Yves here. This post is useful not simply for its discussion of the economics of green energy but also for showing how think tanks fabricate findings to support their political message.
By Frank Ackerman, senior economist at Synapse Energy Economics, and a senior research fellow at GDAE at Tufts University. Cross posted from Triple Crisis
Renewable energy is clean, sustainable, non-polluting, reduces our dependence on fossil fuels, improves the health of communities surrounding power plants, and protects the natural environment. Who could be against it?
Answer: The American Legislative Exchange Council (ALEC), a lobbying group that is active in drafting and advocating controversial state legislation. They’re not just interested in energy: in recent years ALEC has supported Arizona’s restrictive immigration legislation, the “Stand Your Ground” gun laws associated with the shooting death of Trayvon Martin, and voter identification laws proposed in many states. ALEC’s priorities for 2013 include making it harder to bring product liability suits against manufacturers of defective products, ending traditional pension plans for public employees, promoting the diversion of public education funds into private schools and on-line education schemes, and supporting resistance to “Obamacare” health policies.
When it comes to energy, ALEC wants to speed up the permitting process for mines, oil and gas wells, and power plants – and to eliminate all state requirements for the use of renewable energy. The latter goal is packaged as the “Electricity Freedom Act.” In numerous states, ALEC has used studies by Suffolk University’s Beacon Hill Institute (BHI) to claim that the “Electricity Freedom Act” will free ratepayers from the allegedly immense costs and job losses of renewable energy standards.
In a recent study for the Civil Society Institute, my colleagues and I at Synapse Energy Economics analyzed the ALEC studies of the costs of renewable energy. Our report found fundamental flaws in both the energy data and the economic modeling used by BHI.
The ALEC/BHI energy analysis begins with wild overstatement of the costs of wind energy. They develop low, mid, and high cost scenarios, just as if they were doing a reasonable job of reflecting uncertainty. Yet there is more than a decade of data available on actual costs of wind power in the United States – and the ALEC/BHI low cost estimate is higher than the costs paid in essentially every real-world transaction to date. We added the ALEC cost estimates to a graph of actual wind transactions created by Lawrence Berkeley National Laboratory (see graph; “PPA” means purchased power agreement). We had to extend the vertical axis upward in order to display ALEC’s astronomical mid and high cost estimates.
There are other problems in the ALEC energy analysis. They assume that expensive backup capacity is always needed, and always runs, when wind energy is used. New transmission capacity to connect renewables to the grid is assumed to be almost as expensive as generation; one of the data sources cited in the ALEC report actually estimates transmission costs at one-fourth the ALEC level. In reality, states with above-average reliance on wind power have below-average electricity rates; this would be impossible if wind power were as expensive as ALEC claims.
Having exaggerated the cost of electricity from renewables, the ALEC studies go on to exaggerate how much will be needed. Their estimates of the expected growth in electricity use per customer are far above those developed by the Energy Information Administration’s Annual Energy Outlook, the widely cited government forecast of near-term energy supply and demand. This inflates the projected per-household costs of renewable energy, and makes it appear unduly difficult to meet demand with increases in renewables and energy efficiency.
The ALEC/BHI economic analysis is equally unsound. BHI uses STAMP, an idiosyncratic model that has never appeared in academic publications, or in work by anyone outside BHI. STAMP is a computable general equilibrium (CGE) model, developed by BHI to analyze tax policy changes. Like most (though not all) CGE models, STAMP assumes that there is automatic full employment for all those who are willing to work. Thus the failure of Keynesian stimulus programs is built in by assumption.
Yet despite the full employment assumption, STAMP routinely reports huge estimated job losses from government policies such as renewable energy standards. This is done by assuming hypersensitivity to tax rates. In STAMPworld, higher tax rates lead to higher prices, decreasing demand for goods and hence demand for labor, causing a reduction in wage rates. At lower wage rates, fewer people choose to work; in addition, more people are assumed to migrate out of the area and fewer migrate in. While there is still full employment for all who are willing to work, there are fewer willing workers after a tax increase – allowing STAMP to estimate job losses.
To connect this to the attack on renewable energy, STAMP assumes that an increase in electricity rates is paid by businesses everywhere and passed on to customers in higher prices. So higher electricity rates function as a sales tax, with all the job-destroying effects STAMP always sees in taxes. (If all you have is a hammer…)
University of Arizona economist Alberta Charney has examined STAMP’s findings for her state. Charney compared three models’ analyses of a combined $1 billion increase in state taxes and $1 billion increase in state government spending. The IMPLAN and REMI models, widely used to study employment impacts, both projected that Arizona would gain about 8,000 net new jobs from this package; STAMP estimated a net loss of about 9,000 jobs. Charney attributed this to the biased assumptions underlying STAMP’s treatment of government spending and taxes.
It’s no wonder that ALEC favors BHI’s economic model: STAMP has never seen a government program that it liked or a tax cut that it disliked. Those who want an objective analysis of the costs and benefits of renewable energy, however, will need to look elsewhere.