Lynne Kiesling
There has been some attention to Whole Foods’ recent announcement that they will purchase sufficient wind energy credits to run all of their stores.
The Austin-based company said it is purchasing 458,000 megawatt-hours of wind energy credits a year ? enough to power 44,000 homes annually ? from Renewable Choice Energy of Boulder, Colo.
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Because power does not flow from wind farms directly to a home or business through a utility grid, Whole Foods is purchasing energy credits ? like a voucher ? that assure wind energy eventually gets placed on the grid.
The company began rolling out wind energy for all 173 stores in the United States and Canada last month. Prior to that, 20 percent of its electricity had been from renewable sources.
If you want to learn more about how wind credits work, visit Renewable Choice Energy’s website.
I love seeing new markets, and I love seeing entrepreneurs serve the vast, diverse interests of heterogeneous consumers with subjective preferences. I am concerned, though, about some of the unintended pernicious incentives embedded in subsidies of such good things, like renewable energy. The recent Energy Policy Act, as well as other pieces of state legislation (including renewable portfolio standards in several states), contains subsidies and tax breaks for renewable power. My question is this: if it has economic value, why does it need the subsidies? If customers value clean energy enough to pay the higher price, won’t they do it? If the subsidies are meant to overcome some barrier, what barrier is it? The most pressing barrier for wind has been interconnection barriers from transmission-owning utilites, but many of these are falling through some FERC proceedings and rulings.
Recently Pete Geddes said it well:
I recently met with a Bozeman writer about my opposition to subsidies for alternative fuels. Am I opposed to all subsidies, including those for fossil fuels, or just for wind, solar, and synfuels? Of course, I responded, I?m opposed to all commodity subsidies on ethical and environmental grounds. But I support federal investments in basic research and projects like the construction of the Hyalite handicapped trail.
Here?s how I think about the difference. When we subsidize things that trade in the market, we benefit the well off and well organized at the expense of the most vulnerable members of society. This holds true whether in Bozeman, Boston, or Birmingham. Princeton Ph.D. George Will said it well: ?The world is divided between those who do and do not understand that activist, interventionist, regulating, subsidizing government is generally a servant of the strong and entrenched against the weak and aspiring.?
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Here?s a key point. If consumers really derive superior value (i.e., in terms of price and performance) from alternative energy sources, won?t entrepreneurs rush to deliver these products to them?
We all care about our energy future; some of us care for the environmental consequences. They include: human health, natural beauty, and ameliorating the negative effects of climate change. Most folks primarily value warm homes in the winter, fast and convenient transportation, and inexpensive energy. The questions we face involve balancing competing values. In what combination and in what amounts should we seek the things we want?
Thanks to Russ Roberts for the link.
Like Pete, I worry about the extent to which such subsidies serve only to reward the well-organized and do not lead to an increase in economic surplus/welfare.
Tagged with: electricity + renewable energy + environment
Subsidies, generally, pick “winners” and “losers”; most often, in doing so, they subsidize “losers” to make them appear to be winners, until it becomes painfully obvious that they are not and will not ever be “winners”. The subsidies are then redirected to the new “latest and greatest” idea.
Subsidies, generally, pick “winners” and “losers”; most often, in doing so, they subsidize “losers” to make them appear to be winners, until it becomes painfully obvious that they are not and will not ever be “winners”. The subsidies are then redirected to the new “latest and greatest” idea.
Aah, the myth of the rational actor appears again. Of course if we calculate NPVs of all our future revenue flows and decide between the possible alternatives we will naturally choose wind power for its supposed high value. But then again, that assumes that people are willing to collectively get together, invest in a projects with high initial fixed costs, and then reap the benefits later. What organisation would be able to gather a bunch of people together and invest in large projects despite the collective action problem? Might it not resemble government occasionally?
That George Will quote is pure genius. I’ve never been one to display a quote on my wall or .sig or anything, but I may have to change.
He should get the Nobel-freaking-Peace prize for that one. Brilliant!
There are other reasons for policy makers to favor renewables. Regulators must consider future risk when deciding what resources to rely on. In California, one of the identified risks is the risk of future carbon regulation, and therefore the risk that the coal plant invested in today will be worthless in the future. This is the kind of problem that can’t be solved by market forces alone — the players simply don’t have access to the information needed to make the decisions, or else their interests aren’t necessarily long-term.
There are other reasons for policy makers to favor renewables. Regulators must consider future risk when deciding what resources to rely on. In California, one of the identified risks is the risk of future carbon regulation, and therefore the risk that the coal plant invested in today will be worthless in the future. This is the kind of problem that can’t be solved by market forces alone — the players simply don’t have access to the information needed to make the decisions, or else their interests aren’t necessarily long-term.
A common argument I hear is that renewables need subsidy to put them more on equal terms with traditional energy sources that also receive subsidies. Sure, it’d be better to remove all energy subsidies, but it’s more politically feasible to create new subsidies for renewable energy than it is to remove existing subsidies for traditional energy sources.
The tax credits indeed address a real barrier: incomplete markets. The true social cost of coal, nuc, and gas plants will not soon fully be internalized into the market even though REC markets do exist. There is too much of a knowledge problem for enough customers to value clean energy enough to pay the renewable premium that would get us to a pareto optimal resource allocation (though I’m not saying I know what that allocation is!).
Add this externality problem to the political problem of concetrated costs/diffuse benefits of reducing carbon intensities, and there you have a case for at least some smart, market-cognizant government intervention, right?
Perphas a carbon cap & trade system would be a more effective internalization strategy than the PTCs, but that’s a matter of political feasibility.
The tax credits indeed address a real barrier: incomplete markets. The true social cost of coal, nuc, and gas plants will not soon fully be internalized into the market even though REC markets do exist. There is too much of a knowledge problem for enough customers to value clean energy enough to pay the renewable premium that would get us to a pareto optimal resource allocation (though I’m not saying I know what that allocation is!).
Add this externality problem to the political problem of concetrated costs/diffuse benefits of reducing carbon intensities, and there you have a case for at least some smart, market-cognizant government intervention, right?
Perphas a carbon cap & trade system would be a more effective internalization strategy than the PTCs, but that’s a matter of political feasibility.
You raise a good question about why we need to keep subsidizing wind power,
but I think that’s actually the wrong question. In reality, every power generation
source is subsidized in some way and to some extent (and by “some” I mean “a
large”). So it’s not like you have subsidized wind vs. un-subsidized coal. Even
that is not the right comparison, because without on-site backup, wind will probably
not displace coal in the dispatch order, but rather will compete with gas, hydro, other wind, etc.,
all of which receive implicit or explicit subsidies. I think the right question is
how un-subsidized wind would compare against other new plants and technologies (NGCC, IGCC, and so on).
In the literature anyway, there are a handful of calculations
that say wind would be cost-effective, and another handful that say it wouldn’t.
The article you linked didn’t mention a cents/kWh price that Whole Foods is paying.
You raise a good question about why we need to keep subsidizing wind power,
but I think that’s actually the wrong question. In reality, every power generation
source is subsidized in some way and to some extent (and by “some” I mean “a
large”). So it’s not like you have subsidized wind vs. un-subsidized coal. Even
that is not the right comparison, because without on-site backup, wind will probably
not displace coal in the dispatch order, but rather will compete with gas, hydro, other wind, etc.,
all of which receive implicit or explicit subsidies. I think the right question is
how un-subsidized wind would compare against other new plants and technologies (NGCC, IGCC, and so on).
In the literature anyway, there are a handful of calculations
that say wind would be cost-effective, and another handful that say it wouldn’t.
The article you linked didn’t mention a cents/kWh price that Whole Foods is paying.
Whole Foods makes money off the credulity of people who believe that chicken from one farm differs in some important way from chicken from a different farm. They are likely to believe that electricity from one plant differs in some important way from electricity from another plant. the expenditure is therefore just advertising. Fortunately, my daughter in Evanston is now closer to the Dominicks on Green bay than she is to the Whole Foods on Chicago.
Whole Foods makes money off the credulity of people who believe that chicken from one farm differs in some important way from chicken from a different farm. They are likely to believe that electricity from one plant differs in some important way from electricity from another plant. the expenditure is therefore just advertising. Fortunately, my daughter in Evanston is now closer to the Dominicks on Green bay than she is to the Whole Foods on Chicago.
ENERGY MARKETS AND POLICIES: 2006-02-06
As we noted in last Thursday's technology and innovation-focused New Energy Currents post, US energy policy has been a slightly hotter topic than usual after President Bush claimed that the US is 'addicted' to oil…
ENERGY MARKETS AND POLICIES: 2006-02-06
As we noted in last Thursday's technology and innovation-focused New Energy Currents post, US energy policy has been a slightly hotter topic than usual after President Bush claimed that the US is 'addicted' to oil…