Let the Free Market Decide When Oregon Is Ready for More Wind Power

Wind power advocates long have claimed that wind power is a cost effective source of energy. This is only true with the market distortions caused by state and federal governments. Currently, the state of Oregon highly subsidizes wind power at the expense of most ratepayers.

In addition to the federal production tax credit which offers an income tax credit of 2 cents per kilowatt hour (kWh) (about a third of the cost of producing wind power), PGE and Pacific Power customers pay a 3% public purpose charge on their monthly bills to the Energy Trust of Oregon. The Energy Trust, an independent third party nonprofit founded in 2002, uses the money to subsidize renewable resource generation and energy efficiency programs. 17% of the public purpose charge, about $10-13 million per year, goes to projects that generate electricity from selected renewable sources. Another pot of gold is the Oregon Business Energy Tax Credit program. Renewable energy generation projects in Oregon are eligible for a state tax credit that is 50 percent of total project costs. The tax credit is filed over five years: 10 percent each year.

The subsidies that support wind farms hurt all sectors of the economy by redistributing money into a higher priced, less efficient and more unreliable source of energy. The truth behind wind energy is that it costs more than other traditional sources, does not provide reliability like hydroelectric, nuclear or thermal power plants, and may not be as environmentally friendly as advocates like to profess. Most estimates on cost of wind energy without subsidies and other incentives are about 6-7 cents per kWh. In contrast, thermal power plants can produce energy at about half of that cost, at 2-4 cents per kWh.

Reliability is also an important factor in electricity generation, since both homes and businesses need access to consistent power. Wind farms are historically inconsistent and may have 30% average capacity, meaning if a wind generation plant is rated at 500MW, on average it will produce only 150 MW. The variability of wind causes difficulties in integrating this power source into the grid. The Bonneville Power Administration (BPA), the federal power marketing agency responsible for selling the electricity from federal dams on the Columbia River, recognizes the difficulty of integrating wind power into the grid and recently asked the Oregon Public Utilities Commission for an 8.9% increase on the average residential customer’s monthly bill, due to the increasing integration cost of wind energy. Despite subsidies financed by taxes on consumers, BPA is asking for more money to offset the large cost associated with using wind energy.

Subsidies for supposedly “green” energy sources have long been praised by environmental activists as good for the environment and necessary to fix the market failures of pollution externalities associated with traditional power sources such as coal, gas and large hydroelectric facilities. These subsidies, in fact, distort market processes all at the expense of the ratepayer. Free markets can lead to efficiency improvements and the adoption of renewable sources naturally.

The market is showing signs that wind power could become cost effective. The cost of producing electricity from wind has declined significantly from around 38 cents per kWh in the early 1980s. In the not too distant future, wind energy costs could fall even lower than thermal power plants. Not only are the costs of using wind energy declining, but the costs of operating natural gas fire power plants are increasing. Costs of natural gas have been increasing year after year in Oregon.

As consumers demand more electricity, populations increase, and fossil fuel prices rise or are unstable, renewable energy sources can come into the forefront. This market-based progression can drive the use of wind energy or other renewable sources. Not only can it make other sources a viable option but changing fuel prices and technology adoption has and will continue to drive efficiency in the sources we are currently using. Thus, a free market can provide an opportunity for renewable energy and spawn more efficient fossil fuel generation.

Taxes, credits and subsidies artificially force wind farm construction and, in turn, create inefficiencies that increase energy rates which seep into all sectors of the economy. The solution is to let the market work, and let supply and demand guide technologies. Let consumers and businesses have a chance effectively and slowly to adapt to fluctuations in energy prices.

The hysteria of wanting to switch to “green” technologies ahead of the market will hurt the economy and put undue financial burdens on the citizens of Oregon. In times of economic hardship where the last thing Oregonians need is higher energy bills, policy makers should not be using taxes like the public purpose charge to provide subsidies to renewable energy sources that in a few years could become cost efficient on their own.


Todd Wynn is the climate change and energy policy analyst at Cascade Policy Institute, Oregon’s free market public policy research center.

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Posted by at 05:00 | Posted in Measure 37 | 12 Comments |Email This Post Email This Post |Print This Post Print This Post
  • eagle eye

    I find myself in wholehearted agreement with this. Wind energy only exists because of massive subsidies. In my view, it’s massively damaging to the environment. It is utter folly for Oregon to be ruining its landscapes and seascapes for this costly, unreliable, unneeded source of electricity. It’s beyond belief that many environmentalists are supporting this. Hopefully enough people of all persuasions will come together to stop this insanity.

  • Rupert in Springfield

    Whoopie, yay, wind power, love it cant get enough of it, its so great.

    But you know, if wind power is so great, wouldn’t it make sense that it could run without needing all these subsidies? Are there really all that many vastly uncharted realms of research into wind and propellers that would be impossible for private industry to research and develop? That seems hardly credible.

    The big danger from subsidies, especially to something like wind power where it is nearly impossible to justify government involvement on the basis of new technology that needs time to develop, is that they get the government involved in picking winners and losers. History is replete with examples of this, Japans MITI agency being a prime example of the folly of this. The recent disastrous situation in the financial markets, largely caused by governments manipulation of mortgage markets through Fmae/mac and the CRA being another. Our hopelessly antiquated steel production being a third example of direct detriment of an industry through government manipulation of the market.

    Wind power may be great, but few would deny that we are entering a new era of energy production. Through subsidies of wind power we run a great risk of depressing development of other technologies that are no less economically viable but cannot achieve due to competition from the subsidized wind and solar industries. A level playing field would assure development of the most efficient means possible. Government meddling in mortgages was bad enough, you would think we would not repeat the error in such a short time frame.

    • dean

      If the private banking system were so great, wouldn’t it be able to run without these subsidies?

      I respectufully disagree with Eagle, Rupert, and Todd. First, the subsidies are to renewable energy broadly speaking, not wind power specifically. THis means wind is in competition with solar, geothermal, wave energy, and whatever else is out there. At the moment wind energy is more promising than the alternatives, which is why it is being invested in so heavily. No one is FORCING anyone to build wind facilities, contrary to what Todd claims. The private market is CHOOSING wind energy from the array of options available.

      Second, “the energy market” left entirely alone might eventually solve the problem for us, but only after we unalterably raise atmospheric carbon to damgerous levels, ship what remains of our diminishing national treasure to overseas suppliers, tear down entire mountains to get at filthy coal, and go through years of huge price spikes, followed by drops, followed by higher spikes, as the market for diminishing fossil fuels tries to find equilibrium between supply and demand. Sometimes government has to look farther down the road than quarterly profit reports and get things moving.

      Third, the environmental problems of wind energy that Eagle points to are real, particularly aesthetic impacts due to the size of turbines and the large area of land they need (5-20 acres of free space around each 1 million megawatt turbine). Fortunately the United states is very large and very windy, and each turbine only displaces 1/4 acre of actual footprint. Land or water underneath them can be fished, farmed, or grazed. Smaller turbines in urban and suburban areas are also viable. Some windy areas should be off limits to wind energy because of environmental impacts, but there are plenty of other areas where they are welome by local communities.

      • cc

        No one’s talking about the “private banking system” here, dean

        No one but you, of course.

        Wind energy is getting most of the attention because it can be brought on-line fast. Therefore, more of those subsidies can be gotten more quickly – and THAT’S why they’re being built – not because of any “promising” quality. If that’s what you’re after – quick profits for private businesses for inferior technology, then that’s what you’re getting for your subsidies. As always, government intervention has backfired. But hey, at least we’re doing *something*, huh, dean?

        No one I know can talk more and say less than you.

        I know it bumps up your word-count, but why don’t you save your screeds against markets, your fawning praise of government’s wisdom, your pedantic fluff about wind farms and your tired AGW BS for your fellow liberals. There’s nothing they like better than your brand of intellectual(?) onanism.

        • dean

          I was paraphrasing Rupert’s comment: f wind power is so great, wouldn’t it make sense that it could run without needing all these subsidies?”

          Beyond that….”intellectual onanism?” Given the obscurity of that word, didn’t you just do what you accused me of?

          No one forces you to read my posts. Or do they?

      • Todd

        “No one is FORCING anyone to build wind facilities, contrary to what Todd claims”

        Dean,

        The Oregon Renewable Energy Act (Senate Bill 838) has mandated increasing use of qualifying renewable energy generation called the renewable portfolio standard (RPS) on most electric utilities. Large utilities – those with 3% or more of the state’s load- are required to use more renewable energy in their electricity generation, 5% by 2011 going through 2014; 15% for 2015-2019; 20% for 2020-2024; and 25% by 2025.

        Just so you know the definition of mandate is… to order or require; to make mandatory. Mandates are government orders that FORCE utilities and citizens to purchase renewable power.

        Interesting to note, SB 838 also helped to set up a system that provides a type of litmus test for whether the market and Oregonians are ready and willing to have more renewable power sources as part of the state’s electricity generation mix. Although several utilities already offered this program for many years, SB 838 officially established green energy programs in which customers could voluntarily opt into buying 100% renewable energy at a premium.

        According to a recent poll, 76% of Oregonians agree that “global warming is so urgent a problem that even in these difficult economic times, we should take action now.” However actions speak louder than words. Through participation in the voluntary green power program, one can tell just how many Oregonian households really value renewable energy sources. The statewide average participation rate is a dismal 1.79%

        I agree with using renewable power if you are ready to pay for it and you value the “product” enough to pay the above market costs but it is not right to force it on the rest of Oregonians not part of the 1.79% to pay for something that they don’t currently value. This is very similar to organic food premiums and currently in Oregon no one is mandated to purchase organic food. But don’t get any ideas on passing a mandate on that, Dean.

        I sincerely hope that you voluntarily opt into this 100% renewable energy program and you practice what you preach.

  • Dave Porter

    Yes, I’m still learning about energy markets but I generally agree with Todd. It would be nice if we could just let markets decide our energy source. But I see the following problems.
    (1) Existing sources of energy such as coal, gas, water power, nuclear and oil already get subsidies. I’m not yet sophisticated enough to be able to cite chapter and verse on how they are subsidized, but I believe the subsidies are substantial. In an ideal political economy it would be best to remove those subsidies. In our second best, at best, political economy, we give subsidies to renewable sources of energy to try to level the market playing field.
    (2) There are substantial externalities in the energy market whose costs need to be brought into the market. Greenhouse gases are the most significant. I would support an appropriate tax on carbon, or, as a second best option, a system of cap-and-trade. Both are efforts to let the market work.
    (3) I think there is a role for government in accelerating basic research on alternative sources of energy.
    (4) There is a substantial foreign policy public interest in shifting to non-petroleum sources of energy. We are now funding many of our enemies abroad. It would be smarter to subsidize non-petroleum sources of energy than to pay for the larger military needed to take on all these petro-dollar enriched enemies.
    (5) There is the issue of China adding one traditional coal plant per week. If that continues, the global climate will change substantially. This issue is a tough nut to crack. I do not see a free market solution to it. China is not going to put a carbon tax, or anything remotely like it, on it coal plants. China needs cheap coal to continue its economic development. The Chinese Communist Party needs economic development to stay in power. It is that simple. Yes, they would like to improve their environment, and, in the long run, that may balance out the drive for cheap power. But as they say “in the long run we are all dead.” So, it is not enough in working on the issue of climate change just to worry about programs or markets in Oregon, or the US generally. We need fresh ideas on how to influence China to reduce its greenhouse gases.

    • dean

      Dave…China is a big issue, but it is easy for them to put off investing away from coal and towards alternatives when they can point to us, a much richer nation, not doing it. Sometimes you have to lead the way.

      Todd…yes we have been signed up for the PGE green energy program for some time in our household, have switched all the bulbs, insulated, and so forth. We do our bit, don’t worry. Unfortunately as you point out, as part of the 1.79%, our bit is not enough. The core problem with the voluntary green power program is that energy that comes through the wires is all mixed together, Its not like by signing up for that program one is actually getting clean energy, while one’s next door neighbor is getting dirty energy. In effect, it is simply me subsidizing my neighbor while we get the exact same energy, me paying more, him less. Most people are apparently smarter or cheaper than I and have figured this out, which is why they do not sign up.

      What I meant by no one is forcing anyone to build WIND POWER is just that. The mandates are for RENEWABLE power. It is up to the utilities to pick from what is available, and at the moment wind is the most efficient available source. Oregon does not mandate WIND. It mandates NON FOSSIL FUELS. The market picked wind.

    • eagle eye

      Dave, Take a look at this Wall St. Journal editorial reporting on Department of Energy figures for subsidies for various forms of energy:

      https://www.electiongeek.com/blog/2008/05/12/wall-street-journal-looks-at-energy-subsidies/

      So-called new energy sources (wind and solar) have huge subsidies, those for “conventional” sources including nuclear are tiny by comparison.

  • Dave Porter

    Eagle Eye, thanks for the reference to the Wall Street Journal and its link to the Energy Information Agency report on energy subsidies in 2007. Some of the data show the following subsidies for electricity generation: (/mwh means per megawatt hour)

    Coal, $859 million, $0.44/mwh;
    Natural Gas, $227 million, $0.25/mwh;
    Nuclear, $1.267 billion, $1.59/mwh;
    Solar, $14 million, $24.34/mwh
    Wind, $724 million, $23.37/mwh

    And, yes, wind and solar have per megawatt hour subsidies much greater than coal, natural gas, and nuclear. But, because they generate so much more electricity, both coal and nuclear have larger absolute subsidies than wind (and solar, compared to the others, is hardly subsidized at all).

    Better to eliminate all the subsidies, than to try to equalize them. Unfortunately, our political system has difficulties eliminating subsidies.

    • dean

      It seems to me public policy would tax what it wants to discourage, i.e. polluting sources of energy, and not tax what it wants to encourage, i.e. non-polluting energy. So instead of incentives, maybe disincentives are more appropriate…i.e. a carbon tax.

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