Debating wind power cost estimates – 4

[Series header: On the Morning of October 15 the Institute for Energy Research in Washington DC released a report I’d written about the federal government's wind power cost estimates. (Links available here.) Later that day Michael Goggin of the American Wind Energy Association, the lobbying organization in Washington DC that represents the wind energy industry, posted a response on the AWEA website: “Fact check: Fossil-funded think tank strikes out on cost of wind.” I’m considering points made by the AWEA response in a series of posts.]

Next in his response Goggin moves into a more detailed version of his claim my report “relies on old and theoretical data for the cost of wind, even though it had access to more recent real-world data.”

As I mentioned in an earlier post, I primarily draw on the Lawrence Berkeley National Lab’s 2012 Wind Technologies Market Report (WTMR), published in August 2013, and the National Renewable Energy Lab’s 2011 Cost of Wind Energy Review (CWER), published in March 2013. These two reports are the most recent publications in the federal government’s two long-standing research efforts examining the cost of wind energy. If this work isn’t current enough for Goggin, his complaint is with the national labs and not me.

The WTMR summarizes “real-world data,” while the CWER presents Levelized Cost of Energy (LCOE) estimates for wind power. The NREL’s LCOE estimate relies on data from the Berkeley Lab’s WTMR and is typically published a few months later. Since the Berkeley Lab’s 2012 report was published a little over two months ago, the NREL LCOE estimate update for 2012 likely won’t emerge for another few months.

My report focuses on these two recent government publications because they are the latest summaries from the two most thorough and complete research efforts on the developer’s cost of wind energy in the U.S., and because they are the source of the most frequently cited information on wind energy costs.

In the following I reply to remarks Goggin makes in the first half of his more detailed comments.

Continue reading

MasterResource–$0.11/kWh: Why Wind Is More Expensive than Advertised

At the MasterResource blog, “$0.11/kWh: Why Wind Is More Expensive than Advertised,” a quick summary of my report for the Institute for Energy Research, “Assessing Wind Power Cost Estimates.”

And be sure to notice in the comments on that blog post: remarks from the American Wind Energy Association.

Debating wind power cost estimates – 3

[Series header: On the Morning of October 15 the Institute for Energy Research in Washington DC released a report I’d written about wind power cost estimates sponsored by the federal government. (Links available here.) Later that day Michael Goggin of the American Wind Energy Association, the lobbying organization in Washington DC that represents the wind energy industry, posted a response on the AWEA website: “Fact check: Fossil-funded think tank strikes out on cost of wind.” I’m considering points made by the AWEA response in a series of posts.]

The AWEA response to my report includes the retort, “IER is also incorrect in alleging policy support for wind energy is large or unusual.” (Link in source.)

Actually, no claim in my report suggests policy support for wind is large relative to other energy resources–I don’t discuss subsidies or policy supports for other energy sources. I didn’t intend to allege a relative subsidy size claim. But if Goggin is interested in my view, it is: Unfortunately, policy supports for politically-favored energy sources are not at all unusual, and they tend to reduce overall economic performance, and we’d be better off if we gave up on trying to direct energy markets from Washington DC.

We can’t reach back and undo all of the damage from bad energy policies of the past, but we ought to fix the energy policy we have now. And by “fix” I mean cut energy production subsidies, purchase mandates, favorable tax treatments, regulatory limits on competing energy resources, and otherwise minimize the role of political influence in the choices of energy producers and consumers.

Cut them all down: renewable subsidies, fossil-fuel subsidies, and nuclear subsidies. Sure, do something about pollution, and I’m not in principle against government-sponsored research, but various energy production subsidies and other policy supports tend to benefit a few at the expense of the rest of us.

What my report does claim is the PTC-subsidy for wind power imposes costs on non-wind participants in power markets. Without the PTC, we’d have a lot fewer wind turbines connected to the grid; the wind turbines that did get built would not bid into markets at negative prices, and with fewer wind turbines installed the resulting modest displacement of non-wind power might even be a net economic benefit.

Part of the problem is the PTC subsidizes output at the margin and so directly distorts prices and the generation mix in regional power markets. The alternative Investment Tax Credit subsidy sometimes available to wind power developers, on the other hand, is inframarginal and a bit less distorting: excessive amounts of wind are built, but ITC-subsidized wind power faces no special incentive to run at negative prices. (In economics terms, the ITC is more like a lump-sum transfer while the PTC is a per-unit production subsidy. A per-unit production subsidy is typically seen as more distortionary than a lump-sum transfer.) Generally, when wind power runs at negative prices, it suggests that non-wind baseload power plants are being pushed into a costly pattern of cycling off and back on. These cycling costs, as well as the modest wear-and-tear on the wind turbines operating when their output has negative value, are excess costs caused by the PTC subsidy.

Next: So far I’ve been responding to the introduction of the AWEA/Goggin response. The rest of the response goes into a little more detail on certain points–I’ll respond in a little more detail as seems appropriate.

Debating wind power cost estimates – 2

[Series header: On the Morning of October 15 the Institute for Energy Research in Washington DC released a report I’d written about wind power cost estimates sponsored by the federal government. (Links available here.) Later that day Michael Goggin of the American Wind Energy Association, the lobbying organization in Washington DC that represents the wind energy industry, posted a response on the AWEA website: “Fact check: Fossil-funded think tank strikes out on cost of wind.” I’m considering points made by the AWEA response in a series of posts.]

Goggin complains I am relying on obsolete data and government estimates in my report instead of “price data from signed contracts.” He wrote:

The reality is that wind energy is driving electricity prices down, thanks to large recent reductions in its cost. Contracts that utilities signed to purchase wind energy, which were approved by state regulators and filed with the Federal Energy Regulatory Commission, document that the average purchase price for wind energy was $40 per MWh in 2011 and 2012.

While IER tries to hide behind old data and theoretical estimates, it cannot escape from the real-world data proving that utilities are signing low-cost contracts to purchase wind power. It is strange that an organization that claims to support free-market price signals would use government estimates instead of price data from signed contracts.

Wind energy’s costs have fallen by more than 40 percent over the last four years. These cost declines have been driven by technological improvements as well as the development of a domestic wind-turbine manufacturing sector that now builds over 70 percent of wind turbine value in the United States. [Emphasis in original.]

It is true that wind energy is driving electric prices down, but it has little to do with the reduction in capital cost and more to do with the effect of adding low marginal cost wind power in regional power markets. Whether these are efficient prices are another matter–consider, for example, that many in Texas are worried that low power prices are discouraging investment in new generation at a time that ERCOT studies suggest new investment will soon be needed. I’ll come back to this question in a later post.

Old data? My primary resources are the 2012 Wind Technologies Market Report (WTMR) produced by the Lawrence Berkeley National Lab, published in August of 2013, and the 2011 Cost of Wind Energy Review (CWER) produced by the National Renewable Energy Lab, published in March 2013.These two document series funded by the Department of Energy are the most recent publications in the longest, most detailed and complete assessments of wind power costs available targeting the U.S. wind industry. I cite to earlier reports in the WTMR and CWER series on a number of occasions when they present relevant discussions of methods and data sources that are not reproduced in the most recent report. A scan through my bibliography shows I cited one document as old as 2004, but the bulk of my citations link to documents published in 2011, 2012, and 2013.

Government estimates instead of market data? Goggin claims, “It is strange that an organization that claims to support free-market price signals would use government estimates instead of price data from signed contracts.” Not at all. The Berkeley Lab and NREL reports are the most frequently cited and likely most authoritative resources available on the topic of wind power costs. The primary point of the my report was to evaluate and provide broader context for understanding the frequently-cited wind cost estimates presented in the Berkeley Lab and NREL reports. For that reason, the report focuses on these “government estimates instead of price data.”

There is more. Cost and price are far from equivalent concepts. Goggin seems to miss this point, but the Berkeley Lab understands. At page 49 of the 2012 WTMR, the report authors said, “because the PPA prices in the Berkeley Lab sample are reduced by the receipt of state and federal incentives (e.g., the levelized PPA prices reported here would be at least $20/MWh higher without the PTC, ITC, or Treasury Grant), and are also influenced by various local policies and market characteristics, they do not directly represent wind energy generation costs.” (Emphasis in the original.)

As even a basic understanding of economics reveals, a subsidy can reduce a price even as it increases the cost of a good or service.

Goggin claims that, because “the average purchase price for wind energy was $40 per MWh in 2011 and 2012,” we can conclude that there are large reductions in cost. Goggin’s $40 per MWh report likely comes from the most recent WTMR, but here is the full sentence with a bit more information:

After topping out at nearly $70/MWh for PPAs executed in 2009, the average levelized price of wind PPAs signed in 2011/2012—many of which were for projects built in 2012—fell to around $40/MWh nationwide, which rivals previous lows set back in the 2000–2005 period.

So prices for contracts in 2011/2012 have returned to levels of the 2000-2005 period? And this is, supposedly, evidence of vast reductions in the cost of wind power, that we are now–after shoveling billions of dollars into the wind power industry post 2005–only now getting wind power contract prices back to the level that they used to be? Goggin’s got more explaining to do if he wants to make an argument using prices to represent costs.

A much more likely explanation is that wind power contract prices depend, in part, on alternative sources of electric power. As natural gas prices rose up through 2008, utilities were willing to pay higher prices for wind power. As natural gas prices fell beginning in late 2008, wind power contract prices fell with them. I’ll hazard the guess that these contract prices have more to do with natural gas prices then reductions in wind power costs.

Up next: Are government subsidies for wind power large or unusual compared to government support for fossil fuels, nuclear power, and other resources?

Debating wind power cost estimates – 1

On the Morning of October 15 the Institute for Energy Research in Washington DC released a report I’d written about wind power cost estimates sponsored by the federal government. (Links available here.) Later that day the Michael Goggin of the American Wind Energy Association, the lobbying organization in Washington DC that represents the wind energy industry, posted a response on the AWEA website: “Fact check: Fossil-funded think tank strikes out on cost of wind.” I’m considering points made by the AWEA response in a series of posts.

Before we get to substantive issues, I’d like to emphasize that I have no particular objection to wind energy technology. In fact, geek-wise I think it is kind of neat that tall, graceful, well-designed machines can make electric power out of the wind. However, I do object to a wide range of federal energy policies including the Production Tax Credit. Like most other government subsidies, the PTC distorts the electric power market and makes most people worse off.

Okay, still not yet to the substantive issues, but consider Goggin’s opening paragraph:

After two failed attempts to attack wind energy earlier this month, the fossil-fuel-funded Institute for Energy Research (IER) has now struck out swinging (strikes one and two are documented here). Strike three comes from a report written by Michael Giberson that relies on obsolete data and largely regurgitates anti-wind myths that have already been debunked. As a result of those mistakes, IER’s report overstates the actual cost of wind energy by around 100%.

[Links are carried over from the AWEA website for the convenience of the interested reader.]

The words “fossil-fuel-funded” link to a website ran by the Natural Resources Defense Council intended to finger the groups “trying to stop clean energy and new jobs” and reveal (some of) these groups sources of funds. It notes that the Institute for Energy Research (IER) leadership includes people who had worked for large energy companies in the past (Enron, Koch Industries) and that IER had taken money from ExxonMobil. (I tried to dig a little deeper by using resources relied upon in a Daily Kos article published a few days ago about links between the Koch brothers and various policy and advocacy groups, but didn’t turn up anything more on IER.)

Now I didn’t personally speak to anyone from Koch Industries or ExxonMobil about any of this work, and I don’t personally care much where IER gathers its money from (as long as I get paid). It also doesn’t matter to me where AWEA gets its money.

In any case, if you want to dismiss my report because IER once took some money from ExxonMobil, then you should read this short essay instead.

The rest of Goggin’s opening paragraph asserts I relied on obsolete data and anti-wind myths to make my case, and as a result I overstate the “cost of wind energy by around 100%.” These points get into substantive issues, I’ll take them up in subsequent posts.

Assessing wind power cost estimates produced by the US government

From the press release:

WASHINGTON — The Institute for Energy Research released today a study titled Assessing Wind Power Cost Estimates. The study, written by Dr. Michael Giberson, an economics professor at Texas Tech University, details the costs of wind power that commonly go unreported in studies performed by government-funded groups such as the National Renewable Energy Laboratory (NREL). The study is published as the federal wind Production Tax Credit (PTC), a massive subsidy to the wind power industry, is set to expire at the end of the year. Last year, the PTC received another one-year extension that government analysts project will cost taxpayers $12 billion.

“As Big Wind’s lobbyists fight tooth and nail to extend the wind Production Tax Credit, it is important that we look at the true costs of wind power to taxpayers and ratepayers,” IER President Thomas Pyle said upon release of the study.

“Despite being propped up by government mandates and billion dollar subsidies for decades, wind power continues to be an expensive and boutique energy source that the American people cannot rely on for power when they need it. Although lobbyists for the wind industry prefer to downplay the real costs of wind power, Dr. Giberson has produced a fact-based study that demonstrates just how expensive it really is.”

The study highlights several categories of costs that NREL and others fail to recognize in their studies on the Levelized Cost of Energy (LCOE). Rather than approaching the cost of wind power from the point of view of the wind project developer, Dr. Giberson takes a broader view of the cost of wind power to all Americans, including electricity consumers and taxpayers.

As Giberson states in the study, “While expenses faced by wind project developers are an important element of the overall cost of wind power, the addition of wind power to the power grid involves a number of other costs … Such costs include the expense of transmission expansions needed to develop wind power, other grid integration expenses, and added grid reliability expenses.”

So that press release hit the newswires this morning, and a little later today the American Wind Energy Association explained on their blog that I was wrong, wrong, and wrong about wind power costs: “Fact check: Fossil-funded think tank strikes out on cost of wind.”

Now that the study is out, I’ll post a bit about it here over the next few days. I’ll see what I can learn from the AWEA reaction and comment on it as well.

To read the full study, “Assessing Wind Power Cost Estimates,” click here (PDF), for the executive summary, click here (PDF).

ADDED NOTE: One infelicity in the press release describes me as a professor in the economics department at Texas Tech University. Actually, I’m an economist working in the Area of Energy, Economics, and Law in the Rawls College of Business at Texas Tech University–the economics department is located across campus within the College of Arts & Sciences.

Anti-price gouging laws can increase economic welfare

An article by Robert Fleck of Clemson, forthcoming in the International Review of Law and Economics, presented a theoretical case that price gouging restrictions can be value-enhancing under certain conditions. I was skeptical, but Fleck is careful in building his case.

The key qualifier above is under certain conditions. In “Can Prohibitions on ‘Price Gouging’ Reduce Deadweight Losses?” Fleck agreed it is obvious price caps can cause shortages, and price caps designed to apply specifically during emergencies can create shortages at times during which shortages are especially harmful to consumers

But he found a special case for which such laws may be on net beneficial, namely: when consumption of the good creates external benefits, and the price gouging limits are foreseen to create shortages under unpredictable high demand conditions, and production is fixed in the short run, and resale of the good among consumers is impossible, then the policy can induce consumers to buy larger amounts of the external-benefit generating good.

His primary illustration was flu vaccinations, for which production is completed before the flu season type is revealed to be either “high demand” (flu epidemic) or “low demand” (normal). In the absence of shortage-inducing price limits, consumers wait for realization of the flu season type before deciding whether to get a flu shot. Given a price gouging-based price cap and resulting predictable shortage, Fleck explained, more consumers buy a vaccine production prior to the flu season (i.e. before revelation of the flu season type). Because by assumption consumption of the good has external benefits, inducing greater consumption can create net increases in overall economic value.

Fleck clearly stated that his result doesn’t generalize to all price gouging restrictions. While he suggested a few light stories of the potential external benefits associated with drinking water, gasoline, home electrical generators, and chain saws, he didn’t play these alternatives up. (For good reason, too. Unlike flu vaccinations “consumed” at point of retail purchase, these other consumer goods are readily resold. A resale market undermines consumer incentives to purchase the good before the demand type is known and so does not lead to an increase in overall consumption.)

He concluded by raising the possibility the widespread adoption by states of price gouging proscriptions might reflect growth of relatively efficient types of regulation at the expense of less efficient regulation, or perhaps the laws persist because they are not as costly as they otherwise may seen. On this point I remain skeptical.

As Fleck emphasized early in the paper, the model shows that price gouging limits may be on net beneficial, but it does not conclude they must be on net beneficial. In addition, even when the policy may be on net beneficial it will fail to maximize total benefit, and so in theory there are better policies. Finally, he said, the laws would have to be tailored to apply mostly under the restrictive conditions set out above. Price gouging restrictions under other conditions will reduce overall surplus. Fleck suggested (for Hayekian knowledge problem reasons) it was unlikely that policymakers would be so well informed as to be able to identify just which products and at which times the laws should apply.

Overall he has a unique and interesting theoretical case built with traditional microeconomic tools. Other attempts at providing an analytic foundation for price gouging laws are ad hoc and unpersuasive (comments on Rotemberg here, comments on Rapp here and here). But despite Fleck’s offering an efficiency-based justification for price gouging limits, the relatively strict conditions for his theoretical case make the model an unlikely base of support for any existing price gouging policy.

Colorado merchants have pricing freedom

Flooding in Colorado has caused damage across nearly 2,000 square miles of the state. While many businesses are chipping in to help people affected, some people are concerned that lack of a state anti-price gouging law leaves consumers exposed to unjust price increases.

A Denver Post story begins:

Flood-ravaged Colorado is one of only 15 states where price-gouging during an emergency is not illegal — it’s merely capitalism.

To some it might be socially reprehensible and ethically wrong, but legally there’s nothing to prevent a businessperson from upping the cost of necessary post-disaster supplies to meet the pressing needs of those affected by the event.

“The price of a product or service alone is not a scam if it’s fully disclosed,” Colorado Assistant Attorney General Jan Zavislan said. “If the consumer has the information and has the right to shop around, but the sources in an emergency aren’t there, it might be an outrage to people, but there’s no specific law on the price itself.”

As communities begin the process of cleaning up from the floods and taking an inventory of insurance coverage — if any — more immediate needs of food, water, fuel and shelter can be met with surprise over their cost.

As long as a merchant is clear on the price — even if it’s 10 times the rate it had been before the disaster — then there’s no law broken.

The article doesn’t actually cite examples of price gouging in Colorado, just notes that nothing in state law would prevent it. (Another story online said a Longmont, CO resident reported that a septic company nearly doubled it rates after the flood, but that’s it so far as I can find.)

The article explains that a bill to prohibit price gouging in Colorado was vetoed in 2006 by then-Gov. Bill Owens. Owens said, “[the bill] violates the fundamental principles of our market-based economy.”

NOTES: The Denver Post article states Colorado does have an anti-price gouging law solely for needed drugs, the price of which cannot rise more than 10 percent during a disaster declaration.

By the way, by my count 34 states have anti-price gouging laws and 16 states do not have such laws (see my list and the related graphic). The article claims 35 states with and 15 without. Maybe I need to update my list.

Perverse outcomes of water subsidies

I’m intruding on David Zetland’s turf, but in this 2012 Guardian article from 2012 Roger Cowe makes some compelling arguments about why agricultural water subsidies lead to perverse outcomes, do not help the poor, and waste a precious, scarce resource. Water is the only industry in which regulation more perversely stifles self-organizing processes for managing scarcity than electricity. His conclusion is apt:

Like most other perverse subsidies, the goal of improving access to water is not at issue. The perversity arises because making water cheap, especially to crop farmers, leads to excessive use and unintended, environmentally harmful consequences. And the poor, who are often the main targets of subsidies, typically don’t benefit. Irrigation benefits landowners rather than their tenant farmers. And surprisingly, consumption subsidies do few favours for poorer families.

Continuing debate over the economic origins of electric utility regulation

State regulation of electric utilities began in earnest about 1907 and by around 1920 almost all states had begun state regulation. Prior to state regulation, most electric utilities were regulated through city-issued franchise agreements. Was state regulation of privately-owned electric utilities efficiency enhancing relative to the municipal franchise regulation of electric utilities that preceded it?

Thomas Lyon and Nathan Wilson, in the Journal of Regulatory Economics (2012, full cite below), write, “Electricity is perhaps the quintessential regulated industry, yet the historical roots of its regulation remain imperfectly understood. This lack of clarity exists despite the existence of a small but fascinating literature on the subject.”

Two main opposing lines of thought are supported: a public choice story of regulatory capture, and a transactions cost/contracting story of efficiency enhancing state regulation. Lyon and Wilson begin with a quick survey of this literature:

In a pioneering paper that initiated the empirical study of regulation, Stigler and Friedland (1962) argued that the behavior of electric utilities subject to state regulation was not significantly different from that of other utilities. Jarrell (1978) pointed out that interpreting this result was difficult, since utilities not subject to state regulation remained subject to municipal franchise contracting, which had preceded state regulation historically. He showed that not only was state regulation adopted earlier in states with lower rates, these early-adopting states subsequently saw their electric rates fall more slowly than those in other states; he thus characterized state regulation as a classic example of capture by the regulated industry.

More recent work suggests that because municipal franchise contracting was rife with corruption, state regulation was seen as more likely to protect the massive quasi-rents created by large-scale investment in generation capacity. If so, then the relative increase in prices under state regulation could have been necessary to support investment, and state regulation can be seen as a better form of long-term relational contract. Knittel (2006) used an empirical hazard model to shed new light on the drivers of early adoption of state regulation, and found they included not just low prices, but also capacity shortages and low residential electricity penetration rates.

This suggests that a desire to increase investment may have been an important  factor driving the adoption of state regulation. Neufeld (2008), in a similar empirical analysis, finds that states with a higher level of capacity per capita (proxying for larger appropriable quasi-rents) adopted state regulation earlier. This suggests that a desire to protect existing investments may have been an important factor driving the adoption of state regulation. Both papers imply that state regulation was expected to provide better protection for investment than did municipal franchise contracting.

Lyon and Wilson note that both the capture and contracting explanations are consistent with Jarrell’s finding of relative price increases after a move to state regulation, but that the explanations differ with respect to their implications for investment. The capture theory suggests that utilities would raise prices to allow owners to take more profits (with higher prices resulting in slower consumption growth, implying slower capacity growth), while the contract story suggests utilities would raise prices to invest in additional capacity once they had been relieved of the risk of municipal predation.

Lyon and Wilson examine investment in capacity over the period 1902 to 1937 to determine what effect, if any, state regulation had on investment. While data limits challenge the analysis, the authors find a fairly consistent pattern of state regulation being associated with slower rates of investment. That is to say, the authors conclude investment data supports the capture theory of regulation.

From their conclusion:

This paper has tested whether state regulation did indeed result in a stronger propensity to invest on the part of electric utilities. We found no support for this hypothesis. Instead, we found robust evidence that state regulation actually reduced the investment propensity of investor-owned utilities, controlling for existing levels of capacity per capita. From the perspective of enhancing investment, any protection against regulatory opportunism conferred by state regulation was apparently outweighed by its vulnerability to capture by regulated firms.

REFERENCES

Jarrell, Gregg A. “The Demand for State Regulation of the Electric Utility Industry.” Journal of Law & Economics 21 (1978): 269.

Lyon, Thomas P., and Nathan Wilson. “Capture or contract? The early years of electric utility regulation.” Journal of Regulatory Economics 42.3 (2012): 225.

Neufeld, John L. “Corruption, quasi-rents, and the regulation of electric utilities.” Journal of Economic History 68.04 (2008): 1059. [Article discussed earlier on KP here.]

Stigler, George J., and Claire Friedland. “What can regulators regulate? The case of electricity.” Journal of Law & Economics 5 (1962): 1.