Renewable Energy Policy Review Required

The Wall Street Journal ( WSJ) recently reported that 14 of the 29 states that have adopted a renewable procurement mandate are currently considering legislation that would “water down or repeal” the renewable set-aside. Proponents of repeal describe their motivation as simple economics: Renewable power increases costs to electric consumers.

The Political Briar Patch

In our increasingly partisan world, the debate regarding the role of government and renewable power has been relegated to political wedge status. A state senator advocating repeal of Ohio’s renewable legislation equated it to “Joseph Stalin’s five-year plan.” Another state senator seeks to eliminate Texas’ renewable mandate, insisting that renewables “need to be developed with free-market principles, not with the heavy hand of government directing us to an inefficient process.” The intensified political characteristic of the renewables debate is epitomized by Grover Norquist, head of Americans for Tax Reform, advocating the rescission of renewable mandates because they function “much like a tax increase.”

According to the WSJ, the defenders of the renewable mandates are similarly resorting to politics, castigating the repeal initiatives as “funded by fossil-fuel interests.” The WSJ also intimates that a Kansas state senator voted to preserve renewables primarily because his district includes a plant that produces wind turbines.

Political Rhetoric Frustrates Energy Policy

Any meaningful government support for energy resource policy must set long-term objectives; the technological development and commercial deployment of new energy resources are not achievable with off-the-shelf items. The “boom or bust” development cycle wind generation has experienced can largely be attributed to the market uncertainties Congress has engendered by finding it politically more advantageous to offer tax incentives that expire within one year.

As a matter of economic theory, renewable mandates are “inefficient.” For instance, most utility performance targets are set on an MWh basis—utilities thus have the incentive to purchase higher-cost renewables even at off-peak hours when less-costly alternatives are available. For purposes of system operations, the promotion of solar and wind projects—without considering the need for transmission facilities to move their power to load centers, and ignoring the need for additional and flexible baseload power for system reliability purposes—generates far less than optimal results. However, such “inefficiency” provides no basis for repeal. By definition, any government program designed to promote a market is inefficient when compared to the “invisible hand” of a perfectly functioning competitive market.

Attacks against renewable mandates on the basis that they represent yet another government intrusion simply represent just another distracting chapter in the “big” versus “no” government debate. Electricity is perhaps the most regulated, government-intrusive industry in the nation. Accordingly, challenging any governmental energy program—whether it is promoting renewable mandates, encouraging oil exploration, or siting nuclear waste disposals—as being an affront to our capitalistic society ignores reality. Absent governmental direction, a “market” dedicated to least-cost principles will select proven fossil-fuel technologies, disregarding the benefits of diversity in generation and forsaking technological advances.

Least-Cost Analysis Is Necessary

Abstract debates emphasizing political philosophy distract from the imperative to conduct adult discussions with the objective to establish integrated, balanced, and long-term policies regarding generating resources. Other than system reliability, overall cost must remain the primary driver in any assessment among competing fuels and technologies. However, selection of “least cost” cannot be resolved in one-dimensional 30-second sound bites. Any enterprise can achieve “least cost” today by making no investment in the future. On the other hand, everyone supports utilities subordinating least cost and incurring the expenses necessary to maintain current facilities and to construct new facilities to serve load growth.

Selecting the inputs to compare the actual costs of generation resources remains challenging. The higher capital investment for renewables must be weighed against the higher historically volatile, and politically sensitive, price for fossil fuels. The comparison must be dynamic and incorporate a multiplicity of forecasts and assumptions. Will encouragement of solar projects promote investment in solar technologies, driving down capital costs and increasing production? Conversely, will turning away from renewables in the name of least cost inexorably trigger price escalations of natural gas, the “least cost champion” du jour?

Any meaningful comparison between construction and environmental costs of the transmission lines to enable renewable generation to provide the greatest value and the greenhouse gas–associated costs of fossil fuels requires a subjective assessment of infinite proportions. If increased use of renewable technologies can decrease the nation’s reliance on imported fossil fuels, how do policy-makers “monetize” these geopolitical benefits in deciding our energy future?

An optimal-functioning “market” requires governing bodies to commit to an affirmative, consistent, and long-term policy for promoting renewable fuels and advancing the associated technologies. Private investors stand ready to commit hundreds of millions of dollars and enable renewables to become more cost-competitive, but only if they have assurance that they will have a true competitive opportunity to sell their product based on “free-market principles.”

Skeptics must recognize the economic/regulatory reality that five-year (and even 10-year) plans are necessary to afford renewables the opportunity to compete. Legislative critics can best serve their constituents by enabling decision-makers to decide renewable resources policy on the basis of integrated economic, environmental, reliability, and global political considerations, including calculating least cost on a transparent and multiple–time horizon basis.

Steven F. Greenwald (stevegreenwald@dwt.com) and Jeffrey P. Gray (jeffgray@dwt.com) are partners in Davis Wright Tremaine’s Energy Practice Group.