Market Intervention Overkill

During the current legislative session in Salem, many bills have been introduced promoting renewable power in Oregon. Although numerous renewable energy subsidies already exist, new incentives are being dreamed up every day in order to convince citizens and businesses to use more renewable power and to value the “clean” energy it produces.

Despite these subsidies, solar and wind power still generate only a small fraction of energy for the state, and the cost of renewable power remains significantly higher than traditional energy sources. Will there ever be enough subsidies to significantly increase renewable energy generation and eventually allow the industry to be competitive in the market without subsidies? The answer is not clear, and it could be never.

Renewable energy advocates use two main arguments to promote government subsidies for renewable power. The first is that subsidies can correct for “market failures” like pollution externalities. The second is that subsidies can be used to make new technologies cost-effective on their own without government aid once the technology becomes mainstream. Unfortunately, government has been heavily subsidizing renewable energy for decades. Renewable energy is still not cost-competitive, nor does it generate a significant percentage of the nation’s energy. But instead of reevaluating whether citizens truly value expensive unreliable power, legislators want to throw more subsidies onto the pile.

Currently, countless federal and state subsidies prop up the renewable energy industry in Oregon. On the federal level, the production tax credit (PTC) allows an income tax credit of 2.1 cents per kilowatt-hour for utility-scale wind turbines. Wind project developers can choose to receive a 30% investment tax credit in place of the PTC for facilities placed in service in 2009 and 2010. Nor is solar energy left out of the federal subsidy buffet, either. Solar energy systems are eligible to receive the solar energy investment tax credit, which reimburses up to 30% of the cost of the system with no cap for residential projects.

On the state level, in addition to a burgeoning renewable energy certificate market where renewable energy developers can sell the environmental attributes of renewable energy at a profit, the Business Energy Tax Credit was recently ramped up to offset up to 50% of the capital costs of a renewable energy facility. The Residential Energy Tax Credit allows Oregon residents to claim tax credits of up to $6,000 for a solar photovoltaic system, up to $1,500 dollars for a solar water heater, and up to $1,500 dollars for active or passive solar space heating. In addition, the Energy Trust of Oregon, which collects a public purpose charge from major utilities in the state, provides free grants for renewable energy projects.

Apparently, the current subsidies failed to correct for negative externalities and failed to help renewable energy to blossom into a cost-competitive industry because, despite the numerous subsidies that already exist, Oregon lawmakers think they aren’t enough. In 2009, the legislature has proposed even more bills to further subsidize renewable energy.

House Bill 2180 attempts to make state incentives more “effective” by establishing a renewable energy fund that creates upfront funding options for smaller renewable energy projects. Citizens would be able to donate money to the fund and take a tax credit for the donation. House Bill 2121 attempts to accelerate and expand the use of solar energy by creating a production incentive pilot program, called a feed-in tariff, that will require utilities to buy renewable electricity from individuals and businesses at fixed above-market rates set by the government for periods often lasting 20 years, and then socialize this added cost among all ratepayers.

Some bills, like the Oregon Cap-and-Trade Bill (Senate Bill 80) (which increases the cost of generating energy from coal, natural gas, and petroleum), involve indirect subsidies for renewables by punishing the fossil fuel industry for emitting greenhouse gases. Combining massive subsidies that deify renewable energy with greenhouse gas reduction policies that demonize fossil fuel industries is truly market intervention overkill.

National and state governments have shown that they favor renewable energy over more reliable and cost-effective energy sources by showering the industry with direct and indirect subsidies in an attempt to correct for the public’s supposed unawareness of pollution externalities and to help these “new” technologies become competitive in the market. Sadly, no end to the continuous propping up of the renewable energy industry is in sight. Maybe one day in the future, Oregon and national legislators will understand that citizens just may not value the unreliable expensive energy sources that they want to force upon them. It would be better if government stopped intervening in the market and let people decide what they value enough to pay for through voluntary purchases like the Oregon green power program, which allows customers to opt into buying 100% renewable energy at its true, above-market costs.

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