Charting Unseen Costs of Electricity Generation

April 2016, Vol. 243, No. 4

A recent report by the Department of Economics and the Institute of Political Economy at Utah State University explored often overlooked factors that affect the cost of generating electricity from wind, solar, coal and natural gas. While most cost estimates include face-value or seen costs, such as capital, operations and maintenance, and transmission, many estimates overlook the unseen costs that result from government intervention in the energy market.

Wind and solar power receive the lion’s share of modern energy subsidies in the United States. In 2013, wind power received 37% of federal subsidies for electricity generation, while solar received 27%. Despite receiving the bulk of subsidies, these two sources of electricity combined generated less than 5% of the nation’s total electricity in that same year.[1]

Electricity Source % Support % Generation
Coal 6 39
Natural Gas 4 28
Nuclear 10 19.4
Solar 27 0.4
Wind 37 4.1
Other (includes renewable and nonrenewable sources) 16 9
Total 100 100

 

Figure 1: Federal electricity subsidies and electricity generation by source[2].

Many argue that subsidies for wind and solar are necessary to help reduce costs and make renewables competitive with conventional sources of electricity. In reality, however, subsidies do not reduce costs. They simply transfer costs from electricity producers to taxpayers. Thus, subsidies represent an unseen cost of generating electricity that is paid not through an electricity bill, but indirectly through taxes.

In addition to federal subsidies, wind and solar benefit from state-level mandates. Renewable Portfolio Standards (RPS) require that a minimum percentage of a state’s electricity come from renewable sources by a target date in the future. Because federal subsidies make wind and solar profitable for producers, these two energy sources are often used to meet RPS requirements.

Because renewables cost more than conventional sources of energy, RPS may lead to higher electricity rates. A study by the Institute for Energy Research found that states with RPS had electricity rates 38% higher than states without.[3] State-level mandates represent another unseen cost of producing electricity from wind and solar because they result in higher electricity rates.

Wind and solar are also not as environmentally friendly as many claim. Both wind and solar energy are non-dispatchable sources of energy, meaning they cannot be generated on demand and are dependent on location and weather. Solar power can only be generated when the sun is shining, and wind turbines only work well in areas with high wind speeds.

Because wind and solar are unreliable and intermittent, other sources of energy must be ramped up to meet demand when the sun is not shining or the wind is not blowing. This is known as baseload cycling. Researchers at Carnegie Mellon University estimated that baseload cycling reduces the emissions benefits of wind and solar by an average of 20%.[4]

Wind power also has high transmission costs, as many areas with prime wind power resources are located far from population centers. Because the cost of expanding transmission lines is often passed onto state taxpayers and electricity ratepayers, transmission costs represent another unseen cost of generating electricity from wind.

For example, Texas’ Competitive Renewable Energy Zone, a transmission expansion project focused on wind power, was estimated to cost $7 billion. Although the project may result in lower energy costs for consumers, it has yet to be seen whether these savings will outweigh the $7 billion cost, which will have to be paid for by electricity consumers in the state.[5]

At both the state and federal level, lawmakers have enacted policies to encourage the production of electricity from wind and solar for environmental reasons. Although these policies may be well-intended, they create unseen costs for consumers and taxpayers alike. These unseen costs should be included in an estimate of the cost of producing electricity from wind and solar.

Coal, Natural Gas

While solar and wind enjoy the benefit of massive subsidies, conventional sources of energy like coal and natural gas face contradictory federal policies. On the one hand, policymakers have enacted subsidies for coal and natural gas. At the same time, coal and natural gas face an increasingly stringent regulatory climate. Both policies that encourage production from these sources and those that discourage it create unseen costs of producing electricity.

In 2013, coal received 6% of federal subsidies for electricity generation and generated 39% of the nation’s electricity, more than any other source. Similarly, natural gas received 4% of subsidies, while generating 28% of U.S. electricity.[6] Although these subsidies are much smaller than those that wind and solar enjoy, they still represent an unseen cost of electricity generation that must eventually be paid for by taxpayers.

Subsidies encourage the production of electricity from coal and natural gas, but policymakers have also enacted regulations that discourage their use in an effort to address environmental concerns. Both the environmental effects, as well as the economic costs of these regulations, represent unseen costs that affect American taxpayers and electricity consumers alike.

Production of electricity from coal has been declining for the past several decades in large part because of regulations enacted in an effort to address coal’s environmental impacts. The Clean Power Plan, released in 2015 by the EPA, requires electric utilities to lower carbon emissions 32% below 2005 levels by 2030.[7]

Producing electricity from coal also creates mercury emissions, and in 2012 Congress passed the Mercury and Air Toxics Standards, known as the Mercury Rule. In June 2015 the Supreme Court ruled that the EPA had failed to take into consideration costs when it crafted the rule, and sent the rule to a lower court. In December, the D.C. Circuit Court of Appeals ruled that the law could stay in effect while the EPA considers a cost-benefit analysis.[8]

Although these regulations may be well-intentioned, they will have real costs for electricity consumers. From 2012-15, at least 58 coal plants either fully or partially shut down due to government regulation and competition from natural gas.[9]

Because coal is one of the least expensive methods of generating electricity, this capacity will have to be made up for either with more expensive renewables or through increased production of electricity from natural gas. Natural gas prices have been steadily decreasing, making the resource more competitive with coal. State bans on fracking, however, threaten to restrict natural gas production and use.

Since the 1970s federal oversight of natural gas has decreased, leaving most regulatory decisions up to the states. Thanks to innovations in hydraulic fracturing combined with horizontal drilling, natural gas production increased by 9.6% points from 2004-14, reaching 27.4% of total U.S. electricity generation.[10] Due to fears about the environmental impacts of fracking, however, three states have enacted bans on the technology, effectively preventing any natural gas production within their states.

These state bans have both economic and environmental costs. Bans on fracking prevent states from taking advantage of natural gas, one of the most affordable and cleanest sources of electricity generation in the United States. Because natural gas is so affordable, restricting its use may lead to higher electricity rates. Natural gas also produces fewer carbon emissions than coal. Natural gas produces 117 pounds of carbon dioxide (CO2) per MMBtu of energy generated, while coal produces 210.2 pounds of CO2 per MMBtu.[11] Thus, policies that restrict production of electricity from natural gas may lead to higher emissions.

Policymakers at the federal and state level have enacted laws intended to reduce the environmental impact of coal and natural gas. These policies may be well-intentioned, however, they also have real costs for American consumers and taxpayers alike. Any estimate of the cost of generating electricity from coal and natural gas should take into consideration not just environmental impacts, but also the cost of government intervention in the energy market.

To read the full reports, visit: www.usu.edu/ipe

Author: Ryan M. Yonk is an assistant research professor and research director of the Institute of Political Economy in the Department of Economics and Finance at Utah State University and vice president and executive director of Research at Strata Policy. He is a Fellow at the Independent Institute and a policy advisor at the Heartland Institute. His books include Green V. Green (with Randy Simmons and Brian Steed), Direct Democracy in the United States (with Shauna Reilly) and the forthcoming Nature Unbound: Environmental Myths and Government Failure (with Randy Simmons and Ken Sim). Dr. Yonk is the author of numerous academic journal articles and policy reports focused on the intersection of public policy, economics, and politics.

Dr. Yonk received his Ph.D. in political science from the Georgia State University in 2011. He was previously an assistant professor of political science at Southern Utah University, where he was also the director of the Institute for Policy Analysis.

[1] Energy Information Administration (EIA). 2015, March. “Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2013.” Pg. xix and xxi. Retrieved from: http://www.eia.gov/analysis/requests/subsidy/pdf/subsidy.pdf. The data for this chart were taken from Table ES4 and Table ES5. The numbers may not sum to 100 percent because of independent rounding.

[2] Energy Information Administration (EIA). 2015, March. “Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2013.” Pg. xix and xxi. Retrieved from: http://www.eia.gov/analysis/requests/subsidy/pdf/subsidy.pdf. The data for this chart were taken from Table ES4 and Table ES5. The numbers may not sum to 100 percent because of independent rounding.

[3]  Institute for Energy Research (IER). n.d. “The Status of Renewable Electricity Mandates in the States.” Pg. 5. Retrieved December 11, 2014 from: http://instituteforenergyresearch.org/wp-content/uploads/2011/01/IER-RPS-Study-Final.pdf

[4]  Katzenstein, W., &  Apt, J. 2009. “Air Emissions Due to Wind and Solar energy.” Environmental Science & Technology Pg. 253-258. Retrieved from: http://pubs.acs.org/doi/pdf/10.1021/es801437t

[5] Peacock, B. 2010, December. “Texas’ Renewable Energy Experiment: High Costs, Poor results.” Pg. 2. Texas Public Policy Foundation. Retrieved from: http://www.texaspolicy.com/sites/default/files/documents/2010-12-PP25-TexasRenewableEnergyExperiment-paper4-bp.pdf

[6] Energy Information Administration (EIA). 2015, March. “Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2013.” Pg. xix and xxi. Retrieved from: http://www.eia.gov/analysis/requests/subsidy/pdf/subsidy.pdf. The data for this chart were taken from Table ES4 and Table ES5. The numbers may not sum to 100 percent because of independent rounding.

[7] Environmental Protection Agency. 2015, August 3. “Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units”. Pg. 16. Retrieved from: http://www2.epa.gov/sites/production/files/2015-08/documents/cpp-final-rule.pdf

[8] Lyon, John. 2015, December 16. “Court: Mercury Rule Can Stay in Place for Now.” Times Record. Retrieved from: http://swtimes.com/business/court-mercury-rule-can-stay-place-now

[9] Martinson, Erica. 2015, April 16. “The fall of coal.” Politico. Retrieved from: http://www.politico.com/story/2015/04/coal-power-plants-epa-regulations-117011

[10]U.S Energy Information Administration (EIA). 2015, June. “Electricity Net Generation.” Monthly Energy Review. Retrieved from: http://www.eia.gov/totalenergy/data/monthly/pdf/sec7_5.pdf

[11]  U.S. Energy Information Administration (EIA). 2013, February 14. “Carbon Dioxide Emissions Coefficients” Retrieved from: https://www.eia.gov/environment/emissions/co2_vol_mass.cfm

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