Setting the Record Straight on Renewable Energy Subsidies

“Renewable energy subsidies harm the reliability of Texas electricity markets by resulting in artificially low sales prices, victimizing conventional energy generators and investors. Why build a new gas-fired plant when spot prices might be below production cost because wind receives a $0.02/kWh federal production tax credit?”

Last month, a cold front propelled Texas to a new record for wind power, according to the Electric Reliability Council of Texas (ERCOT). Wind-generated electricity provided 9,481 MW on Feb. 9, almost 28 percent of the power generated in ERCOT at that time. This surpassed the previous record of 8,667 MW set only two weeks earlier.

Hold the applause. These records are being set because of Texas’s renewable-energy mandate–the strictest in the nation–and a raft of special tax subsidies. This government largesse harms taxpayers, consumers, and businesses as documented in a study released by the Texas Public Policy Foundation (TPPF) last November.

Here are some key points to keep in mind when thinking about renewable energy and related subsidies:

· Before the wind started blowing heavily on Feb. 9, the electricity that was soon to be replaced by wind power was being supplied by gas turbines.

· Once the wind began blowing, the gas turbines had to stop generating electricity to accommodate wind electricity. (An electrical grid cannot handle at any one moment more generation than is needed to meet demand.)

· Owners and operators of gas turbines that were displaced by wind lost money from forgone sales. Owners and operators of coal-and nuclear-fired generation were likely also harmed, perhaps not because they were displaced on the grid, but because wind likely drove down prices.

· The reason the wind turbines can force the gas turbines off of the grid is because the wind operators get subsidies from taxpayers. Therefore, they can offer electricity at a lower price than the gas operators.

· This is not a case of the free market at work. In fact, because of the subsidies, wind operators can actually pay companies to take wind from them and still make a marginal profit—nothing free market about that.

· Some gas turbines have to keep running on idle to be ready for when the wind stops blowing to meet consumer demand. These gas turbines don’t run for free—somebody has to pay for the gas turbines held in reserve.

· Buyers of electricity generated from wind on Feb. 9 may well have paid less for it than they would have had they continued to purchase from gas turbine operators—though most consumers who are on fixed contracts wouldn’t have noticed any difference. But the wind-generated electricity wasn’t cheaper.

· In fact, it is almost certain that the wind-generated electricity cost more when the consumer payments, taxpayer subsidies, and the cost of the backup gas generation are added together. There is no doubt that it cost significantly more to generate electricity from wind than from natural gas.

· Renewable energy subsidies transfer wealth from one set of consumers/taxpayers to another set of consumers/taxpayers in two ways. One wealth redistribution if from people generally south and east of Abilene to people generally north and west of Abilene where landowners, cities, counties, taxing districts, and others receive wind revenue. Two, wealth is transferred from generators using gas, coal, and nuclear fuel to owners using wind and other “renewable” fuels eligible for the subsidy.

· Renewable energy subsidies harm the reliability of Texas electricity markets by resulting in artificially low sales prices, victimizing conventional energy generators and investors. Why build a new gas-fired plant when spot prices might be below production cost because wind receives a $0.02/kWh federal production tax credit?

· With the prospect of inadequate firm capacity, Texans might be forced to pay billions of dollars in subsidies to generators using conventional fuels through a capacity market.

Let me recap: A state mandate and a raft of special subsidies opened the door for wind, advertised as a pollution-free, new way of generating electricity.

Now, because of renewable energy subsidies, 1) we have to keep turbines using pollution-generating fuels sitting on idle in case the wind stops blowing—or the sun stops shining, etc., and 2) we may have to spend billions of dollars in additional subsidies to ensure that the owners of plants using pollution-generating fuels build enough new plants to supply us with enough electricity to keep the lights on.

Going forward, even though wind power is setting new records for use and breaking all the goals for it set by the state, it is still not a “mature” technology—despite the fact that it has been in use for thousands of years—and so it must continue to receive subsidies that may in turn mean more subsidies for conventional fuels.

Consumers lose coming and going.

Texas Legislature Initiatives

I was recently quoted in the New York Times discussing the prospects of renewable energy subsidies in the 83^rd Texas Legislature. The article points out that at least two bills have been filed to extend/increase renewable energy subsidies. HB 621 would extend property tax credits for renewable energy that are set to expire next year; HB 723 would add new subsidies for electricity generated by solar power.

Heading in the other direction, HB 2026 would eliminate the current renewable energy credits mandated under Texas’ renewable portfolio standards. These credits will cost consumers about $70 million this year, with a ten year price tag of more than $500 million beginning in 2006.

There has never been a better time than now to end renewable energy subsidies in Texas.

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Bill Peacock is Vice President of Research and Director, Center for Economic Freedom at the Texas Public Policy Foundation. This was originally published here.