Can Wind ‘Compete’ without Subsidy?

by Marlo Lewis on April 18, 2013

in Blog, Features

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The House Science, Space, and Technology Committee this week held a hearing on the efficiency and effectiveness of federal wind energy incentives.

The first witness, Frank Rusco, director of energy and natural resources for the Government Accountability Office, summarized his March 2013 GAO report on federal financial support for wind energy. Rusco testified that nine agencies administer 82 programs providing $4 billion in financial support to the wind industry in 2011 in the form of grants, loans, loan guarantees, and tax expenditures (targeted tax breaks). Some wind projects received support from seven initiatives, Rusco found.

Rob Gramlich, Interim CEO of the American Wind Energy Association (AWEA), disputed those numbers, arguing that of the 82 initiatives only two are wind-specific, dozens are defunct, and fewer than 1% of wind projects built in recent years took both a tax credit and a Department of Energy loan.

Gramlich, however, did not dispute Rusco’s finding that 99% of federal support went for deployment of wind energy rather than R&D (pp. 17-18), nor his assessment that ”it is unclear whether the incremental support some initiatives provided was always necessary for wind projects to be built” (p. 43).

Citing Rusco’s testimony in his opening statement, Oversight Subcommittee Chairman Paul Broun (R-Ga.) suggested that instead of subsidizing firms that would install wind turbines anyway, Congress should fund R&D to make wind energy more competitive.

A fair point but one that indicates a more fundamental problem. When government subsidizes activities that would happen anyway, the money goes to free riders. The subsidy is a clear case of government waste. When government subsidizes activities that would otherwise be unprofitable to undertake, the money may simply prop up investments that consume more wealth than they create. If so, the subsidy is a waste of economic resources.

As three MIT scholars wrote in their assessment of President Carter’s energy programs:

The experience of the 1970s and 1980s taught us that if a technology is commercially viable, then government support is not needed and if a technology is not commercially viable, no amount of government support will make it so.

Too bad the Constitution does not mandate a recitation of those words prior to every congressional debate on energy policy!

My main reason for writing this post, however, is twofold. First, if Matt Damon or anyone else in Hollywood ever wants to make a reality-based movie about a conflict between community activists and greedy energy developers, he should look no further than the testimony of Audra Parker, CEO of the Alliance to Protect Nantucket Sound. Second, anyone seeking a clear overview of the economics of wind energy, should read the testimony of Cal State Fullerton professor Robert Michaels, who testified on behalf of the Institute for Energy Research.

The Nantucket Alliance formed in 2001 in response to “multiple threats” posed by Cape Wind, an offshore wind project encompassing “130 wind turbines, each 440 feet in height, spanning an area the size of Manhattan.” Parker’s detailed testimony concludes by asking the Committee to request an independent GAO analysis of the Cape Wind project, examining the costs and benefits for consumers as well as impacts on “historic, tribal, environmental, public safety, and other public interest factors.”

Parker charges that, “Federal agencies have prioritized the interests of the developer over public safety and to the detriment of the environment.” She names names, beginning with the Coast Guard:

The USCG prioritized the financial interest of the developer over the safety of mariners and the public. The USCG initially recommended a buffer zone of 1.5 nautical miles (nm) between the proposed footprint and the main channel, but later removed it due to the economic interests of the developer.

U.S. Coast Guard emails discovered through FOIA include:

  • “If 1.5 NM offset applied to Cape Wind proposal in Nantucket Sound, this would drastically reduce the size of the wind farm footprint (might well scuttle it).” (Exhibit 13)
  • “If Cape Wind were to use these measures, the proposed wind farm would hold too few WTGs [wind turbine generators] to be economical.” (Exhibit 14)
  • Referring to the local port Captain, “He purposely did not recommend the creation of “buffers of navigation” around the turbine array because he believes that would have caused a change in the “footprint of the project” that could unnecessarily “kill the project”. (Exhibit 15)

The protector of species too:

In another example, the U.S. Fish and Wildlife Service (USFWS) found that Cape Wind should shut down wind turbines on a temporary and seasonal basis to reduce bird kills in its draft biological opinion, but did not require such mitigation in the final opinion solely because Interior and Cape Wind rejected a shut down as too costly. USFWS stated that it “considered” temporary shut-down as a reasonable and prudent measure to minimize impacts on listed species, but that “it was determined by BOEMRE and [Cape Wind Associates] to not be reasonable and prudent.” (Exhibit 16) USFWS itself never made an independent finding of whether a temporary shut-down would be reasonable.

Also the guardians of flight safety:

Despite FAA’s safety-first mandate, it made mitigation recommendations to accommodate Cape Wind’s profitability at the expense of public safety. The proposed 25 square mile, 440 foot high Cape Wind footprint lies in the center of three busy airports in a heavily trafficked low altitude airspace. 400,000 flights per year traverse the airspace over Nantucket Sound transporting millions of passengers through an area characterized by frequent fog and quickly changing weather patterns. However, despite objections by all three local airports and even after acknowledging multiple aviation safety impacts and expressing uncertainty regarding the effectiveness of proposed mitigation options, the FAA deferred to Cape Wind’s economics and bottom line. In discussion of potential unresolved radar interference due to Cape Wind, the acting head of the FAA’s Obstruction Evaluation group stated, “Shutting them down midstream will create an undue burden on the developer and could possibly bankrupt them.” (Exhibit 17)

Why would our valiant agencies behave this way? A section of Parker’s testimony discusses ”significant coordination between the Patrick and Obama Administrations through the Department of Interior (DOI) to push Cape Wind forward and gain financial assistance for Cape Wind through the loan guarantee program.”

But all this corner-cutting will help bring down electric rates for consumers, right? Ha!

Despite a potential $4.3 billion in combined federal and state incentives, which should make electricity cheaper, Cape Wind will impose nearly $3 billion in above-market costs on ratepayers, Parker contends. For example, NSTAR has a contract to buy 27.5% of Cape Wind’s power at a starting price of 19 cents per kilowatt hour (kWh), “with a guaranteed annual increase of 3.5% over the 15 year contract life, culminating in a final year price of over 31 cents per kWh. This is an average rate of 25 cents per kWh, in contrast to current MA rates of only 7 cents per kilowatt hour.”

Cape Wind Price vs Market Price

Turning now to the economics of wind in general, Dr. Michaels begins with the basic fact that wind power is non-dispatchable (the wind cannot be switched on or off at our command) and intermittent (wind power is often greatest when it is least valuable — at night — and least during peak hours when it would be most valuable). Ensuring electric supply reliability — balancing supply and demand across the grid from second to second — becomes increasingly difficult as more wind power is integrated into a service area. In Texas, for example, wind’s hourly contribution to electric load (demand) can decline from 25% to zero and vice versa.

Hourly ERCOT Wind as Percent of Load

The gap between wind’s rated capacity (the power it could produce at peak output) and what it actually produces is often huge. During a June 2006 hotspell in California, wind’s average contribution to meeting peak demand ”was only 256 MW, barely 10 percent of potential production had capacity been fully utilized.” For planning purposes, the Electricity Reliability Council of Texas (ERCOT) ”treats a megawatt of wind capacity as equivalent to only 8.7 percent of a megawatt of dispatchable fossil-fueled capacity.”

Wind is mandated and subsidized for a very simple reason: Otherwise it could not ‘compete.’ The “levelized cost” of wind energy (the cost per megawatt-hour of combined capital and operating expenses over the lifetime of the facility) is significantly higher than that of gas. For new units placed in service in 2017, the Energy Information Administration (EIA) estimates a $96/MWh levelized cost for wind versus a $66.1/MWh levelized cost for conventional natural gas combined cycle and a $63.1/MWh levelized cost for advanced combined cycle.

Note: The levelized cost of wind does not include the cost of fossil-fuel generation run in inefficient “spinning reserve” mode to back up wind farms when the wind stops blowing.

One factor making wind more costly is the frequent necessity to construct new long-distance transmission lines. Whereas a natural gas power plant can be built close to the community it serves, wind farms must be built where the best wind resources are, which may be hundreds of miles from the nearest load area. “Over the next five years ERCOT plans on building $8.7 billion of new high-voltage transmission, approximately $5 billion going to facilities that will be solely used to transmit wind power from central and western Texas to consuming areas.” Such costs, of course, are passed on to ratepayers.

EIA’s analysis may understate wind’s costs, Michaels suggests. Research in Denmark and the UK indicates that wind energy’s productivity declines rapidly over time:

A typical onshore wind turbine in the UK starts with a normal load factor (operating hours as a fraction of total hours) of around 25 percent. After five years the average factor is 15 percent, after ten years it is 10, and after 18 years it is 2 percent. Most cost-benefit calculations of wind units have assumed economic lifespans of 20 to 25 years and slower declines in productivity. If these figures continue to hold, a fifteen-year economic lifespan would substantially raise wind’s capital cost above its already high figure.

Even on environmental grounds, the case for wind is weak. Michaels does not discuss avian and bat mortality but rather the cost-effectiveness of wind as an air pollution control strategy. Regulations requiring the use of pollution control equipment or allowing permit trading within a declining emissions cap reduce more pollution at less cost than do policies mandating the substitution of wind for coal or gas. Citing a Bentek study, Michaels also argues that in areas where coal rather than gas provides backup generation, wind can actually increase net criteria pollutant emissions ”even after netting out the emissions reductions due to wind.”

One longstanding rationale for wind energy programs — the need to diversify away from rapidly-depleting fossil fuels – now seems rather dated:

Renewables policies were based in large part on an expectation that the end of inexpensive gas and oil was near. Instead of exhaustion, the nation now looks forward confidently to centuries of clean, inexpensive and secure energy. Instead of a “bridge fuel” to a renewable future, shale-based hydrocarbons are now the future.

 

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