Gresham’s Law of Green Energy

8/7/2019 Gresham’s Law of Green Energy

http://slidepdf.com/reader/full/greshams-law-of-green-energy 1/7

12 |

Regulation

| Wi t r 2010–2011

e n e R g Y

W hile the U. S. economy continues to struggle,politicians, green energy advocates, and energy regulators have adopted a “green jobs” mantra.They espouse the view that policies mandating

renewable resources will provide not only environmental ben-

e ts, but economic salvation as well.The most recent example o this phenomenon is in Cali or-

nia where, last September, the Cali ornia Air Resources Boardadopted a requirement that the state obtain one-third o itselectricity supplies rom renewable energy resources by the year2020. Cali ornia governor Arnold Schwarzenegger noted approv-ingly in a press release, “There is a multi-trillion dollar globalmarket or clean energy, and I look orward to seeing even moreinvestment and job creation happen throughout our state withtoday’s commitment.”

Schwarzenegger is the latest politician to all under the spello “green” jobs. Even New Jersey governor Chris Christie, who

promised to reverse decades o growth in the burden that state’sgovernment has heaped upon its citizens, signed the O shoreWind Development Act in August 2010. He praised the act, whichcalls or at least 1,100 megawatts o wind generation to be devel-oped o the New Jersey coast, saying it will “provide New Jersey with an opportunity to leverage our vast resources and innovativetechnologies to allow businesses to engage in new and emergingsectors o the energy industry.”

Economists point out that there is no such thing as a ree

lunch, green or otherwise. Politicians, perhaps because theirlunch tabs are always paid by someone else, blithely ignore econo-mists and continue to promote a mythical “green” economy thatwill soon emerge. They carry on much like the Spanish conquis-tadors who searched or the Seven Cities o Cibola, convinced the

buildings really were made o gold. While ignoring economistsmay be considered a civic virtue, doing so does not invalidatebasic economic principles. Forcing consumers to buy high-costelectricity rom subsidized renewable energy producers will notand cannot improve overall economic well-being.

Renewable energy might reduce air pollution (althoughno actual evidence o this exists). It will certainly create a ewconstruction jobs. And you can bet that government mandatesand subsidies or renewable energy will bene t renewable energy developers. But when the entire economic ledger is tallied, the netimpact o renewable energy subsidies will be reduced economicgrowth and ewer jobs overall. In e ect, “green” energy mandates

like those o Cali ornia and New Jersey are a new version o “Gresham’s Law,” in which subsidized renewable resources willdrive out competitive generators, lead to higher electric prices,and reduce economic growth.

One o the most egregious examples o the green energy al-lacy is the proposed Cape Wind project, which is to be built o the coast o Nantucket Island. Cape Wind, which is ardently supported by Massachusetts governor Deval Patrick and stateattorney general Martha Coakley, is expensive — more expensive,in act, than onshore wind resources, which themselves requiregovernment subsidies. Even Cape Wind’s proponents admit to Jonathan A. Lesser is ounder and president o Continental Economics Inc.

Gresham’s Law of Green EnergyH gh-cost s bs d zed renewable reso rcesdestro jobs and h rt cons mers.BY Jonathan a. lesseR | Continental Economics Inc.



Wi t r 2010–2011 |

Regulation | 13

T e u n

v a n

d e n

d r i e s / i s T o c k p h o T o



14 |

Regulation

| Wi t r 2010–2011

this. So, to sidestep the high-cost problem, Cape Wind’s advo-cates have cobbled together all manner o arguments to justi y itsdevelopment, most notably how it will spur a new o shore windindustry in Massachusetts.

Several economic allacies underlie green energy and green jobs policies. For example, some renewable energy proponentsand green jobs advocates undamentally misrepresent wealthtrans ersas wealth benefts. Stealing money rom Peter and givingit to Paul may bene t Paul, but it hardly creates wealth. More-over, a number o “green jobs” studies have touted renewablesdevelopment as a source o unbridled economic growth. Thesestudies all contain one striking omission: they ignore the adverseeconomic e ects o the resulting higher electricity prices thathigh-cost renewable generation brings. They are cost-bene tanalyses that ignore the “cost” part. No wonder the results areso encouraging.

In this article, I begin by explaining the wel are economics o subsidized green energy. For most economists, this is a standard,no-such-thing-as-a- ree-lunch analysis. However, it also high-lights the problems caused by one o the supposed bene ts thatrenewable energy proponents fog: that renewable energy willhelp “suppress” electricity prices, thereby creating huge bene ts

or consumers. I then examine the Cape Wind project, which Iconsider to be the current poster child or green energy’s excesses,and I discuss why the billions o additional dollars that Massa-chusetts ratepayers will be orced to pay or the electricity it gener-ates will not provide economic salvation but will simply hastenthe exodus o business, industry, and jobs rom the state.

How Renewable Energy Subsidies

Reduce Economic Well-beingIgnoring, or the moment, the issue o green jobs creation,renewable energy studies o ten talk about “price suppression”as being a bene t o renewable resource development. Theconcept is straight orward: by increasing the supply o electric-ity, market prices decrease and consumers bene t. This is un-damentally true, but while consumers obviously bene t romlower prices in a competitive market, the “bene ts” o arti cialprice suppression are temporary and costly.

For those whose amiliarity with electricity markets ends at thelight switch, be ore there were competitive wholesale electric mar-kets, utilities built enough generating capacity to ensure that when

the demand or electricity peaked (such as on a hot and humidsummer’s day), there was su cient generating capacity available.The construction costs o these resources were part o utilities’ ratebase, on which they earned a regulated rate o return.

With deregulation and electric industry restructuring, regionalwholesale energy markets were created to replace the old vertically integrated utility industry. Not only were wholesale markets cre-ated or electric energy, but also markets or “installed capacity”

— essentially payments to generating rms to recover the xedconstruction costs that were previously included in the rate baseand to provide su cient revenues or rms to construct addi-

tional generating capacity or use during peak times, though thatcapacity would be uneconomical in a standard wholesale market.In overseeing wholesale energy markets, the Federal Energy Regu-latory Commission sought to ensure that these markets wouldprovide su cient revenues to generators, especially peaking gen-erators used only sparingly, to ensure they would be economically viable and thus available on those hot summer days.

Creating a market is always a challenge, and markets or“capacity” have proved no di erent. The rules governing thesemarkets are mind-numbingly complex, whether by accident ordesign. But one thing these markets did was provide explicit pay-ments to generators that had been paid only implicitly be ore.

Outraged at having to pay or something they mistakenly thought was ree, politicians in several states sought to take advan-tage o these markets and lower prices. As a result, a number o states introduced “price suppression” as an explicit policy goal inreaction to the creation o installed capacity markets, especially inNew England. In 2007, or example, Connecticut passed legislationthat required the state’s Energy Advisory Board to issue Requests

or Proposals that would reduce capacity market prices in the state.Similarly, in Massachusetts, Section 105(c) o the Green Commu-nities Act o July 2, 2008 was designed to orce renewable resourcegeneration into the New England capacity market.

Essentially, these states have required that their local utili-ties build new generation (paid or by ratepayers) and bid theoutput into the energy market at a zero price. (There is a pricefoor or bidding into the capacity market.) Adding additional

“ ree” supply into a market obviously lowers, or suppresses, themarket-clearing price.

In some ways, this is a good thing: i I can build a better, less-expensive mousetrap, mousetrap prices all and consumers

(although not mice) are better o . The problem with the price“suppression” practiced by these states is that the resources thatwere built have been subsidized by ratepayers. As such, this typeo price suppression is really just another way to manipulate themarket in a way that makes it less e cient. Moreover, the pricesuppressive e ect is only temporary, because it drives out actualcompetitors and reduces the likelihood o new competitors enter-ing the market. (Generators will not enter the market i they thinkregulators and politicians will simply drive them out at a later date.

Also, investors, perceiving greater risk, will require larger expectedreturns.) Thus, rather than building a better mousetrap, theselawmakers are using subsidies to arti cially and temporarily reduce

the price o mousetraps. And, in act, generators that compete inthese markets have ought back and FERC has taken notice.To understand the di erence between arti cial price suppres-

sion and true increases in competitive supplies, examine Figure 1,which shows the demand or electricity and the e ect o a renew-able generation subsidy. In the gure, the initial supply curveis given by the solid light red line S 0. The market-clearing priceis P*, and the quantity o electricity sold is Q*. In this market,generators A and B sell all o their output, and C sells an amountQ* − QB. Generator D sells nothing.

Next, we introduce a subsidized renewable generator, R, such

E N E R G y



Wi t r 2010–2011 |

Regulation | 15

as a wind energy plant. Without the subsidy, the wind energy plant cannot earn su cient revenues to be competitive. With thesubsidy, the plant now bids into the energy market at a zero price,refecting its marginal cost, as shown as the solid dark red line inFigure 1. As such, it displaces the other generating resources andshi ts the supply curve outward to S 1, shown as the dashed lightred line. The market-clearing price alls to P SUB, and the totalquantity o electricity sold increases to Q . As a result, genera-tor C is knocked out o the market entirely and the economicpro ts earned by generators A and B decrease. This is what I call

“Gresham’s Law o Green Energy”: subsidized renewable resourcesdrive out otherwise-competitive generators.

Renewable energy advocates applaud these results, arguingthat consumers win: the price o electricity has gone down. Well,in the short run consumers can bene t because the subsidy they are orced to pay maybe less than the savings on electricity ratesthat they realize — a net savings. But does society bene t rom thisscheme in the long run? The answer is a resounding “no.”

First, the majority o the bene ts received by consumers aresimply orced wealth trans ers rom existing producers. Genera-tor C, or example, having invested in what he thought was a com-petitive market, is now orced out. Second, because the pro tsearned by generators A and B have decreased, other potential sup-pliers will be less likely to enter the market as demand increases,thus driving up prices higher than they would otherwise be.

A ter all, why invest scarce capital in a market that politicians aremanipulating? Third, the consumers who do bene t in the shortrun rom the suppressed prices may not be the same consumerswho are paying the subsidies.

The short-run economic wel are implications are also shown inFigure 1. The large light red rectangle is the economic value trans-

erred rom producers to consumers. The small dark gray trap-ezoid is the actual gain in consumer surplus. When renewablesand green jobs advocates talk about price “suppression,” they arere erring to these changes in consumer surplus. It is importantto note, however, that the vast majority o the “bene ts” o pricesuppression are not bene ts in any economic sense. Rather, they

represent an income trans er — and an economically ine cientone at that — rom producers to consumers. Green jobs studieso ten confate such economic trans ers with “bene ts.”

A key question, there ore, is whether the real gain in consumersurplus shown in Figure 1 can ever be greater than the cost o the subsidy. In other words, can a subsidy increase the overalleconomic value o a market? The answer is no. To convince your-sel o this, consider the ollowing: I the renewable generator R cannot compete in the market without a subsidy, then it requiresa price greater than P* to be economically viable. Thus, to beeconomically viable with a subsidy and a market-clearing priceo PSUB, the subsidy must be greater than (P* − P SUB) per MWhproduced by the generator. I the renewable generator producesR MWh, then the total cost o the subsidy is greater than R ×(P* − PSUB). That amount is always greater than the actual gain inconsumer surplus shown in the gure. Thus, the subsidy reducesthe overall economic value o the market.

s b d r d m | To support renewable port o-lio standards such as Cali ornia’s 33 percent mandate by theyear 2020, consumers must subsidize renewable resources.These subsidies come in several orms. First, consumers may be required to pay a speci c renewable energy charge on theirelectric bill. Second, they may be required to pay or above-market price contracts with renewable generators. Third, astaxpayers, they must o set tax expenditures to alternativeenergy companies, such as investment tax credits or grantsin lieu o tax credits, ederal production tax credits, ederalloan guarantees, and accelerated depreciation allowances thatreduce tax payments.

To counter the need to provide renewable generation with

all manner o subsidies, renewable advocates generally resort tothree types o arguments. First, they argue that ossil uel genera-tion and nuclear generation are subsidized; there ore, it is only

“ air” that renewable generation be subsidized, too. Second, renew-able generation reduces air pollution, including greenhouse gasemissions, but markets ail to value those emissions reductions.Third, by reducing ossil uel use, renewable energy reduces price volatility and increases energy “independence.” Fourth, becauseo its high up- ront capital costs, renewable generation aces

“market barriers” that can only be overcome with subsidies.None o those arguments are sound. The rst argument, that

subsidies or ossil uels and nuclear energy should be countered

with subsidies or green energy, is simply to argue that two wrongsmake a right. One can certainly argue that ossil uel extractionhas bene ted rom avorable tax treatment. However, ossil uelresources are not directly subsidized in electricity markets. Renew-able energy advocates o ten point to the liability limits on nuclearpower plants courtesy o the Price-Anderson Act (see “Determin-ing the Price o Price-Anderson,” Winter 2002–2003), as a subsidy,which they are. But the appropriate policy solution is to removethose subsidies, not lard energy markets with more o them.

The second argument, that green energy produces no air pol-lution negative externality, may be true, although the reduction

Demand

QA MWhQCQB

$/MWh

Q�Q*

PSUB

P*

A

B

C

D

S1S0

Transfer of producer

surplus to consumers Actual gain inconsumer surplus

FiGuRE 1

imp c R w b g r s b dy



16 |

Regulation

| Wi t r 2010–2011

in emissions wrought by green energy sources is ar smaller thanadvertised because o the need or back-up generation. Moreover,one would be hard-pressed to nd a more expensive way to inter-nalize the air pollution externality. A properly set emissions taxwould achieve the same result at a ar lower cost and would notdistort the competitive market as renewable subsidies do.

The third argument, that green energy improves American“energy independence” and reduces supply volatility, has no basisin empirical evidence. Reducing the demand or a commodity does not imply that price volatility will be reduced, unless thedemand is reduced to zero. However, even i the argument weretrue, the need or additional back-up electric generation to “ rm”the changing output o wind and solar power is likely to lead togreater volatility o natural gas demand and, hence, to greaternatural gas price volatility. A ar more e cient way to reduce price volatility is to use standard hedging tools, which contribute argreater fexibility to the design o a customer’s pre erred hedgingstrategy. As or the energy independence canard, not only doesrenewable energy provide an insigni cant percentage o totalenergy consumption in the United States, but its ability to dis-place crude oil consumption is de minimus.

The last argument, that subsidies are needed to overcome“market barriers,” is perhaps the most disingenuous. High costis not a market barrier. For example, not everyone can a ordto purchase a Rolls-Royce, but that does not mean Rolls-Royce

aces market barriers that necessitate policies speci ying that a minimum percentage o Rolls-Royce cars must comprise theentire automobile stock. Although illustrative, one may object tothis analogy because Rolls-Royce motorcars do not provide vari-ous external social bene ts as public goods do. One may assumethat renewable energy is a public good and it has attributes that

society values, but that not all o those attributes are priced inthe market. One economic solution, which already has beeninstituted, is to establish a market or the non-market attributes.This is the entire purpose o renewable energy certi cates, which,like emissions allowances, can be bought and sold publicly.

Jobs: Green and OtherwiseWith the U.S. economy struggling, politicians are promotingrenewable energy as a (clean) engine o unlimited growth. Anumber o studies have been published touting the job cre-ation potential o renewable generation. But like a one-eyed

accountant, those studies consider only one side o the eco-nomic ledger.For example, in November 2009, a report published by the

College o Natural Resources at the University o Cali ornia at Berkeley recommends a comprehensive policy o aggressiveenergy e ciency improvements and renewable generation. Thosepolicies would, theoretically, create between 900,000 and 1.9 mil-lion new jobs and increase per-household income between about$500 and $1,200 per year. The report concludes that “the strongerthe ederal climate policy, the greater the economic reward.” Thisis a stunning example o ree-lunch economics. The study notes

that rom 1972 to 2006, energy e ciency programs in Cali ornia “created 1.5 million additional jobs.” However, the authors ailto provide the most important component o such an assertion:compared to what? The study never considers the e ects on busi-nesses and households rom higher electricity prices and taxes to

und those energy e ciency programs. Another study, released in February 2010 by Navigant Con-

sulting, was prepared or the res Alliance or Jobs, a group whosemembers primarily include renewable generation manu acturers.The study examines the economic e ects o adopting a manda-tory national renewable port olio standard o 25 percent o totalgeneration by the year 2025. The report concluded that such a standard would “lead to job growth in all states, especially thosecurrently without state-level renewable electricity standards,” andthat it would create 274,000 new jobs in the renewables industry.

Most recently, a September 2010 report issued by the NationalRenewable Energy Laboratory concludes that building 54,000MW o o shore wind generation under a “30 percent by 2030”renewables requirement would “revitalize our domestic manu ac-turing sector and create high-paying, stable jobs while increasingthe nation’s competitiveness in 21st century energy technologies,and “create approximately 20.7 direct jobs per annual megawattin the United States. That is over one million jobs.”

But le t unanalyzed in all o those studies is the number o jobsthat the scenarios would eliminatebecause o the resulting higherprices or electricity. The “25 percent by 2025” and “30 percent by 2030” goals might indeed create hundreds o thousands o new jobs in the renewables industry, but higher-cost electricity wouldnecessarily reduce available income or other goods and servicesand or investment, and reduce overall economic growth. Ironically,the Navigant report noted that nearer-term renewable standards

are required to “mitigate a lattening or decline in industry-supported jobs that will otherwise occur across industries withthe expiration o tax incentives and stimulus-related policies.” Inother words, without continued subsidies and renewable port oliomandates, the renewables energy industry would contract.

The U.S. economy is immensely complex, and accurately pre-dicting how speci c policies would change output and employ-ment in every industry is probably impossible. There ore, mosteconomic impact studies rely on so-called static models that arebased on a “snapshot” o the economy at one time. When themodels are used to estimate the economic e ect o renewablegeneration construction, they allocate the expenditures or that

construction in di erent sectors o the economy (e.g., cement,turbine manu acturing, wire, wages, etc.) and determine howthose expenditures would ripple through the economy. Forexample, increased demand or wind turbines would mean morepurchases o cement or oundations and increases in demand orsand and gravel, and so orth. Similarly, wages paid to construc-tion workers would be spent on goods and services; this wouldincrease the demand or those goods and services and cause

urther increases in employment, and so orth.Renewable resource advocacy studies always ignore the eco-

nomic e ects caused by higher electricity prices. Households

E N E R G y



Wi t r 2010–2011 |

Regulation | 17

whose electric bills increase because o renewable energy mandateshave less money to spend on everything else. At the same time,goods and services whose production requires electricity increasein cost. So, consumers have less money to spend on goods andservices that cost more to produce. That is no di erent thanimposing a tax on consumers and producers. Higher taxes reduceeconomic growth. This is why subsidizing industry — green, red,or tutti- rutti — reduces economic well-being. A study I per ormedto examine the economic e ects o a proposed renewables require-ment in Pennsylvania, or example, ound that or each $100million increase in electricity costs rom renewables, 640 jobswould be lost. No wonder renewable energy advocates tout the jobimpacts o building renewable resources but ail to mention thelong-term job-killing impacts o higher electricity prices.

It Is Easy to Be Green — When SomeoneElse Pays the BillCape Wind is a proposed o shore wind energy development tobe built in Nantucket Sound, o Cape Cod. Consisting o 130individual wind turbines, each capable o producing 3.6 MW o power, the entire project will provide 468 MW o generatingcapacity. Although the project has been the subject o muchenvironmental wrangling — speci cally its potential impactson the Cape Cod area — I ocus here on the project’s dubiouseconomics.

On June 4, 2010, National Grid, an international electric andgas company, submitted to the Massachusetts Department o Public Utilities its application and proposed a 15-year contractthat would require National Grid to purchase one-hal o CapeWind’s total output. The contract was signed under the auspices

o Section 83 o the state’s Green Communities Act, which wassigned into law by Governor Patrick in 2008. The act requireselectric utilities in Massachusetts to purchase up to 3 percento their total projected electric energy needs rom renewableresources i — and this is an important “i ” — those resources are

“cost e ective to Massachusetts electric ratepayers over the term o the contract,” and “where easible, create additional employmentin the commonwealth.”

The initial purchase price under the contract was set at $207per megawatt-hour in 2013, increasing 3.5 percent each year.Thus, by the end o the contract, the price would be just under35 cents per kilowatt-hour. However, National Grid’s ratepayers

would pay an even higher price because the Green Communities Act also includes a 4 percent “adder” that accrues to the utility signing the long-term contract, raising the price paid by ratepay-ers to $215 per MWh. The contract also included provisions toincrease the price in the event that Cape Wind did not quali y oreither the ederal investment tax credit or the ederal productiontax credit. Without either o those, the initial price would increaseto $235 per MWh and, adding in the 4 percent adder, ratepayerswould pay $244 per MWh.

One o the key questions or the developer was the project’sestimated cost — in ormation that the developer ought to keep

rom being released. Although Attorney General Coakley was onrecord in November 2009 as supporting Cape Wind, her o ceentered into negotiations or the in ormation to be made public.What came out o the negotiations, however, was not cost in or-mation, but a revised contract agreement signed on August 4,2010 that, in theory, reduced the initial price by about 10 percent,to $187 per MWh, excluding the 4 percent adder to be receivedby National Grid. However, the price would not really be that low.Because Cape Wind stated it would apply or a grant in lieu o the investment tax credit, under the terms o the revised contractthe price would increase by just over 10 percent. I one adds the4 percent adder received by National Grid, the base price jumps

rom $187 per MWh to just over $214 per MWh, again escalating3.5 percent per year.

Figure 2 illustrates the additional amount that National Gridratepayers would pay or their hal o the project. The gureshows the annual contract price that would be paid by NationalGrid’s ratepayers (the black line) under the revised contract andthe estimated market price or electricity based on two indepen-dent market price orecasts prepared or National Grid.

The orecast market price (the red line) increases rom around$110 per MWh in 2013 to just over $150 per MWh by the year2020, then hovers around that value through the remainder o the contract term, ending in 2027. In contrast, by the last year o the contract, the price paid by National Grid ratepayers wouldbe almost $350 per MWh. The estimated above-market cost orelectricity (the gray vertical bars) that would be paid by ratepayersis just over $75 million in the rst year o the contract, increasingto over $140 million in the last year o the contract.

From an economic standpoint, the key question is whetherNational Grid ratepayers bene t rom paying those above-market

costs, which over the 15-year contract would total almost $1.5 bil-lion. Speci cally, is this contract “cost-e ective to Massachusetts

$400

350

300

250

200

150

100

0

$5200

5180

5160

5140

5120

5100

5080

5060

5040

0’13 ’14 2015 ’16 ’17 ’18 ’19 2020 ’21 ’22 ’23 ’24 2025 ’26 ’27

P r i c e ( $ / M W h )

A b o v e -M a r k e

t C o s t

( Mi l l i o n

s )

Cape Wind PPA price ($/MWh)Market price + ACP ($/MWh)

Above-Market Cost (Millions)Market price ($/MWh)

sourc : exhibit MnM-2 (suppl m tal) a d author calculatio

FiGuRE 2

C p W d R v d a r m dC -ef c v t r d Pr c



18 |

Regulation

| Wi t r 2010–2011

E N E R G y

electric ratepayers over the term o the contract,” and does it “cre-ate additional employment in the commonwealth”?

According to National Grid and Cape Wind, the answer toboth is yes. They assert the project is cost-e ective, at least whencompared to other o shore wind projects; that it would reduce

ossil uel emissions; that it would help Massachusetts reduce itsgreenhouse gas emissions; and that it would create between 600and 1,000 jobs while under construction and around 150 jobsduring operations.

However, those claims do not address the cost side o theeconomic ledger. For example, as shown in Figure 2, by 2015(the third year o the contract), the above-market cost wouldbe around $80 million. Thus, a reasonable question is whetherratepayers would receive bene ts equal to or greater than theabove-market cost in that or any other year.

One answer, according to its proponents, is that Cape Windis needed to meet a growing renewable resource “gap” in Massa-chusetts and New England. However, this “gap” — to the extentit will exist — is an entirely arti cial legislative creation. Statelegislatures in New York and New England enacted requirementsthat growing percentages o electric generation be obtained romrenewable resources. (That they do not all de ne “renewableresource” in the same way is another matter.) Concluding that a resource — any resource — is cost-e ective because it is “needed”to ll an arti cial “gap” is circular reasoning at its nest.

Moreover, this reasoning ails to consider protections enactedin Massachusetts to prevent the cost burden o achieving thesearti cial renewable energy goals rom alling excessively uponMassachusetts ratepayers. Speci cally, Massachusetts, like many states with renewable energy mandates, includes an “alterna-tive clearing price” that establishes a ceiling price on renewable

energy certi cates that utilities must have in order to meet thelegislatively set mandates. A utility that cannot obtain su cientcerti cates at a reasonable price can instead pay the alternativeclearance price to meet its obligation.

One test o cost-e ectiveness, there ore, is whether the cost o a renewable resource is greater than the sum o the orecast mar-ket price o electricity plus the alternative clearing price, becausethe sum can be thought o as the maximum price ratepayersshould be required to pay or renewable generation. This sum, oreach year, is also shown in Figure 2.

As the gure shows, the orecast market price plus the alter-native clearing price is still below the contract cost. That means

that National Grid ratepayers will be orced to pay more or theCape Wind power and its renewable energy certi cates than they would otherwise be orced to pay or an equivalent amount o certi cates. Under such a “bright-line” test, Cape Wind is notcost-e ective.

National Grid and Cape Wind argue that the subsidy will cre-ate a new o shore wind industry and deliver other non-monetary bene ts that cannot be quanti ed. For example, in a brie it ledon October 7, 2010, attorneys or Cape Wind argue that “CapeWind represents the rst o shore wind-energy acility proposedin the United States and its approval and ultimate construction

will inspire a burgeoning new industry that will o er new jobs,innovation, research, and possibilities on how electricity is gener-ated in this country.”

Cape Wind likely will inspire a “burgeoning new industry” i the subsidies it has requested are granted. Whether that industry is located in Massachusetts and employs Massachusetts workersis unclear. However, even i such an industry is created in Mas-sachusetts, those are not bene ts per se. Moreover, the undsratepayers will be required to pay to Cape Wind are unds thatcannot be invested elsewhere. The higher price or electricity thatratepayers will pay or Cape Wind’s output means ewer dollarsavailable or investment and ewer dollars to spend on othergoods and services that those ratepayers would otherwise chooseto purchase. I one applies to Massachusetts the Pennsylvania jobimpact estimate o 640 jobs lost or every $100 million increase inelectric costs, then Cape Wind, while creating construction jobs,would cause the net loss o hundreds o jobs in Massachusettsover the long term. That was one reason cited by the Rhode IslandPublic Utilities Commission when it rejected a similar contractbetween Deepwater Wind LLC and National Grid on April 2,2010. According to the commission:

It is basic economics to know that the more money a businessspends on energy, whether it is renewable or ossil based, the lessRhode Island businesses can spend or invest, and the more likely existing jobs will be lost to pay or these higher costs.

Like the proverbial vampire who ears daylight, basic economicsis the last thing Cape Wind’s proponents wish to see appliedto the project.

ConclusionsIndustries that require never-ending subsidies simply cannotincrease overall economic wel are. To conclude otherwise is tobelieve in “ ree-lunch” economics o the worst kind. Yet, ree-lunch economics are driving the push or renewable energy.The subsidies paid by ratepayers trans er wealth rom existinggenerators to a chosen ew renewable resource owners. Onemay like to rail against the existing generators — as many poli-ticians have — but the long-run implications o such subsidieswill be to destroy competitive wholesale electric markets anddrive out existing competitors. This course o action will cost

jobs because businesses, orced to pay higher electricity prices,

will either relocate, contract, or disappear altogether. It willreduce the disposable income o consumers, who will oreverbe orced to subsidize renewable resources (just as they mustnow subsidize corn ethanol producers) — all in the name o

“green energy.”Cape Wind stands at the ore ront o this new renewable

energy push, one that is based on long-discredited — and, alas,long-believed — promises. Un ortunately, it is politicians whoare selecting the winners and losers in the renewables game, andthe select ew are bene ting at the expense o the many, i.e., theratepayers. This is hardly a recipe or economic growth.

Gresham’s Law of Green Energy

Documents

Transcript of Gresham’s Law of Green Energy