Is Windpower the Ethanol of Electricity? (Part I: Economics)

Repeating past mistakes is an unfortunate but common part of federal policy, and perhaps no more so than with  energy. Indeed, much of the Obama administration’s “clean energy economy” and “energy independence” agenda is a virtual repeat of the follies from the 1970s – failed attempts by Washington to pick winners and losers amongst alternative energy sources and energy-using technologies, as well as taxes and regulations that exacerbated the very concerns they were supposed to address.

One of the Reagan Administration’s lesser-remembered successes was the repeal of much of this government meddling beginning soon after taking office in 1981. Reagan’s turn away from energy central planning and towards free markets brought down energy costs and helped launch a long period of economic growth.

Of course, this decades-old lesson may be lost on younger politicians, bureaucrats, and activists who seem unaware that their energy policy ideas are proven failures from the age of disco. But the same cannot be said of efforts to enact a federal renewable electricity standard (RES), as this would be a near-exact repeat of a blunder that was launched just a few short years ago – the renewable fuels mandate.

Part I of this two-part post will review the lessons of the RFM, or ethanol. Part II tomorrow will turn to windpower, the central energy of the RES. Indeed, the requirement that ethanol be added to the gasoline supply has quickly proven to be an economic and environmental failure. Congressional proposals mandating wind and other renewable sources of electricity show all the signs of becoming a similar flop, but with far more serious implications.

The True Cost of Ethanol

It should come as no surprise that the renewable fuels mandate has raised the cost of driving. After all, if ethanol was cost competitive with petroleum-derived gasoline, it would have caught on without substantial government intervention. Nonetheless, despite repeated promises during the 2005 energy bill debate to help provide relief for high pump prices, Congress mandated that a specified amount of renewable fuels –mostly ethanol derived from corn – be added to the gasoline supply.

The 2007 energy bill increased the mandate substantially. The law raised the targets to 13 billion gallons of renewable fuels in 2010 -12 from corn, and the rest from non-corn renewables like cellulosic ethanol and biodiesel. This is a near-tripling of ethanol use over the last five years. The mandate increases each year and will reach 36 billion gallons by 2022, with 15 billion gallons coming from corn and 21 billion from non-corn renewables.

The mandate comes on top of several tax breaks and subsidies for ethanol, including a 45 cents per gallon tax credit. This tax credit expires at the end of 2010 and Congress is currently debating whether to extend it. According to the Congressional Budget Office, supplanting each gallon of gasoline with ethanol costs taxpayers $1.78, and that is on top of the higher cost to drivers. And this number may be an understatement. Indeed, the government assistance is so generous that ethanol production has actually exceeded the mandated levels in recent years. Domestic corn growers and ethanol producers also benefit from protectionist tariffs that limit the amount foreign ethanol (chiefly sugar-based ethanol from Brazil) that can compete in the American market.

The mandate took effect on January 1, 2006, and it has boosted the cost of driving ever since. Over this period, ethanol has been both more and less expensive than gasoline, but per gallon price comparisons tell only part of the story. Ethanol contains a third less energy per unit volume than petroleum-derived fuels, thus using it lowers fuel economy. In addition, the logistical costs of mixing ethanol into the fuel supply – it cannot be transported via pipeline and must be shipped by more expensive means from the Midwest to the rest of the country – also adds to the burden.

The costs also affect us at the supermarket. The diversion of a third of the corn supply from food to fuel use has raised the price of corn and related items like corn fed meat and dairy, though estimates of the impact vary widely.

Ethanol proponents have long claimed that technological breakthroughs and economies of scale would bring down the costs over time, but there is scant evidence that this is happening. Quite the contrary, the above-mentioned logistical challenges and food-versus-fuel tradeoff show no signs of resolution and will likely worsen as the mandate ratchets up. In addition, there may be new problems using ethanol now that it will soon comprise more than the current limit of 10 percent of the fuel mix. Too much ethanol may impact engine performance and actually damage older cars and trucks as well as motorcycles, watercraft, and gasoline-powered equipment. The Environmental Protection Agency is currently considering whether to allow blends of up to 15 percent ethanol, and is receiving pushback from manufacturers and owners of affected equipment.

Also troubling is the news with non-corn renewables and in particular the development of cellulosic ethanol to be produced from grasses or crop waste. Contrary to plan, cellulosic ethanol is not becoming available except in very small and very expensive quantities. The target in the 2007 energy bill was 100 million gallons of cellulosic in 2010, but EPA has had to scale it back to a mere 6.5 million. The agency has proposed lowering the 2011 target, originally set at 250 million gallons, to 6.5-25 million gallons.

All things considered, corn ethanol has proven to be an economic failure, and the other renewable fuels are even worse. The problems are likely to grow along with the mandate.

The True Cost of Wind

The story is much the same with wind power, which is the most common renewable source of electricity, as well as lesser-used ones like solar. Wind has long been a beneficiary of generous and overlapping tax breaks and subsidies, especially a 2.1 cent per kilowatt hour production tax credit. Overall, subsidies for wind and other renewable electricity sources are more than ten times higher per unit energy output than coal, which provides nearly half the nation’s electricity, as well as natural gas and nuclear power which provides most of the rest. Without this tilting of the playing field, wind would be significantly more expensive than coal, $149.30 per megawatt hour versus $100.40, according to conservative estimates from the Energy Information Administration..

Despite all this help, wind and other renewables comprise only about 3 percent of the electricity supply (excluding hydroelectric which provides 6 percent). This low market penetration explains the current push by wind proponents for a federal mandate. Congressional proposals vary, but they typically require ramping up non-hydroelectric renewables to 15 to 25 percent of electric generation over the span of a decade or so. The RES proposal recently introduced by Sens. Jeff Bingaman (D-NM) and Sam Brownback (R-KS) is pegged at 15 percent by 2021.

As is the case with ethanol, direct cost comparisons of wind energy with its conventional counterparts tell only a part of the story. Just as integrating ethanol into the overall motor fuel supply creates many logistical problems, so does integrating renewable electricity into the grid. For one thing, the most desirable sites for wind are often remote mountain ridges or sparsely populated plains, necessitating thousands of miles of new transmission lines to bring the electricity into metropolitan areas where it is needed. One study estimates that a 20 percent renewable electricity standard would require $80 billion in transmission line investments, with ratepayers likely picking up the tab. And that assumes such transmission line projects could overcome the many regulatory and legal challenges to them and actually get built.

Even more significant are the costs that stem from wind energy’s intermittent and unreliable nature. Simply put, the wind does not always blow, and when it does is difficult to predict and impossible to control. Given the need for electricity 24/7 and the fact that peak demand – hot summer days – is often a time when the wind is still, a mandate for increased renewable electricity is, for all practical purposes, also a mandate for additional non-renewable backup capacity, chiefly natural gas. Not only must the non-wind part of the system be sufficient to carry the entire load, it must also be operated in an inefficient manner – ready to ramp up whenever the wind dies down, then throttled back when it picks up – in order to accommodate wind.

Thus, even beyond the direct cost of manufacturing and operating the wind turbines that produce renewable electricity, integrating it into the system raises the cost of nearly everything else that affects our electric bills.

As with ethanol, there is little reason to think that wind’s difficulties will recede with greater usage over time. Most likely, the problems would accelerate as the mandate increases, since the low hanging fruit of ideally-suited wind sites is giving way to less desirable ones, and the challenge of integrating a source of electricity that can kick out at any time only intensifies with the percentage that must be accommodated.

The Heritage Foundation conducted one of the few studies attempting to take all of these costs into account. It concludes that an RES starting at 3 percent in 2012 and increasing by 1.5 percent each year thereafter would raise residential electric rates by 36 percent by 2035, destroy over one million net jobs, and reduce GDP by a cumulative $5.2 trillion dollars.

Ben Lieberman is an associate fellow in Environmental Policy with the Competitive Enterprise Institute, in Washington, DC.