RFF Goes Nice on Renewables: Revisiting a 1999 Paper and Its Criticism

By Robert Bradley Jr. -- January 21, 2016

“Your paper inspired me to re-review some of the congressional testimony of the renewable interests to see whether the litmus test of success was a cost target or more generally, competitiveness and market penetration. I think it is clearly the latter.”

“Imagine the coach of a football team justifying a perennial losing record by telling the administration that his players are getting bigger and faster …. Surely the administration would respond—’yes, we know the general trend and our participation in it. But we want real victories, not moral victories’.”

– Letter from Robert Bradley to Dallas Burtraw, January 1999.

It was arguably the very top intellectual research paper to justify past and continuing U.S. government support for renewable energies at the time of its publication (1999). I had a chance to rebut, working at Enron (as director, public policy analysis) that was a financial supporter of Resources for the Future (RFF), as well as a business leader in renewables.

Alas, my criticisms on the draft were pretty much ignored, except for the sop of a footnote mentioning my view (per my Cato renewables paper) that it was time to ‘pull the plug on renewable-energy subsidies.’

Background

In 1998, the Renewable Energy Policy Project (REPR, now defunct) commissioned a research paper from a group of scholars at RFF. “Winner, Loser, or Innocent Victim: Has Renewable Energy Performed as Expected?” was released by REPP in March 1999 (Research Report No. 7).

The executive summary read:

Renewable energy has met or exceeded past price projections, but cheap conventional energy generation has blocked renewables from gaining greater market share. The renewables industry has been most successful with factors within its control—and any argument that support for renewables should be ended because “past efforts have been unsuccessful” is based on a faulty premise.

The staff of REPP, lead by research director Adam Serchuk, added this note on the inside cover of the report:

Renewable energy may have won the hearts and souls of forward-thinking Americans, but it is losing miserably the battle to dominate the national energy system…. Why, we might ask, has renewable energy done so poorly?

Or has it?

In the following paper, a research team from Resources for the Future suggest that while renewable energy technologies have failed to meet many early projections of market penetration, they surpassed most cost goals. The answer to the riddle is that the target has moved: the cost of generating power

The RFF researchers were three senior economists Dallas Burtraw, Joel Darmstadter, and Karen Palmer, and graduate student James McVeigh. Their introduction read in part:

Public support for renewable energy technologies has been part of U.S. energy policy for nearly 30 years. Yet these technologies have failed to emerge as a prominent component of the U.S. energy infrastructure. This failure has created the impression that renewable technologies have not met the goals and claims of proponents, and that therefore after several decades of support without success, it is time to pull the plug on renewables….

Our findings document a significant difference between the success of renewable technologies in penetrating the U.S. electricity generation market and in meeting cost-related  goals, when compared with historic projections….

Renewable technologies have succeeded in meeting expectations with respect to cost. For every technology analyzed, successive generations of projections of cost have either agreed with previous projections or have declined relative to them.

In virtually every case, the path of actual cost has equaled or been below the projections for that period in time. The only exception appears in the case of capital costs for photovoltaics, where expectations from the 1970s and 1980s underestimated  actual realized costs in the 1980s and 1990s….

These findings refute the premise that renewable technologies have failed to meet public policy goals, especially with respect to projections of cost, which we perceive to be the more important measure….

The small market share of renewables appears to have more to do with changes outside their own development–principally regulatory reform and changes in conventional technologies–than with their technological performance. The industry appears to have been most successful with respect to factors most within their control.

The blame for the small market share of renewables was then placed on the improving competition.

Our analysis indicates the small market share of renewable technologies appears to have more to do with changes outside the development of renewable technologies than with their own technological performance. …

An increasingly competitive world petroleum market has led to a decline and stabilization in the price of oil, such that currently the real price of oil is the lowest that has been observed since 1973. Deregulation of the railroads led to dramatic cost reductions for coal use in electricity generation. The Public Utility Regulatory Policies Act (PURPA) of 1978 opened the door for nonutility generation of electricity for resale, and the Energy Policy Act of 1992 opened the door for competitive wholesale generation.

These changes and other technological developments have produced a dramatic decline in the price of fossil-fueled electricity generation. In addition, public policy and technological changes have led to a dramatic improvement in the environmental performance of these technologies (especially for newly constructed facilities).

My Rebuttal

Here is my letter of 17 years ago to Dallas Burtraw on RFF’s get-out-of-jail-free card for windpower. It was addressed to the draft, and not the final, but the (rejected) arguments apply to the final product as well. I reproduce it verbatim without comment–let history decide what still stands up to scrutiny today.

January 14, 1999

Dr. Dallas Burtraw Resources for the Future 1616 P Street, NW Washington, D.C. 20036

Dear Dallas:

I was very excited to see this paper commissioned by the REPP since their work to date has been almost entirely non-critical. I have wanted for some time for RFF analysts to provide some scholarship to the subsidized renewable debate to extend and second-guess my own work in this area. That is why I contacted you about the paper some time back.

Now that I see the draft, I have major concerns. It is not that the analysis is technically deficient. It is that there is too much missing analysis, misplaced emphasis, and economic forgiveness. I’m afraid that the paper as it now stands will be press release material for special-interest groups with your caveats long lost.

Let me be the first to say that even the most expensive and least market-friendly energy technologies have substantially improved and can be expected to improve more, perhaps relatively more than the conventional competition. Ken Lay has used the number 70%-75% improvement in wind and solar costs since the early 1980s.[1]

But behind the improvement is the point of departure and the fact that the information and technological boom across the economy makes any individual case less spectacular. The latter point is made in the paper—but buried. More specifically to subsidized renewables, the cost (really selling price) effect of midstream tax breaks (accelerated deprecation in ?? and the federal tax credit in 1992) is a huge caveat to a major conclusion of the paper.

Cost vs. Competitiveness/Market Penetration

Your paper inspired me to re-review some of the congressional testimony of the renewable interests to see whether the litmus test of success was a cost target or more generally, competitiveness and market penetration. I think it is clearly the latter. The language of competitiveness and market penetration is naturally present-versus-future cost of that particular technology, but the overriding flavor of the testimony and give-and-take is competitiveness and market penetration.

The end state for subsidized renewables has never been “building x units by y year” to solve the perceived societal problem(s) but giving the favored technologies a boost so they could achieve a natural market penetration and could grow over time with less or no support.

I start with some solar testimony right after the Arab Embargo. In this testimony on solar subsidies, terms like “economically provide” and “impact the marketplace” and “shell out an additional” sum of money (emphasis added) pop up.[2]

Wind as a grid power source was not really up and going in 1974; by 1983 it was. A study by Booz, Allen & Hamilton, Inc. for the Solar Energy Industries Association, American Wind Energy Association (AWEA), and Renewable Energy Institute stated that “the private sector can be expected to develop improved solar and wind technologies which will begin to become competitive and self-supporting on a national level by the end of the decade if assisted by tax credits and augmented by federally sponsored R&D.” [3]

Major DOE grants and tax breaks, including the federal tax credit in 1992 and accelerated depreciation, would be forthcoming. Here is where RFF needs to compare the assumptions of this Booz Allen study with later subsidies to see if the promise made to Congress in fact turned out wrong

In 1986, an AWEA representative testified:

The U.S. wind industry has…demonstrated reliability and performance levels that make them very competitive. It has come to the point where that the California Energy Commission has predicted windpower will be that State’s lowest cost source of energy in the 1990s, beating out even large-scale hydro. [4]

He goes on to add, “We are not quite there. We have hopes.” Again, the operative word is “competitive” as defined by market penetration. Sure, there is a lot of talk about cost improvements, but that is the perceived means to the end, not the end itself.

Three years later a representative of the AWEA testified:

Despite this progress, our industry needs to do better if we are to expand our market and become more competitive. The cost and performance of these wind turbines in many parts of the country is still not competitive with coal-fired generation or with oil or gas at current prices. [5]

Here is the real debate—relative economics. Wind versus coal, oil, and gas. Everything else is just show.

Back to the solar side, an industry representative stated in 1987 testimony that amending PURPA to include larger solar facilities “is the key to making solar thermal electric generation competitive in the immediate future.” [6] You should see if the amendment was enacted or if a later equivalent favor came forth to judge this prediction. Again the focus is not so much on cost as market penetration and competitiveness.

And the distinguished solar lobbyist Scott Sklar makes the most erroneous forecast that I have on record: “I think frankly, the—the consensus as far as I can see is after the year 2000, somewhere between 10 and 20 percent of our energy could come from solar technologies, quite easily.” [7] Surely he was thinking about market friendly economics and not government subsidies to achieve this result decades out.

Your paper brings attention to the failure of the subsidized renewable quantity forecast versus the cost forecast. But you let the fish off the hook by using the oldest business excuse in the book, which to the business person is something like: “we were really viable, but we couldn’t get our costs down enough since we couldn’t get the market share to lower our cost to be competitive.”

This circularity problem begs the question: why didn’t the cost decline enough to start a positive cycle of more volume and lower costs to achieve scale economies? They have had a couple of decades to do it—and now (at least in the wind industry) it is crisis time since the PTC is due to expire. [8] On this point, could an RFF researcher review the testimony and legislative history of the Energy Policy Act to see what they said about scheduling the PTC expire in 1999? Most likely they figured six years was enough for sustainability. Another point on the quantity side—it is worth mentioning that environmentalism could be a partial culprit here since siting constraints are important with wind and geothermal in particular (as stated in fn. 9).

The Above Restated More Generally

Achieving a certain level of cost over a one or two or three decade period is interesting but secondary to the real debate for both consumers and public policy decision-makers. Cost per se is not the measure of success for a technology or public policy—success is a relative competitiveness and market verdicts.

Imagine the coach of a football team justifying a perennial losing record by telling the administration that his players are getting bigger and faster and their game plans (helped by the latest in video equipment and communications) are more sophisticated. Surely the administration would respond—“yes, we know the general trend and our participation in it. But we want real victories, not moral victories.”

Arguably the greatest advance of economics in the last two hundred years is replacing cost with value and absolute value with relative value. Your study digresses from the marginalist revolution only because of a peculiar definition of the public policy criteria that you are applying. Your statement (p. iii) of the “more important measure of cost” is a public policy variant of the labor theory of value.

Turning from economic theory to the historical record, there was never a “deal” between government and the subsidized industry to meet a certain cost target by a particular year to justify a past subsidy or qualify for the next one. It was always to get to the happy day of competitive viability—call it sustainability.

The fact that energy markets would get more competitive and energy costs would fall in the 1980s and 1990s showed us how wrong the key premises behind subsidized energy were (and still are). We erred by not appreciating how distorted past markets were by government intervention. We have even erred by making a distinction between renewable and nonrenewable energy.

[Michael] Toman and [Douglas] Bohi could not find the “depletion signal” in their 1984 RFF book [Analyzing Nonrenewable Resource Supply],  and today I don’t think energy economists can say we can find the depletion signal with any of the three fossil fuels on the world stage. It could be decades or centuries before we clearly see the world’s “depletion signal” for fossil energies. And we might never see the signal if other energy technologies seamlessly replace some present ones at that distant date—wouldn’t that be a lesson for us all.

These realities of competitive markets and technological improvement do not make subsidized energy technologies “innocent victims.” Too many people, especially within the subsidized energy sector, used a pessimistic baseline about energy reality—there were no Acts of God involved. And there is little reason to think that the future will not continue to verify how robust and practical competitive markets are. Competitive markets always have been a threat to subsidized goods and services and always will be.

Compared to What? Relative Economics Needed

The paper defaults on the crucial information that the reader and policymakers need—what do today’s best technologies cost on an apples-to-apples basis, let alone what future changes in the relative position might be. I have some estimates—economy energy at 2 cents per KWh, gas at around 3 cents, coal at 4.5, wind at 6, nuclear at 7.5 and solar at 20+.

You have your own estimates—share them and put it in the executive summary in a then-versus-now table. And going forward, the paper should ask the same question my Cato paper did: has natural gas made renewable energy subsidies obsolete? And remember that wind and solar (and electric vehicles) has a free market past prior to World War II and are not infant industries as much as often portrayed. (This was in my “Increasing Sustainability” paper I sent a while back.)

Specific Comments

The above are my general comments. Let me mention my more specific criticisms that often reinforce the above points:

• I would substitute the term “non-hydro renewables” for renewables throughout the paper. Or conventional versus non-conventional or better yet, use the terms subsidized energy versus non-subsidized energy.
• Regarding technology, there is some overlap with general costs that make all energies costs and prices move in the same direction. This needs to be quantified, but the high capital costs of wind and solar reflect in part conventional energy costs (such as the energy cost of cement, steel, and fiberglass that goes into the 150,000-pound wind turbines that are being built in the U.S.). You mention on page 18, conventional and nonconventional energies are all benefiting from the quantum leaps in information technology—keep going and add energy-input costs. In a hypothetical situation of higher energy costs and no change in information technology, surely today’s wind and solar capital costs would be higher.
• You dodge a big issue by not getting into the subsidy side of the cost gains, but this is too huge to not weigh in on. Footnote 4 is very misleading. Calculate the subsidies per unit of energy output, don’t compare absolute dollars. My calculation for 20 years of DOE subsidy vs. energy output per fuel in today’s dollars is over 20 cents per kWh for solar, almost 4 cents per kWh for wind, .9 cents per kWh for geothermal, .2 cents per kWh for nuclear, .05 cents per kWh for coal, and .01 cents per kWh for natural gas. This is quite a story and certainly is important to cost (or bid price).
• Turning to the tax side, not factoring in accelerated depreciation for wind and the 1992 federal tax credit into the cost declines is a very big omission (as mentioned above). Taken together, this could account for one-half of the unsubsidized price—in other words your 3-cent price (p. 10) could be 6 cents. Leaving this issue aside (p. 3) begs the central question the study seeks to answer. If you don’t know the answer, state both verdicts if the level of future subsidies was assumed or not assumed. At the same time wind and solar were cashing in, tax breaks for oil and gas were declining. Furthermore, a case can be made that th3e totality of government intervention created a negative subsidy for oil and gas in the price control period.
• On page iv you mention “precaution against rising energy prices, vulnerability to disruptions of foreign energy supply, and environmental concerns.” I’d drop the first two of the three rationales. As the traders with tell you, you can get fixed gas prices out 5, 10, 15, or 20 years. Oil has an offer curve out a good ways—a trader told me that $25 oil is doable 20 years out. Coal and nuclear are domestic. The energy security issue is much more for oil and transportation than for U.S. electricity supply.
• Environmental concerns as the third rationale—okay but be careful. There is an environmental constraint with wind, solar and geothermal supply in the U.S. (this should be incorporated in the supply forecast section as well) that will come increasingly into play more going forward. Each issue of Windpower Monthly has stories of birds or noise or visual blight with wind and geothermal is almost in the same boat with hydro. Also, I have never seen a carbon-debt study done with wind and solar infrastructure, yet they talk about carbon debt with nuclear. Cement production in particular is a global warming bad boy.” [9]
• You could credit PURPA and EPAct with creating the competitive conditions that would counter the improving economics of subsidized renewable (p. iv). Careful, these same laws subsidized these renewables as you state elsewhere. [10] Again, no “innocent victim” here.
• I’d drop the fire insurance analogy and “largely unrelated outcomes” (p. iv) given the above. It is not relevant for the electricity market, and Bohi might fuss at you for using it even on the transportation side.
• Careful about emerging versus mature technologies (p. 19). Would you have said gasoline or motor vehicles or gas combined-cycle were mature technologies as decade ago? Surely RFG and NGCC are “new industries” even if their roots are on the conventional side. Would you say that RFG and NGCC are mature industries today? I wouldn’t—things are still changing. Also, wind and solar have a long, pre-subsidy history as mentioned.
• Wind may not be a distributed resource like solar (p. 4). Old-fashioned windmills are, but I’m not sure the new high-tech wind turbines qualify.
• Intermittency and dispatchability are certainly a factor that reduces “value” below cost (p. 4). (By the way, it might be useful to differentiate between value and cost as well as cost versus bid price.) On the other hand, green pricing may get some of this lost “value” back. [11] This aside, there is the question of incremental transmission costs, which works against remote sources serving the grid versus fossil plants that can be located closer to load centers.
• Footnote 1 on my [Cato] paper should have Green in quotes—‘Green’. I don’t think an objective definition of green exists, and I was trying to connote what strict environmentalists consider as non-invasive, not me.

Rework the Summary Areas

I think the paper can be turned around in two ways: by making specific changes and caveats along the lines suggested above to increase precision and to rework the ES, introduction, and conclusion to prevent special interests from exploiting the paper.

I think to meet RFF standards we need some more work on quantifying the timing and amount of subsidies and discussing relative economics and not just absolute cost as a standard. This will bring some heat from the REPP no doubt, and I know this paper isn’t well enough funded to spend a lot more time on it, but RFF has too significant an academic imprimatur to be misused in a very political debate.

I hope some of this is helpful and doesn’t detract from the positive side of the paper—quantifying a lot of cost and quantity projections. And I hope I don’t come across as a know-it-all with this heap of criticism. I need a lot more criticism myself but never really got it with my Cato paper. In fact, I wish REPP would commission an in-depth critical analysis of my Cato paper on both the economic and environmental sides.

Sincerely,

Robert L. Bradley, Jr.

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[1] Kenneth Lay, “The Energy Industry in the Next Century: Opportunities and Constraints,” in Irwin Stelzer, ed., Energy After 2000 (Madrid, Spain: Repsol, 1997), p. 23.

[2] Solar Home Heating and Cooling Demonstration Act of 1973, Joint Hearings before the Special Subcommittee on Science, Technology, and Commerce, Department of Commerce and the Committee on Interior and Insular Affairs, United States Senate, 93^rd Cong., 2^nd sess. (Washington, D.C.: Government Printing Office, 1974), p. 68.

[3] Renewable Energy Industry, Joint Hearing before the Subcommittees of the Committee on Energy and Commerce et al., House of Representatives, 98^th Cong., 1^st sess. (Washington, D.C.: Government Printing Office, 1983), p. 52.

[4] Statement of Michael L.S. Bergey, American Wind Energy Association in Renewable Energy Industries, Hearing before the Subcommittee on Energy Conservation and Power of the Committee on Energy and Commerce, House of Representatives, 99^th Cong., 2^nd sess. (Washington, D.C.: Government Printing Office, 1986), p. 129.

[5] State of Thomas Gray, American Wind Energy Association in Renewable Energy Technologies, Hearing before the Subcommittee on Energy and Power of the Committee on Energy and Commerce, House of Representatives, 101^st Cong., 1^st sess. (Washington, D.C.: Government Printing Office, 1989), p. 68.

[6] Statement of Patrick Francois, Luz International Limited in Solar Power, Hearing before the Subcommittee on Energy and Power of the Committee on Energy and Commerce, House of Representatives, 100^th Cong., 1^st sess. (Washington, D.C.: Government Printing Office, 1987), p. 12.

[7] Ibid, p. 26.

[8] See, for example, Lyn Harrison and Ros Davidson, “Scary Times,” Windpower Monthly (December 1998), p. 4.

[9] Intergovernmental Panel on Climate Change, Climate Change 1995, vol. 1 (Cambridge, U.K.: Cambridge University Press, 1996), pp. 69, 78, 82.

[10] Timothy Brennan et al., A Shock to the System: Restructuring America’s Electricity Industry (Washington, D.C.: Resources for the Future, 1996), pp. 124-25.

[11] California’s APX has some green premiums calculated. For October it was 9% on-peak and 25% off-peak.