Utilities don’t like wind not because it’s not competitive, but because it brings prices down for their existing assets, thus lowering their revenues and their profits. Thus the permanent propaganda campaign against wind.  The reality is that wind power brings prices down for consumers.

by Jérôme Guillet

Bloomberg has a somewhat confusing article about the newest complaint about wind power, but the gist of it is that wind power is an issue for the industry because it brings their revenues down:

operators in Europe may have become their own worst enemy, reducing the total price paid for electricity in Germany, Europe’s biggest power market, by as much as 5 billion euros some years

Implicit in the article, and the headline (which focuses on lower revenues for RWE, a big German utility) is the worry that wind power will bring down the stock market value of the big utilities – which is what the readers of Bloomberg et al. care about.

But despite the generally negative tone of the article, it’s actually a useful one, because it brings out in the open a key bit of information: wind power actually brings electricity prices down!

windmills (…) operators in Europe may have become their own worst enemy, reducing the total price paid for electricity in Germany, Europe’s biggest power market, by as much as 5 billion euros some years

The wind-energy boom in Europe and parts of Texas has begun to reduce bills for consumers.

Spanish power prices fell an annual 26 percent in the first quarter because of the surge in supplies from wind and hydroelectric production.

This tidbit of information, which will hopefully begin to contradict the usual lies about the need for hefty subsidies for the wind sector, has been publicised by EWEA, the European Wind Energy Association in a report on the merit order effect (PDF). This is the name for what happens when you inject a lot of  capital-intensive, low-marginal-cost supply into a marginalist price-setting market mechanism with low short term demand elasticity – or, in simpler words: when you have more wind, there is less need to pay to burn more gas to provide the requisite additional power at a given moment.

I’ve long argued that this was one of the strongest arguments for wind (see my article on The cost of wind, the price of wind, the value of wind from last year), and I’ve pushed the EWEA people to use it more – so this study (which I was not involved in) is most welcome.

The key thing here is that we are beginning to unveil what I’ve labelled the dirty secret of wind: utilities don’t like wind not because it’s not competitive, but because it brings prices down for their existing assets, thus lowering their revenues and their profits. Thus the permanent propaganda campaign against wind. But now that this “secret” is out in the open, it’s hopefully going to make one of the traditional arguments against wind (the one about its supposed need subsidies) much more difficult to use… The argument remains true for solar, and to a lesser extent for offshore wind, but the utilities are going to complain much less about offshore wind given that they are investing so much capital in that sector right now. The reality is that wind power brings prices down for consumers, even taking into account the cost of feed-in tariffs or other regulatory support mechanisms, which means that these regulatory schemes are not subsidies, but rather smart corrections of market inefficiencies for the public good.

Ironically, wind provides “utility-like” returns to investors, ie low, stable single-digit returns, as befits a regulated strategic infrastructure activity required for the common good. Utilities and investors should love the sector; but they have been spoiled by market deregulation, which has allowed companies to seek higher returns by under-investing, building merchant gas-fired plants, going for M&A games, and playing on market price volatility and trading – in other words, by behaving as perfect clients for investment banks…

As I’ve noted many times, the energy sector is one of the best examples of how the financialization of the economy has brought results that are bad for everybody except the investment bankers and top management; it’s also, thankfully, one where reality can most objectively re-assert itself.

And the reality is that you get cheaper electricity with wind – and oh by the way, wind requires no imports of fast-depleting fuels from unstable countries, spews no carbon and provides lots more domestic jobs. And it’s a perfect investment for our pension needs – safe, low risk, stable, decent long term returns…

© 2010, jerome_guillet. All rights reserved. Do not republish.

After feed-in tariff legal uncertainty, a recent 2010 report by the National Regulatory Research Institute finds that states can successfully and legally implement feed-in tariff programs to accelerate renewable energy projects.

by Jeremy Gross, Green Economy Post

As states search for ways to legally implement “feed-in tariffs,” a January 2010 report was issued called, “Renewable Energy Prices in State-Level Feed-in Tariffs: Federal Law Constraints and Possible Solutions.”  The report, mostly written by Scott Hempling of the National Regulatory Research Institute (NRRI) and co-authored by the National Renewable Energy Laboratory (NREL), looked to reduce legal uncertainties that surround states and their desire to use feed-in tariffs.

Basically, feed-in tariffs are a possibility for states who want to build up and accelerate renewable energy projects.  The tariffs would require (with specific prices and terms) that utilities buy electricity generated via renewable energy methods. Two of the benefits are that revenue is guaranteed making it easier to persuade producers to build out projects as well as decreased financing costs.

The report explains that two federal acts – the Public Utility Regulatory Policies Act of 1978 (PURPA) and the Federal Power Act of 1935 (FPA) – have limiting rules around selling electricity and creating tariffs. This is where states have run into problems implementing feed-in tariffs.

However, the author says there are two paths for legally implementing feed-in tariffs: the PURPA path, and the FPA / Federal Energy Regulatory Commission (FERC) path.

The PURPA Path

In order for feed-in tariffs to be possible under PURPA, a few things need to happen:

• Sellers must get FERC certification to be a “qualifying facility” (QF) – which are exempt from most FPA price regulation.
• Prices can be set by the state (and the state’s prices can’t be greater than the utility’s “avoided cost”).
• Or prices can be negotiated with the utility – which can be greater than avoided cost.

Note: Avoided costs are costs the utility would have had anyway if it supplied the energy or bought from another party.

Avoided costs can also be supplemented by providing: Renewable Energy Credits, cash grants, utility tax credits. This can make the deal more attractive for the seller and the utility.

The FPA / FERC Path

The report goes on to say that since 1935, the Federal Power Act has given FERC the authority to regulate “the sale of electric energy at wholesale in interstate commerce” and says that it is illegal to sell wholesale without a contract, and without FERC approval of that wholesale contract.

However, there are exemptions from FPA Sections 205 or 206 for a “qualifying facility” (QF) with a capacity of 20 megawatts (or less).  At that capacity, QF’s can sell without FERC approval. The author says that seller’s could participate in a state program without any federal involvement or extra steps.

Another Possibility

The reports explains that federal laws only apply to wholesale transactions, and that state’s could establish retail transaction programs to allow renewable energy generators to sell to retail customers.  In this situation, non-utilities could sell power to retail customers – such as in ‘net metering’ agreements.  Net metering is when a customer’s meter runs backwards and offsets utility purchases.  FERC sees the non-utility generator as making only retail sales as long as the customer’s usage doesn’t exceed their purchases.

Report Conclusion

The report concludes by stating a fact that is clear when you look at many current laws and acts: “statutes enacted in 1935 (FPA) and 1978 (PURPA) do not apply neatly to market situations and feed-in tariff policy proposals in 2010.”

And of course, all the dancing around laws and finding a clear path through the gridlock can be avoided if Congress updates PURPA and FPA to meet today’s needs!

The Full Report

For detailed information, you can find the report here: Renewable Energy Prices in State-Level Feed-in Tariffs: Federal Law Constraints and Possible Solutions

Additional resources:

• http://en.wikipedia.org/wiki/Feed-in_tariff
• http://www.wind-works.org/FeedLaws/USA/NRELFeed-inTariffsLegalinUSAWhenCertainConditionsMet.html

© 2010, Jeremy Gross. All rights reserved. Do not republish.

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.

© 2009, Agopstein. All rights reserved. Do not republish.