatly from those experienced in Spain over the past decade.
Dr. Alvarez is gaining international media coverage for his study through erroneous claims relating the KJCU Study to U.S. investment in alternative and renewable energy technologies. It is time that the energy, policy, and scientific communities identify the failures of the corollary argument, and recognize these claims for what they are: exceptionable attempts to gain unwarranted prominence for one’s work. Hopefully this analysis can serve as an informed rebuttal to the claimed relevance of the KJCU Study to U.S. policy, and can help stop the promulgation of the KJCU Study within domestic energy and policy circles.
The preceding analysis was written by Avi Gopstein. We spoke with Avi and obtained his permission to reprint these statements that were originally posted on the Wall Street Journal comments section of the article “Green Jobs: President Clinton and Spain’s Clean-Energy Bill“. These are his personal views.
