THE UNSEEN COSTS OF WIND-GENERATED ELECTRICITY

A report summary contributed by Robert Lyman

On April 16 2016 the Institute of Political Economy at Utah State University published a report entitled The Unseen Costs of Wind-Generated Electricity. The report was written by Megan Hansen, BS; Randy Simmons, PhD; and Ryan York, PhD. The study analyzed the findings of studies by prominent experts of the cost of wind-generated electricity in the United States. This is a summary of that report.

The experts’ studies identify several factors that affect the cost of wind generation. These include capital cost, operation and maintenance cost, capacity factor, transmission costs, base load cycling, social and environmental costs, and the cost of government subsidies. Other factors are more difficult to quantify but nevertheless add to the costs; these include the opportunity cost of taxpayers’ dollars, the reduced reliability of the grid, and the effects on consumers and the economy of higher electricity prices.

Federal Subsidies

Data collected by the U.S. Energy Information Administration show that federal wind subsidies grew by an average of 32% each year from 2000 to 2014. Of those subsidies, the Production Tax Credit (PTC) is the largest. It was originally introduced in 1992, and then provided a subsidy of $15 per megawatt-hour (MWh) to wind energy producers. The American Recovery and Reinvestment Act (ARRA) of 2009 made small wind producers (those with a capacity of 100 kilowatts or less) eligible for refunds of up to 30% of total investment cost. Producers can opt to accept this in lieu of the PTC. The ARRA also provided $31 billion for clean energy research, development and deployment. In 2013, Congress increased the amount of the PTC from $22 per MWh to $23 per MWh. According to the Institute for Energy Research, this equates to $38 per MWh in post-tax subsidy.

In 2014, Congress extended the PTC further so that any project that began work before January 1. 2015 was eligible for the credit. The ARRA also established the 1603 Treasury Program, which allowed taxpayers who are eligible for the PTC, a tax benefit for producing energy from certain sources, or the Investment Tax Credit to receive a payment from the Treasury in lieu of a tax credit. The 1603 cash grant program applies to wind, geothermal, biomass and solar among other forms of renewable energy. Through May 2012, the 1603 program provided almost $8.4 billion to wind projects and in total awarded about $11.6 billion to over 37,000 renewable energy projects.

That is not all. Including the PTC, Congress has created 82 initiatives overseen by nine different federal agencies to promote the production of wind energy.

Wind and solar energy both receive 20 times more federal subsidies than coal or natural gas in terms of average electricity generation. Since it was expanded in 2009, the PTC has cost an average of $5 billion per year. Recent IRS decisions expanded eligibility so that costs will increase.

A hidden cost of these subsidies is the opportunity cost – the cost of opportunities that could have been paid for by taxpayer money that was instead spent on policies such as the PTC. If those subsidies did not exist, the government could have used the funds for higher value economic or social programs, or it could have left the funds in taxpayers’ hands, where as consumers they could have been free to make decisions about energy consumption based on their own choices about what was the most highly valued use. Another opportunity lost is that of other existing or potentially new energy sources that might supply electricity but are not eligible for taxpayer subsidies.

State-level Wind Policy

The Database of State Incentives for Renewables and Efficiency categorizes state policies into roughly 30 specific types of incentives and policies. Many of these are grant and loan programs that finance renewable energy expansion and performance-based incentives that provide cash payments based on the amount of energy generated. States also offer rebates for installation of new renewable energy systems and equipment. Thirty-eight states have at least one rebate program for renewable energy. The most common policies used are Renewable Portfolio Standards (RPS), tax credits, and transmission improvements.  An RPS is a state policy intended to increase the percentage of a state’s electricity that is generated from renewable sources. It might require utilities to supply 15-25% of a state’s total electricity from renewables by 2020 or 2025. As of early 2015, 29 states and the District of Columbia have binding RPS requirements.

As producing electricity from renewable sources is more expensive than producing it from conventional ones, RPS entails costs that fall to electricity consumers. The Institute for Energy Research found that states with RPS legislation have electricity rates 38% higher, on average, than states without RPS.

Cost Studies

The studies Hansen, Simmons and York reviewed included these:

The Energy Information Administration (EIA) Annual Energy Outlook

• The National Renewable Energy Laboratory (NREL) 2011 Cost of Wind Energy Review
• Levelized Cost of Energy Analysis Version 8.0 by Lazard, an international financial advisory and asset management firm
• The Hamilton Group report A Strategy for America’s Energy Future: Illuminating Energy’s Full Costs
• George Taylor and Thomas Tanton’s The Hidden Costs of Wind Electricity
• Michael Giberson’s Assessing Wind Power Cost Estimates

The report focuses only on the cost of onshore wind power.

The following tables indicate the range of cost estimates in the different studies.

TABLE 1

CAPITAL COSTS ($/Mwh)

Lazard                                    48

NREL                                      61

EIA                                          64.1

Hamilton                                N/A

Giberson                                88

Tanton/Taylor                      71.8

TABLE 2

OPERATION AND MAINTENANCE COSTS  ($/MWh)

Lazard                                    11.5

NREL                                      11

EIA                                          13

Hamilton                                N/A

Giberson                                21

Tanton/Taylor                      9.8

The capacity factor of a power plant is its annual utilization rate, which is a measurement of how much electricity a plant generates in a year as a percentage of how much electricity it would generate if it could run at full power for the whole year. This is an important factor in comparing the costs of wind and solar generation to conventional energy generation whose operation can be controlled by the utility to match variations in demand. The estimates of the average market capacity factor of wind vary widely from report to report

TABLE 3

AVERAGE CAPACITY FACTOR (%)

Lazard                                    41

NREL                                      38

EIA                                          35

Hamilton                                34

Giberson                                33

Tanton/Taylor                      33

Both Giberson and Taylor and Tanton note that established studies on the cost of wind energy neglect to include the total cost of building new transmission lines once the existing infrastructure is occupied. Wind, however, is a location-specific power source, and wind-friendly sites are often far from centres of consumption. They argue that the extra cost of building transmission lines should be included in the cost of wind energy. Giberson refers to a Berkeley Labs 2009 technology review that found the median cost to build transmission lines was $15 per MWh. Taylor and Tanton calculated a $27 per MWh added cost.

When wind represents a high proportion of generation capacity, or where the contractual arrangements give wind generators “first-to-the-grid” rights, utilities will use wind-generated energy first. As wind is an intermittent source of supply, while demand varies with time of day and the seasons, utilities must maintain sufficient standby “dispatchable” generation to meet needs when the wind does not blow. The back-up generators, usually natural gas or coal-fired generation, cycle between use and non-use, hence the terms “base load cycling” or “load balancing”.

Base load cycling increases operation and maintenance costs. Giberson considers this to add $2 per MWh to the costs of wind, while Tanton/Taylor consider that it adds $23 per MWh.

As the subsidies and mandates constitute the main factors in utilities’ decisions to use renewables over conventional energy generation, Hansen, Simmons and York conclude that the cost of these subsidies should be included explicitly in the cost of wind-generated electricity. The NREL, EIA and Hamilton studies state that they have included the value of subsidies in their cost calculations; they do not give any explicit values.  Table 4 shows the cost of subsidies in the other studies.

TABLE 4

COST OF SUBSIDIES ($/MWh)

Lazard                                    19

Giberson                                23

Tanton/Taylor                      19

In principle, one should add social, environmental and health costs and premia to the calculation of energy costs. This, however, is a very controversial area. While there is extensive anecdotal evidence of adverse health impacts associated with industrial wind turbines, most of the studies to date do not assign a health, or more general social, cost. The one exception is Hamilton, who calculates the added social cost of a new wind project to be $9 per MWh.

The calculation of the “social cost of carbon” is, if anything, even more contentious. In this case, such a cost would constitute a premium for wind in terms of the carbons dioxide emissions avoided. However, the estimates for the correct social cost of carbon vary from $5 to $100 per tonne. Economist Robert Pindyck of MIT considers that given all the uncertainty concerning the relationship between human-caused greenhouse gas emissions and future climate changes, attempts to quantify the environmental cost or benefits of different actions are unlikely to produce useful estimates.

Table 5 shows the estimated total costs of onshore wind energy, priced low to high.

TABLE 5

TOTAL COST OF WIND ENERGY ($/MWh)

Lazard                                    59

NREL                                      72

EIA                                          80.3

Hamilton                                97

Giberson                                149

Tanton/Taylor                      151

Hansen, Simmons and York’s work shows that the growth of wind energy in the U.S. is not the result of new technology and favourable market forces. Rather, wind energy’s rapid emergence is largely a response to generous federal and state subsidies intended to boost the technology and shift the U.S. energy portfolio away from fossil fuels. In 2012, wind energy represented 43% of all new electricity-generating capacity, more than any other type of energy. Environmentalists like to quote these figures as a sign of success. This growth, however, comes at a substantial cost to taxpayers and competitors in the energy marketplace.

Government subsidies and state mandates are responsible for this growth. However, these incentives do not seem to be generating substantial returns in terms of electricity production. In fiscal year, 2010, for example, wind energy received 42% of direct federal subsidies for energy, more than any other type of electricity generation. Despite this, wind produced only 2 % of U.S. electricity. In 2013, that figure grew to 4%, while still receiving 37% of direct federal subsidies for energy. The costs remain far out of proportion to wind’s contribution to energy supply.

One can debate how much wind-generated electricity actually costs, based on the different studies. What seems clear, however, is that the actual cost of wind-generated electricity is higher than most published cost estimates indicate. Mandates requiring the use of wind energy increase electricity costs for consumers, and subsidies mask the actual cost of doing so, while penalizing taxpayers.

See the Utah State University paper here:

http://www.usu.edu/ipe/wp-content/uploads/2015/11/Reliability-Solar-Full-Report.pdf

For additional information on the extraordinary subsidies provided to renewable energy sources, especially since 2009, see the U.S. Congressional Budget Office report of November 2015:

https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/50980-EnergySupport_1.pdf