July 23, 2010
Conflating Markets and Source Preferences in the Energy Sector
Forbes blog about Business in the Beltway today discusses energy policy, and quotes an energy policy analyst at the Competitive Enterprise Institute, who says the government should get out of energy policy. Although I don't agree fully that such a position is sensible or feasible, the argument starts out reasonably enough. He says the United States should, "Get the government out of the electricity industry." Deregulation is certainly an option, and reasonable people can think that's the best policy.
However, one also needs to keep in mind the issue of stranded costs and who pays them. Utilities have invested money -- often shareholder money -- with an expectation of a return based on the current market structure. Without a process for assessing those already committed costs, it would punish the utilities and their shareholders. Full-scale deregulation might improve the market (and that's a significant "might"), but it's not as simple as just stepping out of the way, as we saw in the 1990s when partial deregulation of the industry took place at both the state and federal levels.
Furthermore, the analyst then goes on to argue that renewable energy incentives should stop. He argues that if people are “so confident that renewable energy can compete on the merit of price of alone, then let’s revoke the mandates.” It's fine to say government should get out of the way, but this implies that oil, gas, and coal companies shouldn't get any incentives, either. It's often forgotten that the incentives in those industries far outweigh renewable industry incentives.
Removing renewable incentives in the name of free markets means we should remove ALL incentives related to energy sources. Only then can we have any idea what "the market" actually wants. Otherwise, this is simply a market-based argument cloaked in a source-based argument (e.g., a preference for coal over wind). And, while perhaps valid, that's a very different argument.
The government should get out of a lot of businesses. I have never heard of any truly successful government run or sponsored or managed business that has been successful. And speaking of energy, how about the success of the Dept. of Energy. They've been spending billions a year since their creation. In case we have forgotten, their sole mission was to get us off the dependency of foreign oil. I believe that we've gone from 30% of our oil being imported then to 70% now.
Posted by: Ron Stone | Jul 23, 2010 2:25:20 PM
Dear Professor Fershee, Thanks for your response to our views at the Competitive Enterprise Institute on energy policy. I won't respond to your comment about stranded costs except to say that it is a real issue, but too complicated to address in a short reply. What I want to clarify is where we stand on incentives (and mandates). CEI opposes all incentives and mandates for all types of energy--conventional as well as renewable or alternative energy, and energy efficiency measures as well. Your point that subsidies for conventional energy far outweigh those for renewable energy is somewhat misleading. The most recent study by the Department of Energy's Energy Information Administration of the per unit federal subsidies for the fuels used to produce electricity was published in 2008 and is available at http://www.eia.doe.gov/oiaf/servicerpt/subsidy2/index.html. Total subsidies according to EIA were:
natural gas $0.25/MWH
(from the table in Chapter 5, page 106)
It is argued that wind and solar need high subsidies (and mandates) in order to surmount various barriers to market entry, but these subsidies started in the 1970s. I doubt that wind and solar companies have ever developed plans to become profitable without these huge subsidies (and mandates). They are 100% corporate welfare dependents.
Posted by: Myron Ebell | Jul 26, 2010 8:41:40 AM