Empty Economics

Wind power is empty economics enabled by pernicious public policy. For the financial benefit of a tiny few, it is a rigged game that misappropriates math and science and falsely exploits the well attentions of a naive and trusting public in the name of a greater good. It is neither great nor good.

Without massive government supports forced upon us, with costs borne by the taxpayer, the ratepayer, the sufferer and the environment, it would simply not exist.

To this charge, the wind merchants exclaim "give us time, we will one day be able to stand on our own". But this is a fraudulent claim which can never be made good, short of a fundamental change in the laws of physics.

The purpose of this section is to catalog and discuss the bad economics that is wind power.

11/22/11 - Alternative Energy's Alternate Reality (An excellent read from Forbes Magazine)

11/22/11 - Alternative Energy's Alternate Reality (An excellent read from Forbes Magazine)

Alternative Energy's Alternate Reality (Forbes Magazine)

SPREMBERG, GERMANY - AUGUST 09: Workers near ...

Image by Getty Images Europe via @daylife

Creating a “green energy” economy may be the most daunting central planning task ever attempted. It entails nothing less than the reengineering of our entire energy infrastructure. And, like all central planning schemes, it is based on a roadmap that eschews real-world experience and sound economics in favor of utopian ideology driven by political connections.

Now the experiment is unraveling, having barely begun. As the parade of government-subsidized failures like Solyndra, Stirling Energy, SpectraWatt, Evergreen Solar, Beacon Power, and others mount, now is a good time to look at how all the pieces of the alternative energy puzzle are supposed to fit together—and what happens when they don’t.

Everyone acknowledges that electricity generated from wind and solar cannot be produced and delivered at prices that compete with coal or gas. However, alternative energy advocates believe that someday the cost curves will cross, and that government subsidies will accelerate that day’s arrival.

For this to come true, multiple problems have to be solved before taxpayers run out of money or patience. Along the way, the alternative energy industry has to avoid getting sidetracked into the wrong technologies, as this will delay the eagerly awaited carbon-free future.

First, technology has to be invented that can deliver unprecedented levels of efficiency in the conversion of low energy-density sources like wind and solar into electricity suitable for transmission over the grid.

Second, the prices of fossil fuels have to rise, either because reserves become depleted or through the passage of regulatory encumbrances, such as a massive carbon tax.

Third, new techniques need to be developed to store electricity produced only while the sun shines or the wind blows, allowing that stored energy to be delivered later, when it is actually needed.

Fourth, massive transmission system upgrades need to occur to transport electricity from the wind and solar farms where it is produced to the urban areas where it is consumed.

Finally, unknown problems that crop up when immature technologies are brought to market have to be identified and resolved—from the scarcity of critical materials never before consumed in large quantities to the siting of massive structures that disturb the view of influential public figures. And, of course, after decades trying to protect wildlife from oil spills and other calamities, we must avert our eyes as windmills annually massacre millions of birds, many of them supposedly protected as endangered species.

Failure to solve any of these problems can doom the whole enterprise, stranding investments. Picking winners and losers in this interconnected risk management puzzle is like playing ten games of roulette simultaneously—you can only win if every bet comes in. Yet this has not dissuaded the Department of Energy from smacking your money down. So, how is our Nobel Prize-winning high roller doing?

Conversion efficiency is, indeed, climbing—very slowly. Under unsubsidized conditions, wind and solar would be nurtured in niche markets that fossil fuels cannot satisfy. In time, improvements might expand the market beyond those niches.

But when government subsidies are used to prematurely scale up technologies that make no economic sense, these early experiments become frozen in amber. Speculative investments counting on those subsidies fail. Solyndra was one such failure. Loss-making operations at scale can only be sustained while the mandates and subsidies last. Take away that expensive government support and the businesses crash.

Meanwhile, mature technologies are not standing still. Thanks to fracking and horizontal drilling, proven reserves of gas and oil are soaring, holding fossil fuel prices in check. Even as the Obama administration throws regulatory sand into the gears to slow these developments, newly accessible oil and gas isn’t going anywhere. Sooner or later, it will be pumped out, delaying the day at which the cost curves cross.

Attempts to store enough electricity to power the grid predate current environmental fashion. The motivation has been to reduce the cost of running expensive peak-load generators. However, the storage problem has not yet been solved because the physics are very, very hard. Dozens of ideas have been tried and found wanting, including flywheels, compressed air, pumping water uphill, and mammoth ultracapacitors. And if a practical technique is ever found, its primary economic benefit will not come from enabling windmills and solar farms, but from allowing the expansion of base-load fossil fuel generators, making it possible to reduce the fleet of peak-load facilities.

Then there is the upgrade of transmission lines. Political pressure can be used to force regulated transmission companies to agree to install new high voltage lines. But imagine how long the permitting and construction process will take when company executives are as loath to make these malinvestments as NIMBY-objecting residents are to have towers erected on or even on sight of their land.

The likelihood that all of these problems will be solved simultaneously before the political winds shift is vanishingly small. As we enter an election year, it is easy to see why the venture capital community is rapidly abandoning early-stage alternative energy investments, shifting their last bets to late stage deals, hoping to cash out before the party is over.

No one knows when the final chapter in this saga will be written, but we can be sure it’ll make a fine addition to a book describing the folly of central planning.

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Electricity rates now depend more on public policy and regulatory decisions than on actual costs.

Based on a newly released report from Oliver Wyman, a leading global management consulting firm, “There is a growing need to increase electricity prices. These rate increases are largely being driven by environmental, regulatory, and security requirements.” And they are adding to “financial strain at the worst possible moment.”

The report, designed to help utility companies deal with customer wrath, states that “the increases have been the most significant in the residential segment”—where they grew more quickly than other sectors. Despite declining pricing on some fuels, such as natural gas, electricity rates have risen 2.7% per year with some regions experiencing average price increases of 5.1% annually. In contrast, the consumer price index—excluding food and energy—rose by 1.7%.

Residential customers experiencing the highest increases, and/or potential increases, are those who are heavily dependent on coal-fueled generation, as required retrofits cannot economically meet existing environmental requirements—resulting in the proposed retirement of older coal-fueled plants. Existing and proposed EPA rules are having a significant impact on rates—with the vast majority of compliance costs falling on residents. The report states: “If these are enacted and enforced, the Federal Energy Regulatory Commission staff has informally estimated that 8% of our electric generation capacity, representing 81 GW of the nation’s generating capacity, will need to be retired.”

Lisa Jackson, EPA Administrator, was recently asked about the mass retirements of coal-fueled power plants as a result of EPA regulations. While they do not technically require shutting down any plant, the rules are such that plants cannot be operated economically—but Jackson doesn’t see that as her problem. “I can’t say what a business will decide to do. Some businesses are investing in nuclear, some are looking at natural gas. There are states that are leading the way on solar or wind.”

Jackson’s comment, plus the Department of Energy’s loan guarantees, makes clear that the only correct path is wind and solar. But why?

Because most states have renewable portfolio standards (or renewable energy standards) that require power companies to produce a set percentage of their electricity from sources such as wind and solar. These renewable sources, however, increase electricity prices, use more land, and have other personal impacts.

A recent article in the Financial Times quotes Steve Sawyer of the Global Wind Energy Council. He said, “In areas of strong wind and plentiful land, such as west Texas or Colorado, wind power could be cheaper than fossil-fuel generation even without subsidies.” Yes, it “could” be—if the public policy and regulatory decisions keep driving up the price of electricity generated from traditional sources. But currently, renewable energy is clearly more expensive.

A few weeks ago, I wrote about the shenanigans the legislature went through in Rhode Island to push an off-shore wind farm—even though the Public Utility Commission declared that it was “commercially unreasonable.” That story made clear that renewable electricity, despite what proponents say, is more expensive. In short, earlier this year, Rhode Island residents were paying 9.4 cents per khw. However, due to a drop in natural gas prices, in March the Public Utility Commission approved a 26% ratedecrease, dropping rates from 9.4 cents per kwh to 6.9. By comparison, the contract for the wind-generated electricity started at 24.4 cents per kwh and includes a guaranteed 3.5% price increase bringing the wind-generated electricity to 47 cents per kwh in twenty years—making the wind-generated electricity roughly 4-8 times more expensive than the natural gas-fueled electricity.

While disposable income for most Americans has shrunk, rules and regulations—not market forces—have driven the price of electricity up, increasing energy’s share of people’s disposable income by 12%.

As Lisa Jackson proudly stated, “There are states that are leading the way on solar or wind.” If she has her way, and utilities need to shut down their coal-fueled power plants and replace them with renewable facilities, we know the costs will be considerably higher—which some believe to be a worthwhile trade-off—but, what will that really look like?

In New Mexico, in order to meet the state’s Renewable Portfolio Standard, the primary utility company, PNM, is in the process of installing five major solar arrays around the state. Each of these industrial solar parks occupy fifty acres and have a capacity factor of one megawatt—or enough electricity for 1200 “average” homes.

The San Juan Generating Station, one of the state’s coal-fueled power plants targeted by Lisa Jackson’s EPA, consistently cranks out 1482 megawatts—or enough for 1.8 million “average” homes.

Simple math and these real life scenarios, tell us that in order to replace the one coal-fueled power plant (which is built right next to the coal mine that provides an abundant supply) with the planned industrial solar parks would require 1482 of the arrays—which would cover 74,100 acres.

A similar comparison is available for wind. The New Mexico Wind Energy Center provides wind-generated electricity to PNM through 136 wind turbines on 9600 acres—yielding about 50 megawatts of usable power to serve 60,875 homes. To replace the San Juan Generating Station with wind would cover, using the New Mexico Wind Energy Center model, 284,544 acres. However, using the industry average, replacing the San Juan Generating Station with wind turbines would occupy 509,808 acres.

As noted in previous columns, environmentalists are obstructing industrial wind and solar parks due to the massive land use and others fight the instillations due to viewscape pollution.

So public policy and regulatory decisions are making electricity more expensive while requiring massive land use and damaging habitat and degrading the viewscape. But there’s more.

Colette read an article on renewable portfolio standards that I’d written earlier this year. Last week she e-mailed me to ask about my comment: “It is not that renewable energy is wrong. There are many cases where wind or solar are the best option.” Following her name, her signature included, “Resident living with the incessant twirling and swooshing from 24 industrial wind turbines.” I e-mailed her. In her response she said, “I took exception to your statement because I believe that in the end things like wind energy are wrong even for those small scale situations where someone wants the visceral satisfaction that they are doing ‘something’ toward their energy usage.”

Colette proceeded to tell me her story of living with four wind turbines within about a half a mile from her backdoor—and 24 within about two miles from her farm and home.

Back in 2006, Colette, and other farmers, were approached by a wind-power generation developer and offered the opportunity to “host” the industrial wind turbines. Many of the farmers saw wind as their “new crop to harvest.”

Before signing the developer’s contract, Colette had an attorney review it. She was shocked at the restrictions that would be placed on her own land should she sign the contract—including putting the long-term ownership of her farm in danger. She did more research and found myriad reasons to fight the industrial wind energy project. She says, “Unfortunately there were forces in local government that were prepared for opposition, and that had already paved the way for development, regardless of community reaction.”

Now, with 24 wind turbines within a few mile radius of her home, Collette says: “It’s not pretty living with these 400-foot behemoths and there are many times the incessant swirling and swooshing has me depressed and angry. The enjoyment of my home and property has been taken away. Other residents are suffering deeply with tinnitus, ear pain, migraines, and sleep disruption. Luckily my symptoms are not as severe and, other than the lack of sleep, I seem to be able to cope. Some neighbors have told me that they have resigned themselves to finding a way to live with the development because there is no hope of changing anything now that the turbines are up and running.”

The personal impacts have been greater than sleep disruption, tinnitus, or migraines. They are more than viewscape degradation or loss of enjoyment of one’s home and property. Reflecting on the multi-year battle, Colette says: it “completely shattered my faith in government and the environmental movement.”

These snapshots are representative of what is going on throughout the western world. Colette is from Canada. In the European Union, according to the Financial Times, “energy bills have become an increasingly acrimonious political issue, and there are signs of similar tensions flaring in the US.”

The Oliver Wyman report states, “While the future outlook for electricity rates is largely dependent upon public policy and regulatory decisions, one fact is clear: substantial capital investments are required by the nation’s utilities to modernize the electric grid and meet proposed environmental requirements.”

However, unlike Colette’s neighbors, we do not have to be resigned to finding ways to live with the current public policy and regulatory decisions as they are not yet fully up and running. Significant impacts on future consumer prices are being debated today. In the midst of an economic war, we should not be arbitrarily raising energy costs. We need to push “legislators and regulators to find constructive solutions to keep rates low for consumers—including deferring or modifying rules and regulations that have significant capital requirements.”

Alternative Energy's Alternate Reality (Forbes Magazine)

Paying the Rates Obama Demands